Last November, the Consumer Financial Protection Bureau issued a long-anticipated new rule standardizing two mortgage forms. We wrote about it here. The new rule will go into effect August 1, 2015. Small lenders, which will have no exemptions from the new requirements, are expressing concerns that the new rule will stifle their businesses.
The new rule, formally known as Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act and the Truth in Lending Act, is the culmination of a two-year effort by the CFPB to standardize what it calls the “mortgage shopping sheet.” The rule was designed to make the mortgage process more transparent and easier to understand for consumers. Details are available here.
Small lenders had long sought an exemption from the rule. Camden Fine, president of the Independent Community Bankers of America, told Bloomberg.com that his group and others had “been all over CFPB,” citing the regulatory burden the rule would impose on smaller lenders. “Community banks were not responsible for the mortgage crisis,” he said. The US House of Representatives also petitioned the CFPB to either exempt small lenders or delay implementation of the rule. There were three main concerns.
First, small lenders argued that since they are so much closer to the consumers they serve, there was no need to require a costly change in practice. For instance, the new rule requires that information such as interest rate, total monthly payments and total closing costs be bolded and listed in a uniform way. Small lenders argued that such information was already of primary interest to their customers and was not difficult to locate or discuss. The new rule, they say, will simply mean less efficient service.
Also, the standardized format may tend to limit innovation in the mortgage marketplace. Community banks have a significantly different risk profile than the large national banks that are the main target of CFPB regulation. One example is adjustable rate loans, the details of which will be difficult to present under the new rule’s requirements since some data must of necessity change over the life of the loan. The CFPB rule offers few guidelines for how to represent an adjustable rate loan. Balloon payment mortgages are not addressed by the rule at all, but may become impossible for rural lenders to offer.
Finally, the burden of compliance with the new rule will be significant. Forms will have to be reissued and new policies implemented, as well as any informational or promotional materials. The rule will require new or updated software and compliance systems, as well as associated costs for training employees or outside vendors. Small lenders may also incur costs in obtaining legal advice regarding the new integrated forms, which will vary by jurisdiction. At least a portion of the costs of such changes will be passed along to consumers, and some fear that small lenders could even be driven out of business.