Financial Reform Is Just Around the Corner
Are You Ready?

Major financial reform laws are now a matter of when, not if. On June 25, the joint committees of the House of Representatives and the Senate hammered out their final compromises on the differences between their respective bills. The House passed the revised bill on June 30, and the Senate is expected to make its vote in early July. President Barack Obama has indicated that he will sign the revised bills.

So what’s in the bill that affects me?

The financial reform laws are wide-ranging, with provisions ranging from a new customer protection agency to risk retention rules for mortgage lenders. Below is a brief synopsis of the provisions that will most impact mortgage lenders.

Risk Retention Has a Shelter

Originally, Congress wanted to require all mortgage lenders to retain five percent of every loan closed. The Senate and House agreed to accept an amendment, submitted by Sens. Mary Landrieu (D-La.), Kay Hagan, (D-N.C.), and Johnny Isakson (R-Ga.), that requires regulators to carve out a category of "qualified residential mortgages.” These safer loans will be completely exempt from the risk retention requirements. Another amendment from Sen. Mike Crapo, (R-Idaho) provides similar conditions for commercial mortgages by  requiring regulators to consider other forms of risk retention for the CMBS market.

New Consumer Watchdog Agency

One of the biggest portions of the bill creates a new agency, which will be housed within the Federal Reserve, to serve as a Consumer Financial Protection Bureau. The bureau will be charged with regulating mortgages and credit cards, and it has been given authority to write and enforce consumer protection rules.

Underwriting Standards Now Law

The bill puts into law the tighter underwriting and predatory lending standards that all mortgage lenders must consider the ability of the borrower to repay the loan based on the highest expected monthly payment. The bill does include a “safe harbor” for certain well-underwritten loans. For example, the legislation excludes affiliate fees and up-front and monthly private mortgage insurance premiums from the calculation of the three percent limit on points and fees. In addition, agencies such as the FHA, VA and the Rural Housing Service have more flexibility to establish which mortgages are qualified for the safe harbor.

Eliminating YSPs

The legislation establishes new restrictions that prohibit yield spread premiums and other compensation to a mortgage originator that varies based on the rate or terms of the loan. The legislation does allow originators to be compensated based on the principal of the loan, to be financed through the loan’s rate (with certain restrictions) or in the form of volume incentives.

Banks Face Stricter Rules

While not related strictly to mortgage lending, all banks face a new regulatory landscape. The legislation bars proprietary trading by banks for their own accounts unrelated to customers, and over-the-counter derivative trading will be redirected through more accountable channels.

The bill also includes provisions to allow the government to seize and liquidate large financial firms on the edge of collapse, essentially ending the practice of “too large to fail.”

Banks will also be required to establish larger capital cushions, submit hedge fund trading to more regulatory scrutiny and reduce the fees on debit card transactions.

What’s Next?

Once the bill is signed into law, the real work will begin. Regulatory agencies will begin the long work of proposing the specific standards, guidelines and examiner processes to meet the requirements of the new law. DocuTech’s legal team will keep up with all of the upcoming changes and make sure that you know exactly what changes are being proposed and what lenders can do to ensure their views are taken into consideration.