The Bureau of Consumer Financial Protection has opened Pandora's box.
All regulations that the Bureau "inherited" from the Federal Reserve and other agencies are up for review--and, potentially, change.
This could be a very good thing. Or a very bad thing.
It all depends.
What the bureau says, versus what it may mean
The Bureau has announced that it plans to "simplify" and "streamline" the inherited regulations. This sounds good, but what, actually, does the Bureau mean?
Will streamlining a regulation make it better?
Or will it raise more questions?
How clear is compliance?
Regulations must be developed with public review and comment. That is why the Bureau has opened a comment period. Every regulation it has inherited is fair game.
You can suggest anything that comes to mind.
Hold on there...
But your suggestions should be constructive.
For example, don't even think about asking to get rid of opt-in and opt-out rules for overdraft protection or privacy.
And don't suggest that the government stop requiring creditors to collect monitoring information.
Ideas like that just won't fly.
There are ways, however, that we could improve our lives by clarifying or simplifying requirements. Several opportunities with respect to Regulation C come to mind.
A viable candidate for Bureau review
Regulation C--Home Mortgage Disclosure Act reporting--is a source of common violations. Citations range from inaccurate data entries to confusion about what is reportable. Many of the problems stem from the fact that HMDA data now reported must be pulled from a variety of different phases in the application, underwriting, and closing process. This creates opportunities for mistakes.
A common violation is failure to report something that should have been reported and reporting something that should not have been reported. In fact, an appalling amount of compliance time is spent on figuring out whether a transaction should be reported.
This is one of the most common questions that compliance consultants get. In the process of answering the coverage question, we get bogged down in discussions of whether and how long the property is a dwelling; the relationship of the current loan to any previous loan; whether the borrower is really going to use the loan proceeds to make improvements ... the list of questions seems infinite.
There should be a way to shorten the list or make the answers clearer.
Forgetting the spirit of the law
Defining reportable transactions could be significantly simplified. So could the definitions of application. But over the years, we have become so focused on what is in and what is out that we have lost sight of the actual purpose of HMDA.
The original Home Mortgage Disclosure Act was intended to ask where an institution was willing to risk its resources by making a real-estate secured loan. The question was: Does the lender have enough faith in that neighborhood to take property in that neighborhood as security for a loan?
The concerns were all about whether lenders would risk their money in areas where racial or ethnic minorities were a significant portion of the population. So the question was, given who lives there, will you lend there?
All of HMDA's legislative history focused on concerns about whether lenders would make conventional mortgages in certain neighborhoods. As a result, HMDA specifically addresses dwelling loans, but doesn't require reporting for non-dwelling loans.
Over the years, there have been detailed debates about what should be reported and what would constitute double reporting--or cheating. Consumer and neighborhood advocacy groups don't want lenders to pad their results by reporting loans more than once. So we got into the issue of when and how to report a loan that was made or renewed more than once in a calendar year.
The "report it only once" principle added other complications as well.
And then we fell into the debate of whether a loan was for a "covered purpose." Is it going to be used to improve the property, or to buy a car? These arguments led us to the devious and confusing definitions of refinancing and preoccupation with multiple reporting.
Getting back to the spirit
Why not dump the debates and go back to the original question: In what parts of your market are you willing to take real estate as security?
Why should it make a difference whether the borrower is putting on a new roof, installing a swimming pool, or replacing an old car with a new one? The real issue is the willingness of the creditor to take that piece of real estate--located where it is--as security for a loan.
There need to be some related questions, such as loan purpose, type, and lien position, because these help to explain or understand loan terms and rates. However, these additional categories could be handled much more simply than they are in the current regulation.
Let's not miss an opportunity
We now have an opportunity to reshape Regulation C. We know the Bureau will be looking at it because Dodd-Frank requires additional reporting.
More complication is the last thing we need! But, since the Bureau has stated the goal of simplification and streamlining, let's ask the Bureau to take another look at the definitions and all the coverage issues.
HMDA supports fair lending and CRA analyses. Both fair lending and CRA now look far beyond mortgage lending. In fact, the breadth of these issues was a force behind expanding the data to be collected. So let's use the evolution to our advantage.
What if HMDA reporting were based on real property securing loans?
That would provide a raw measure of whether and where the lender is willing to risk taking property as security. Now we have an information base that looks more like a call report approach than the HMDA LAR. There would have to be additional information, such as loan types, rates and amounts. We would also have to separate business from consumer-purpose loans.
But we could get rid of a lot of questions, such as the proportion of loan proceeds that will be used to make home improvements.
The new reports would be driven by location--and that was the original question. Let's think about this. Could it work?
Disclaimer: This blog represents the opinions of the author and does not necessarily reflect ABA policy.
Do you agree with Lucy Griffin's idea? What other regulations do you think the Bureau should take under consideration for streamlining? Talk about it in the comment section below.
Disclaimer: Views in Common Sense Compliance do not necessarily reflect the viewpoint of the American Bankers Association.
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