Obama's Consumer Financial Protection Agency by Feldman Law Center

Feldman Law Center - Loan Modification News by Feldman Law Center -- Part of Obama's plan to overhaul regulation of the mortgage industry, unveiled last week, would create a Consumer Financial Protection Agency to monitor consumer financial products and change the entire process of getting a mortgage. With a stated goal of developing a mortgage process that is as simple as signing up for a retirement plan, the President’s proposal centers on an automatic offering of a “plain vanilla loan” to potential homebuyers. These loans would offer fixed interest rates and 30 year maturities, unless the borrower opts for a loan with riskier terms such as interest only or adjustable rates.

The plan has received vehement opposition from the mortgage and banking industries who say that government-approved mortgages would restrict borrowers' options, make loans harder to get, and make them potentially more expensive. Powerful trade groups like the American Bankers Association, for example, oppose creating a consumer financial protection agency. Even lobbying groups open to the idea of a consumer-products regulator question whether the government should suggest which mortgages are best for consumers. "We don't want to stifle innovation, and we don't want to stifle competition," said John Courson, president of the Mortgage Bankers Association.

One thing that would definitely be restricted, and one of the main factors behind these groups’ opposition to the plan, will be the potential commissions that mortgage brokers can charge when they sell a mortgage. For example, administration officials want to curb the fees that brokers and lenders receive tied to inflated mortgage rates. Brokers argue the incorporating those fees are a way for borrowers to amortize the costs of a loan without having to come up with thousands of dollars in closing costs. Another aspect of the plan would link compensation to whether the borrower ends up defaulting on the mortgage. "There's no reason that we should have to assume that risk," said Marc Savitt, president of the National Association of Mortgage Brokers. The group’s stance is that while a mortgage broker can facilitate a loan, the ultimate approval for the mortgage comes from the lender.

Mortgage brokers’ fees were typically highest on the most creative and dangerous of the mortgage varieties. With those mortgages a thing of the past, volume, commissions, and their share of new business has dwindled. Mortgage brokers’ share of new loans has dropped from a high of 60% to the current 20%, on much lower volume. Fixed rate mortgages have increased from a low of 50% of the total of new loans originated in 2004-05 to 95% today.

As the plan stands now, the newly created agency would approve a set of mortgages including fixed and adjustable rate mortgages. Approval for vanilla mortgages would be similar to the “prime mortgage” approval process. Potential home buyers could still get mortgages outside of the government approved versions but disclosure of risks and dire warnings will accompany them.

Supporters of the new regulatory agency say that it is needed as much to protect borrowers from themselves as from predatory lending practices. Many borrowers went through the process of getting their mortgage without ever taking the time to understand exactly how the loans they were applying for worked and where the risks were. Still, previous Congressional efforts to regulate the mortgage industry have consistently broken down over the years, even on simple issues such paperwork reduction, so the fight could be long, drawn out, and years in the making.