Published July 29, 2013
WASHINGTON – U.S. bank regulators, wary of upsetting the fragile housing market, are moving cautiously in fashioning dozens of new rules to prevent reckless underwriting and other mortgage market abuses.
In implementing the 2010 Dodd-Frank financial reform law, the regulators have said they are sensitive to arguments from a rare alliance of both lenders and consumer groups that too-tough rules could hamper credit availability.
Last week, citing sources familiar with the matter, Reuters reported that officials from six agencies that oversee housing might ease a proposal requiring lenders to keep a portion of securitized mortgages on their books. Consumer groups and lenders alike had pushed such a change.
The Federal Reserve and other agencies had already decided against requiring banks to raise more capital to fund their residential mortgage lending.
And an unexpectedly cooperative relationship has developed between banks and the newly created Consumer Financial Protection Bureau, which has broad authority to regulate mortgage lending.
"Listen, I think everybody is trying to make sure the housing market doesn't lead the country into another double-dip recession," said Barry Zigas, director of housing policy for the Consumer Federation of America.
Analysts say rising home prices, which support household net worth and boost consumer confidence, keep the economy resilient despite government spending reductions.
New-home sales jumped to a five-year high in June, but recovery is still considered shaky. A realtors group on Monday reported that contracts to purchase previously owned homes fell in June.
Regulators walk a fine line: Lending practices remain fairly conservative, but too much leniency could prompt a return to shoddy lending practices. Bartlett Naylor, who tracks financial policy for advocacy group Public Citizen, called the dilemma a "very important and dangerous issue."
TAKING A COMPROMISE STANCE
The biggest clashes over revising lending procedures involved the consumer bureau, which was charged with implementing key provisions of Dodd-Frank and was criticized as overly powerful by lenders and by Republicans in Congress.
Consumer groups and lenders said the bureau struck a balance with its first major mortgage rules, including a requirement that lenders be able to verify that borrowers could repay loans that was released in January.
Since then, bank lobbyists say bureau officials remain attuned to their concerns about complying with the many new rules. In some cases, the bureau has even revisited final rules and amended technical aspects in response to banks' comments.
"The bureau should be credited with continuing to listen," said Bob Davis of the American Bankers Association. "But the fact that they're having to do so suggests that the package of rules still has flaws."
The bureau hired a Fannie Mae official to help implement its rules, which also include requirements for mortgage servicers, and a Freddie Mac official to reach out to businesses.
Kelly Cochran, the bureau's assistant director for regulations, said officials knew they would need to continue "fine-tuning around the edges" to implement the many new rules.
"We are trying to make this a learning process for ourselves, to get a deeper insight in how financial service providers implement changes and the issues that they face," she said. Bank lobbyists say the concern now is that the bureau's tinkering could make it difficult to comply with all of the new rules by the January 2014 effective date.
The next big challenge facing lenders will come when the Fed, the Federal Deposit Insurance Corp and other agencies put out the rules requiring lenders to keep a stake in securitized loans. The "skin-in-the-game" rules would force lenders to keep 5 percent of most loans on their books.
Consumer advocates and bank lobbyists say they want this group, which does not include the CFPB, to follow the consumer bureau's even-handed approach.
"I think the CFPB is a poster child for balanced rule-making," said Julia Gordon, director of housing finance and policy at the Center for American Progress, a left-leaning think tank.
The regulators are expected to revisit the risk-retention rules soon.