During the first debate, Romney asserted that the Dodd Frank Act designates a number of banks as too big to fail and has caused 122 community and small banks to close (more about that misstatement at a later date, maybe). He went on to state:
Let me mention another regulation in Dodd-Frank. You say we were giving mortgages to people who weren't qualified. That's exactly right. It's one of the reasons for the great financial calamity we had. And so Dodd-Frank correctly says we need to have qualified mortgages, and if you give a mortgage that's not qualified, there are big penalties, except they didn't ever go on and define what a qualified mortgage was.
It's been two years. We don't know what a qualified mortgage is yet.
Contrary to Romney's statement, the Dodd Frank Act does define what is a “qualified mortgage.” Additionally, the Consumer Financial Protection Bureau has been working on regulatory amendments that would include certain protections for lenders from liability for qualified mortgages and would define a lender's obligations to assess a borrower's ability to repay a mortgage loan. Amending regulations is a lengthy process, in part because the public is given an opportunity to comment on proposed changes. It appears that that the amended regulation may soon be published.
The fight for consumer protection has been ongoing for more than 50 years. We now have significant protections for the consumers. I will try to explain why limiting loans with mortgages to those that were “qualified” is necessary and why it is so disliked in some sectors, i.e. those that want to kill the Bureau. It is crucial that we replace republicans in Congress with democrats like Elizabeth Warren whenever possible.
Illinois Senator Paul Douglas first introduced a version of the Truth In Lending Act (TILA) in 1960. Representative Leonor Sullivan was the primary House sponsor. As Senator Douglas stated, legislation was needed to protect the consumer’s “right to be informed – to be protected against fraudulent, deceitful, or grossly misleading information, advertising, labeling, or other practices, and to be given the facts [the consumer] needs to make an informed choice” and to protect the “ethical and efficient lender or credit extender” which would “invigorate” competition. 109 Cong. Rec. 2029 (1963)
In 1968, Congress enacted the TILA as part of the Consumer Credit Protection Act (CCPA) because Congress determined that “economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit.” As stated in the Act in § 102, the purpose is “to assure a meaningful disclosures of credit terms so that the consumer will be able to compare more readily the various credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit practices.”
On May 29, 1968, President Johnson signed the CCPA, including the TILA, which is implemented by Regulation Z. Over the years TILA and Regulation Z have been amended several times.
As originally passed, TILA was primarily a disclosure statue, but the Act also provided that a creditor who violated these disclosure requirements could face a civil suit for actual damages, statutory damages, and attorney fees. As result of the litigation that followed, in 1978 Congress began a complete revision of TILA. In 1980, the Act was almost completely rewritten when the Truth in Lending Simplification and Reform Act was passed. This Act substantially streamlined TIL requirements, often at the consumer’s expense.
According to the National Consumer Law Center:
“Strongly influenced by the FRB and its staff, Congress changed the basic philosophy of the Act. The revised Act takes a much leaner approach to almost every significant disclosure required by the legislation. Congress and the FRB have decided that only certain information is useful and, therefore, necessary to a consumer’s credit decision. For example, the legal right of acceleration is not directly related to the financial cost of credit, even though the exercise of that right can significantly affect the financial condition of the consumer; therefore, the right of acceleration was eliminated as a necessary disclosure. Perhaps, of greater importance, an itemization of the finance charge was no longer required, and an itemization of the amount financed was not automatically required, which can make it more difficult to detect inaccurate disclosures.
…
The elimination of statutory damages for inaccuracies in such disclosures as the itemization of the amount financed has enabled creditors to avoid liability for widespread and even intentional misstatements.”
Truth in Lending, Volume 1, § 1.2.2
Fast forward to the “subprime mortgage” crisis. – In 2001, Edward M. Gramlich, a Federal Reserve governor warned that “a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford” and “a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of ‘best practices’ and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices … soon let them slip.” Gramlich and Bair had noticed, as early as 2002, that half of all subprime mortgage were being made by non-bank lenders, which were poorly supervised and poorly regulated. Sheila Bair would later be appointed chair of the Federal Deposit Insurance Corporation.
In the aftermath of the mortgage crisis, regulators and lawmakers began focusing on concerns about the steering of consumers into less favorable loan terms than those for which they otherwise qualified.
“The mortgage market crisis focused attention on the critical role that loan officers and mortgage brokers play in the loan origination process. Because consumers generally take out only a few home loans over the course of their lives, they often rely heavily on loan officers and brokers to guide them. But prior to the crisis, training and qualification standards for loan originators varied widely, and compensation was frequently structured to give loan originators strong incentives to steer consumers into more expensive loans. Often, consumers paid loan originators an upfront fee without realizing that their creditors also were paying the loan originators commissions that increased with the price of the loan.”
“This compensation structure was problematic both because the loan originator had an incentive to steer borrowers into less favorable pricing terms and because the consumer may have paid origination fees to the loan originator believing that the loan originator was working for the borrower, without knowing that the loan originator was receiving compensation from the creditor as well.”
On September 24, 2010, the Board of Governors of the Federal Reserve System published the 2010 Loan Originator Final Rule, which became effective April 6, 2011, prohibiting certain payments to a mortgage broker or loan officer based on the transaction’s terms or conditions, prohibiting dual compensation as described above, and prohibiting a mortgage broker or loan officer from “steering” consumers to transactions not in the consumers interest, to increase mortgage broker or loan officer compensation.
Title XIV of the Dodd Frank Act contains prohibitions on loan originator compensation that are similar in many ways to the Rule, and in some cases, more comprehensive. Title XIV prohibits a loan originator from steering a consumer away from a “qualified mortgage” or to a loan for which a consumer lacks the ability to repay, or to a loan with predatory characteristics. Title XIV imposes individual liability on mortgage originators not to exceed the greater of actual damages or three times the total amount of direct and indirect compensation or gain to the mortgage originator, plus costs and attorney’s fees. In order to enforce individual liability, the mortgage originator must include on all loan documents any unique identifier provided by the Nationwide Mortgage Licensing System and Registry.