Dodd-Frank Rewrite Could Improve Local Mortgage Lending

Blog posted On March 20, 2018

Last week, the Senate passed the most significant Dodd-Frank reform bill since the original legislation was enacted in 2010.  The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed to curb predatory banking activity and restore economic normalcy following the Financial Crisis.  However, since economic recovery, Dodd-Frank has not been changed despite the expensive regulatory burden it imposes on many financial institutions, especially smaller banks and lenders.  The bill passed with some bipartisan support and will now move on to the House of Representatives. 

The Senate’s bill specifically addresses regulatory relief for smaller institutions with up to $10 billion in assets.  Under Dodd-Frank, financial institutions of all sizes face the same restrictions, though the cost of implementing these restrictions is more significant for smaller lenders.  Under the new bill, mortgages originated by smaller lenders will not face the strictest federal underwriting requirements, though they will still have to meet other conditions. 

Under Dodd-Frank, a “qualified mortgage” required the borrower’s loan to satisfy numerous guidelines to protect the lender if the borrower later argued they were sold a risky mortgage.  Some requirements include a limit on the income to loan ratio, a reduction in upfront points and fees, and the prohibition of interest-only, negative amortization, and balloon payment activity.  Under the new bill, the loan would not have to meet all of those underwriting requirements in order for the lender to be legally protected.  However, the lender will have to keep the mortgage in its own portfolio instead of selling to investors, thus assuming the risk.  Since the bank will be responsible for the credit risk, they will likely perform the due diligence to make sure the loan is underwritten responsibly.  Supporters of the proposed legislation believe the reduction in requirements will make it easier for some home buyers to secure mortgages.  The legislation will especially benefit home buyers in less populated rural communities, where larger lenders may not operate. 

The Senate passed the bill with a vote of 67 to 31, including supportive votes from 17 Senate Democrats.  The GOP-majority house may have favored more drastic rollback, but last year such a bill died on the Senate floor, due to a lack of bipartisan support. 

Sources: Consumer Financial Protection Bureau, CNBC, CNBC