Latest financial regs are of questionable value
If you’ve gotten a residential mortgage loan in the last five years or so, you may have marveled at the plethora of paper that you’re required to sign at the closing. It’s like autographing a Bible, page by page.
Most of these documents relate to consumer protection and disclosure, a concept that started in the late ’60s with the enactment of the federal Truth in Lending Law, and which was followed about a decade later by the Real Estate Settlement Procedures Act.
The first law sought to tell borrowers the actual cost of their money, while giving them the right to back out of certain transactions within three days if they should change their mind. The second was written to give consumers the opportunity to shop for services in connection with securing a loan.
With the passing of the Dodd Frank Act in the wake of the Great Meltdown, and the creation of the Consumer Financial Protection Bureau, the paperwork has proliferated.
Some of the regulations have been beneficial for borrowers. For example, lenders are no longer permitted to pay higher commissions to loan originators for delivering loans with higher interest rates. Premiums are still paid for a higher coupon rate, but it’s paid to the borrower, not an originator.
Much of the post-crisis regulation has been a knee-jerk reaction to protect consumers under the dubious assumption that borrower exploitation was somehow a big factor in the crash. That’s like blaming recruiting sergeants for wars.
How important is all of this, really, to borrowers, especially the disclosures and the ability to shop for title insurance and other services? Empirical evidence, that is some 40 years of dealing with borrowers, indicates not very.
Virtually all of us have been borrowers at one time or another, and most of us aren’t dumb. But we focus on what’s important to us, i.e. how much in dollars a product or service costs. A complex explanation of a loan’s Annual Percentage Rate (APR) and why it’s different from the rate shown on the note, and what closing costs are a “Prepaid Finance Charge” and what aren’t has always been a sure fire way to get a loan closing off topic.
What is important to all of us who borrow money is, “How much in dollars?” How much do I have to pay every month? How much do I have to dig into my pocket for at closing? That’s why the statutory mandated delivery of settlement statements to borrowers before closing are indeed beneficial to borrowers.
The slotting of a closing cost into the Prepaid Finance Charge that might result in the APR increasing from 5.25 percent to 5.35 percent just zings over the head of most of us. We’re too busy looking at that monthly payment and calculating what it’s going to do to our beer budget.
Congress, the CFPB, and every other governmental agency and entity remotely connected with housing will say that most of the regs coming in the wake of Dodd-Frank are having the ultimate effect of better informing consumers, making borrowing cheaper, and assuring that mortgage money is more readily available to the nation’s homeowners.
The first statement is debatable, the second, questionable, and the third? Almost certainly not true.
The cost of anything is, to a degree, a reflection of the resources expended to create the product. On the other hand, the great majority of mortgages are produced by a handful of monster financial institutions, and they can afford to put the necessary systems in place and accept tighter operating margins; if you make a dollar on every unit you sell, and you sell millions, well, you’ll gross millions.
But capital sources have shrunk dramatically in the last 10 years. Smaller banks and credit unions, the ones that should be providing the mortgages in small and medium-sized communities across the country, are getting out of consumer-related mortgage lending: too complicated, too costly, too risky from a regulatory standpoint.
Richard Cordray, the current director of the CFPB, regularly, from the podium and in press releases, touts his bureau’s positive effect on making money more available, and easier to get, for American homeowners and purchasers. But it’s beginning to appear that the opposite is true.
If you close down gas stations, well, it’s harder to get gas.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
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