Message To The CFPB: First, Do No Harm

12217_scream Message To The CFPB: First, Do No Harm BLOG VIEW: (This week's Blog View is written by David Coster, author of Total Mortgage Services' Total Mortgage Blog. Phil Hall's regular blog will return next week.)

The mortgage industry needed a comprehensive review of the regulations that govern how it interacts with consumers. Many of the proposed regulations have responded to glaring holes in the past regulatory scheme and have made the mortgage origination process better for consumers.Â

The Consumer Financial Protection Bureau (CFPB), an entity set up after the housing and financial crises to promote consumer-friendly treatment of consumers by financial industry firms, has issued proposed regulations regarding mortgage loan officer compensation that are due to take effect on Jan. 21, 2013 – the day after the presidential inauguration. However, since the proposal's issuance, the mortgage industry and even consumer groups have rallied against it due to fears that it may actually limit access to borrowers at the lower end of the income scale.Â

Recently, the CFPB indicated that it might be willing to provide some exemptions to the rules, particularly relating to borrower fees used to ‘buy down’ the interest rate on a loan. Thus far, the proposal on the table still includes a provision that would limit origination fees to a flat amount, regardless of the loan size. Opponents of the flat fee provision point to the inequity it would create for consumers with smaller loans, as the flat fee would represent a much higher charge on a percentage basis of the loan amount relative to consumers' borrowing larger amounts.

Two issues have been raised from this opposition. First, consumers with lower loan amounts are likely in a weak position to afford to pay higher fees. Second, these higher percentage fees may violate other regulations, namely the ‘high cost’ prohibitions of the yet-to-be-defined qualified mortgage (QM). Those in opposition to the flat fee requirement point out that the risk of failing the QM test would likely result in lenders' refusal to work with low-loan balance borrowers, thereby restricting their access to credit.

While concerns regarding credit restrictions due to increased liability are valid, I wish to focus on a different aspect of the proposed rule. In my opinion, the proposal that mortgage loan originators receive a flat-fee for each transaction – regardless of loan size – smacks of price-controls, and is actually anti-consumer.Â

Without getting into an extended discussion of economic theory, let me simply say this about attempts to limit or control prices. Historically, price controls have been used to attempt to limit the cost of certain items to protect those most vulnerable to price increases during times of high inflation. Examples from U.S. history include price controls on many products during both World Wars and the Korean War, as well as the wage and price controls instituted during the rampant inflation of the early 1970s.

The two biggest problems (among many) that develop when price controls are implemented are ‘quality’ and ‘quantity.’ Take, for example, the price control on ground beef from the early 1970s. When butchers and grocers were limited in the price they could charge for ground beef, they began to substitute poorer cuts of meat with significantly higher fat content. The inability of government to ‘police’ every grocery store made the price control on ground beef into a negative change for consumers.

In the mortgage industry, the impact of price controls as it relates to quality will be regarding the types of people working in the industry. The fact is that limiting the potential income and stipulating that someone's time is worth only so much will discourage the best and the brightest from entering the field, thus diluting the level of competition needed to encourage better service to consumers.

The other issue that price controls will bring to the mortgage industry is a reduction in the quantity of financing available. I am not referring to a reduction in quantity due to liability concerns, but rather to a simpler reduction due to lack of incentives.

Price controls in the mortgage industry will have the effect of diminishing the desire of lenders to lend to any potential borrower, except the easiest of loans that can be originated in an assembly line manner. This will limit access to mortgage credit, reduce the number of competing lenders and increase costs to consumers. I strongly doubt that the intent of the CFPB was to reduce the supply and increase the costs of financing available to American consumers; yet, fixing prices will certainly have that effect.

The CFPB's proposed rule to limit origination fees via price-fixing is poorly conceived and will hurt the very people they are charged with protecting. They have signaled their willingness to amend their original proposal, and I would recommend they do just that. They should abide by the same principle that guides the medical profession in its Hippocratic Oath: first, do no harm.

(Photo courtesy National Gallery, Oslo)


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