Whenever there is a financial crisis, Congress responds with legislation.
This time around, it is the 849-page Dodd-Frank Wall Street Reform and Consumer Protection Act, whose mandate includes looking out for borrowers' welfare in the mortgage market.
The most important lesson of this "mother of all financial crises" was how dependent the economy is on mortgage lending, said Kenneth Benton, a senior specialist in consumer regulations at the Philadelphia Federal Reserve Bank. Benton spoke Thursday at the bank's conference on "Reinventing Older Communities."
"Mortgage lending was at the heart of the financial crisis," Benton said, and Dodd-Frank has given the Consumer Financial Protection Bureau the ultimate responsibility to make things right.
An example of how wrong mortgage practices were in the wild days of the mid-2000s was what Benton called the "Ninja" loan: "No income, no job, no assets."
Dodd-Frank requires that loans be made only to borrowers who can repay them, establishing tests to determine ability, for example.
Dodd-Frank creates a framework for the lending rules the bureau will establish and enforce, "centralizing rule-making and enforcement in one place," he said.
"The bureau will be the 900-pound gorilla in the mortgage market," Benton said, less than a day after the agency had proposed rules to be completed in the summer for a Jan. 31, 2014, effective date.
Dodd-Frank places restrictions on the points and fees offered with most mortgages. For example, discount points are a fee, expressed as a percentage of the loan amount, that the consumer pays the creditor at the time of loan origination in return for a lower interest rate. The points can let consumers lower monthly loan payments. The bureau is considering requiring that any discount point must be "bona fide" — consumers must receive at least a minimum reduction of the interest rate in return for paying the point.
The bureau also has proposed restrictions on lenders' compensation payments to mortgage brokers. Brokerage firms and creditors could no longer charge origination fees (which differ from discount points) that vary with the size of the loan. They could charge only flat origination fees.
Loan originators currently must meet different standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The bureau is considering ways to implement Dodd-Frank requirements to apply the same standards to all loan originators to help level the playing field for consumers.
Benton said one problem stemming from the housing boom was the "steering of consumers to loans they could not repay" so originators could make more money. The bureau has proposed rules to end the practice.
Almost obscured in efforts to correct problems in the mortgage market is the future of the Community Reinvestment Act, which was passed in the 1970s to force major lenders to stop redlining primarily minority areas.
Theresa Stark, senior project manager for the Fed Board of Governors, said that although the act's critics blamed it for the housing crisis, saying it forced mortgages to be made to the poor who couldn't repay them, "studies have shown that those loans are performing better than those made by institutions outside CRA."
Although Dodd-Frank didn't address CRA, it likely needs updating, Stark said. The examination process of lender performance, for example, needs to be upgraded, she said.
"When we were working on the examination procedures, I received a call from someone purporting to be from [Vice President] Al Gore's office urging us to consider the Internet," Stark said.
"I asked what it was."