I’ve worked, off and on, in the regulatory compliance realm for nearly a third of a century.
One advantage of being a “veteran” is that I’ve seen a lot of different scenarios play themselves out in the credit union world. It gives me some basis for looking at the world and making educated guesses as to what the future may bring—things I think I know, such as:1. While the urge to improve disclosures is laudable, a new disclosure regimen by itself will not move the financial literacy needle one whit.
I printed the 1,888 pages of the new rules combining the disclosures required for the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). That’s 1,888 pages.
There are splendid concepts behind the rules. The intention is to make the terms of a loan and a real estate transaction clearer to the member.
The rules will, according to the Consumer Financial Protection Bureau (CFPB), “simplify and improve disclosure forms for mortgage transactions.” I’m not so sure. Here’s why.
TILA was enacted in 1968 and simplified in 1980. In all that time, we have been making disclosures to consumers that were, hopefully, clear and understandable. Yet all these years later, we are trying to “simplify and improve” disclosures.
Will these new disclosures make consumers better consumers of financial services? The new mortgage disclosures are five to seven pages long. I just don’t think it will improve consumer understanding of loan products.
Let me make a basic suggestion to consumers: If you are buying a piece of property costing hundreds of thousands of dollars, you hire a lawyer to explain the transaction to you. That way, the disclosures may make sense and the financial literacy needle may actually move.
2. The Qualified Mortgage (QM) rules are intended to create a “safe harbor” from allegations that lenders have failed to review a borrower’s ability to repay (ATR) a mortgage. They will provide no such “safe harbor.”
Under Dodd-Frank, all mortgages must be underwritten to ensure the borrower has the ability to repay the loan. A subset of loans may follow specific rules creating what is known as a “qualified mortgage.”
In theory, a QM gives the lender the “safe harbor” that it has followed the ATR rules.
The problem is that when a borrower has financial trouble, and a foreclosure is commenced, a good defense lawyer will not take the word of the lender that it created a QM. It will force the lender to prove that it followed all the rules.
Defense counsel will go over every decision and practice with a fine tooth comb to find errors in a credit union’s practice. Can you ensure everything has been done perfectly in every loan transaction?
The rules give defense counsel a roadmap to attack QMs. Some “safe harbor,” I’d say.
3. Credit unions will continue to face uncertainty regarding the “disparate impact test.”
Some regulators and agencies have vowed to pursue the concept of “disparate impact” as their chief means of determining if financial institutions and other lenders are violating the anti-discrimination provisions of the Equal Credit Opportunity Act and the Fair Housing Act.
At its basic, the disparate impact test uses statistics to determine if there is a discriminatory disparate impact on a protected group, even if there was no discriminatory intent by the lender.
CFPB has warned credit unions with indirect lending programs that it is their responsibility to make sure dealers are not causing a disparate impact by marking up loan interest rates. Okay, I get that.
But at the same time, if credit unions only make QMs, CFPB and other regulators will not consider that to be a disparate impact. That’s interesting.
So, if you are a borrower and you can’t get a loan because a lender only makes QMs, you won’t view that as discrimination? It seems to me it is either discrimination or it is not discrimination based on a disparate impact on a protected class of borrowers.
I don’t get it. And I assume counsel for individuals that claim discrimination won’t get it either.
So those are my curmudgeonly thoughts New Year’s thoughts. I’m a compliance guy. I want my work to have a positive impact on people’s lives.
Sometimes I’m not sure if we’ve figured out that we’re trying to make people better users of our products and services.
One final thought: The sun is shining, my wife is beautiful, and my daughter is doing well in college. Life is good.