Wishing Regulations Away

On Capitol Hill, meanwhile, lawmakers “strongly disagreed” about the impact of the Court’s ruling, according to a Mortgage Bankers Association synopsis of hearings held in the House to examine the future of congressional policymaking. “While GOP lawmakers on the panel felt the decision will re-establish Congress’s primary role in the statutory construction of new law — and subsequent regulation,” the MBA said, “Democrats countered that it will instead unintentionally decrease the power of the legislative branch by empowering courts at the expense of Congress.”

Republicans and Democrats in the U.S. Senate also have introduced competing legislation. Bill Cassidy, R-La., introduced a measure that would require the head of a federal agency signing a major rule to testify about the rule before the committee of jurisdiction within 30 days of the rule being published. Cassidy’s bill also would require agencies to conduct cost-benefit analyses and reviews for major rule makings within five years of each rule’s effective date.

On the other side of the aisle, Elizabeth Warren, D-Mass., joined by 10 of her Democratic colleagues, introduced a bill that would give agencies more power to proceed with rulemaking in line with a “reasonable interpretation” of statutes. Their legislation also would allow agencies to reinstate rules that were overturned by the Congressional Review Act and would strengthen the public’s ability to comment on rules.

Taking Aim

With this background in mind, I asked several industry players what one, single rule they would like to see overturned. Specifically, I queried, “if you had to pick one regulation above all others that you would like to see overturned, what would it be and why?” Here are their answers:

If Jay Crowell, senior vice president of Cornerstone Home Lending, could change one thing, it would be the QM and Dodd-Frank income requirements. The rules eliminated stated income and no-income programs, Crowell reports, replacing them with “cumbersome and poorly priced” non-QM programs.

Originally, these programs were designed for high net-worth individuals with significant equity in their homes, being that equity is the main predictor of a loan’s performance. They were not meant for borrowers who put little to nothing down, and who ended up underwater when markets shifted.

The problem: High net-worth individuals with complex finances and numerous investments struggle to get competitive rates. They face excessive paperwork and questions about the minutiae of their financials, despite many being capable of paying for their homes in cash. Meanwhile, first-time home buyers with a salaried job and a small down payment gift from their parents often find the process easier.

Crowell would like to see the process simplified “for those who have earned it” by offering an A-paper product that has reduced documentation for high net-worth borrowers with substantial home equity. “While guardrails are necessary to prevent ‘liar loans,’ the current situation doesn’t make sense,” he told me. “Some bank statement programs exist, but their rates are terrible.”

It’s not a regulation that Dax Junker, CEO of Title Clearing & Escrow in Tulsa, Okla., would like to see overturned, but rather a court ruling that he says has “significant and potentially problematic implications” for the title business.

In that case (Show Me State Premi Homes v, McDonnell), Junker says, the decision by the U.S. Court of Appeals for the Eighth Circuit “significantly altered” the practice of nonjudicial foreclosures in the United States. “The ruling mandates that when the United States holds a subordinate lien, the senior lien holder must pursue foreclosure through judicial action to extinguish the subordinate interest.”

As Junker sees it, the decision has a profound impact on foreclosure processes nationwide. It “has essentially nullified the ability to conduct nonjudicial foreclosures when the U.S. government has any interest in the property, making it a lengthy and cumbersome process,” the title business executive told me.

“This has created significant hurdles for REO managers and servicers, halting many REO transactions across the country. The intent of the ruling might have been to protect the government and other junior lien holders, ensuring they don’t miss out on claims. However, it inadvertently complicates and delays the foreclosure process, frustrating many in the industry.”

The Eighth Circuit ruling also has led major underwriters, like First American, to change their underwriting guidelines, effectively prohibiting nonjudicial foreclosures when a government interest is involved. This adds risk to mortgage loans and can alter the way lenders approach these situations.

Says Junker: “By shifting the matter from a state to a federal level, this case has muddied the waters and increased the complexity and duration of foreclosure proceedings. It’s a decision that many in the servicing industry view as detrimental to the economy. While it aims to protect junior lien holders, its broader impact on the foreclosure market potentially does more harm than good. Reversing this ruling would streamline the foreclosure process, reduce delays and provide much-needed clarity and efficiency in real estate transactions.”

Sebastian Jania, who owns Ontario Property Buyers, a company that focuses on flipping and renovating houses in Kitchener, ON, would like to squelch the need for lenders to know a borrower’s credit score.

That requirement, says Jania, places undue stress on borrowers, who already are under much tension and anxiety and might just make snap decisions or bail entirely. In addition, the need to see credit scores could lead to unequal treatment among borrowers. “Given that not all borrowers have the same credit score,” he told me, “some borrowers may benefit more than others from disclosure of this information” and unfair practices and discrimination may result.

But most significantly, Jania says, a borrower’s complete financial situation and how it may impact their mortgage approval are not fully revealed by only knowing their credit score.

“Lenders take a number of things into account before approving a mortgage, including credit scores,” he points out. “The debt-to-income ratio, employment history and income are some additional important variables that are also very important.”

He concludes: “Not only would getting rid of this rule help borrowers a little, but it would also free up lenders to concentrate on other crucial aspects of determining a borrower’s mortgage eligibility.”

While Peter Idziak of the Polunsky Beitel Green law firm in Dallas believes there should be some restrictions on how loan officers are compensated, he tells me the Loan Originator Compensation Rule “has failed to create a compensation regime that truly benefits consumers and appropriately compensates loan originators for the time and effort that they put into working and winning loans.”

The rule’s prohibition against paying loan officers differently based on the loan product prohibits lenders from compensating their officers appropriately, Idziak says. For example, construction loans require more time. “Although intended to prevent steering, this prohibition could in and of itself encourage steering borrowers into products that require less work for a loan officer,” he says.

Furthermore, under the rule, the originator cannot lower his fee in order to offer consumers a more competitively priced loan, which harms both the borrower and the loan officer.

“Consumers may lose out on a better deal when LOs cannot freely compete on price,” the attorney says. “The loan officer may lose out entirely on a commission with a prospective borrower when he would otherwise be happy to lower their compensation to match the fees of a competing offer.”

Abhinav Asthana, product business and growth leader at Tavant, an information technology company based in Brunswick, N.J., would like to see changes in the new banking regulators’ requirements, including a combination of risk assessment and categorization based on weights.

Asthana explains it this way: “Based on the Basel III proposals from 2023, the Federal Reserve Board, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency proposed new risk-weighted capital requirements for banks that would increase the amount of capital that banks with over $100 billion in assets must hold.

“The banks would be required to make changes to adhere with the guidelines between 2025 and 2028. This would make it more difficult for large banks to make mortgages available to consumers — limiting the choices consumers have when seeking a mortgage, especially when consumers rely on their banking relationships to help them with their mortgage needs.”

As chief marketing officer at Capital Max, an investment, advisory and fund placement firm in Boca Raton, Fla., Kris Mullins oversees the company’s strategic positioning in the alternative space. As such, that gives him a front row seat to the regulatory impacts on the financial markets and mortgage lending. And he believes the QM Rule “would benefit from a fresh perspective.”

Originally designed to safeguard consumers, the qualified mortgage regulation now seems to stifle innovation within the mortgage industry, Mullins says. “It’s high time we reconsidered viewing regulations like QM as inflexible doctrines and started acknowledging their real-world effects on both lenders and borrowers.”

With its strict debt-to-income ratios and narrow definitions, the rule “often acts as a barrier that prevents individuals from achieving home ownership,” he complains. “It feels like we’ve constructed a fortress around the mortgage market, unintentionally excluding those who could benefit most.”

As Mullins sees it, the rule’s rigidity is especially challenging in today’s ever-evolving economy, where non-traditional income sources and gig work are increasingly prevalent. “People are more than just figures on a financial spreadsheet,” he told me. “Our regulations should adapt to this truth.”

If the rule was modified or abolished altogether, Mullins says, “we could usher in a wave of innovative mortgage products tailored to a wider array of financial circumstances.

Lenders would be able to come up with new ideas, providing loans that take into account a broader perspective of a borrower’s financial situation rather than just focusing on their income at a specific moment.”

“This isn’t about removing consumer protections. Quite the opposite,” he offers. “It’s about adjusting them to find a better equilibrium between preventing reckless lending practices and promoting an inclusive and dynamic mortgage market.

Donna Schmidt, managing director of DLS Servicing in Grand Rapids, would dump two regulations: First would be the current CFPB rule that requires full loss mitigation applications whenever a streamlined option results in a higher monthly payment. And a close second would be the CFPB’s proposed servicing rule that installs a foreclosure safeguard when a borrower is unresponsive for at least 90 days, unless there are no other loss mitigation options available.

The first CFPB dictum had a “particularly adverse impact” on VA borrowers during the COVID pandemic. “When interest rates began to increase,” Schmidt explains, “many streamlined options would have led to slightly higher monthly payments. However, unlike the standard, full package (of) loss mitigation options, the VA’s streamlined Refund Modification program had a principal reduction component.”

That, in turn, meant that the full package loss mitigation modification “always resulted in an even higher monthly payment than the streamlined Refund Modification, which had the benefits of a claim for arrears and partial principal reduction,” she told me.

At the same time, the proposed servicing rule does not have a denial component. That means all loans can be modified as a last resort to keep borrowers in their homes, even though the final modified payment may be unaffordable. And lengthening the time frame from 45 to 90 days means all calculations must be updated, creating what Schmidt says is an “endless cycle of reissuing loss mit options and engaging and re-engaging borrowers” and leaving servicers without the option of starting the foreclosure process on borrowers who do not act quickly enough.

“Doing away with both rules would not only make a servicer’s loss mitigation efforts more effective,” she argues. “but ensure that every borrower has a fair shot at keeping their home without any unnecessary hurdles.