The controversy over the level of risk introduced by conflicts of interest involved in the use of affiliated business has moved back into Congress, thanks to legislation introduced last month.
The legislation, HR 4323, the "Consumer Mortgage Choice Act" would "improve upon the definitions provided for points and fees in connection with a mortgage transaction", according to the bill's stated purpose. But not everybody sees the proposed definition changes as an improvement.
The bill would change the law so that fees paid by a mortgage originator to its affiliated settlement service businesses would be treated the same as fees paid to third-party independent settlement service business when calculating total mortgage fees for the purposes of certain new regulations. These new regulations, expected to be implemented later this year, establish a new class of preferred "Qualified Mortgages". To qualify, total mortgage fees must be less than 3% of the loan amount.
Advocates for the bill characterize the differing treatment of fees as little more than an oversight, resulting when language correcting the discrimination was inexplicably dropped from the final version of The Wall Street Reform and Consumer Protection Act, commonly known as "Dodd-Frank". Opponents of the bill say that the differing treatment of affiliated business fees is intentional and necessary, because the use of affiliated business in mortgage lending introduces conflicts of interest that makes loans riskier.
The provisions which the bill seeks to amend are contained in sections of Dodd-Frank that are intended to manage conflicts of interest and other risks in the mortgage market. After the financial crisis of 2008, legislators perceived that many mortgage lenders had made large numbers of mortgage loans to borrowers whose ability to repay their loans was highly questionable, because the originators were able to sell all their loans to third parties, and therefore passed off all their risk. When large numbers of these borrowers defaulted on their mortgages, a financial chain reaction occurred which caused the near total collapse of the banking system and the economy.
Dodd-Frank, passed in 2010, contained many provisions aimed at reducing the likelihood that the events of 2008 would be repeated. One regulation from Dodd-Frank requires mortgage originators to retain 5% of the mortgages they originate or otherwise reserve capital equal to 5% of their loan balances-- causing the originators to have "skin in the game"-- if their borrowers default, they would be directly on the hook for the loss.
A side effect of this provision is that originators would in many cases have substantially greater capital requirements, which would reduce their capacity to make loans-- likely reducing the availability of mortgage credit and possibly harming the lending businesses themselves. So to partially mitigate this effect, legislators included provisions that exempted mortgages meeting a high set of standards from the 5% retention provision.
The legislators who crafted Dodd-Frank provided a framework for setting the standards for a qualifying, exempt mortgage. While the exact standards were left to be determined by regulators, the framework provided by Dodd-Frank dictated that the conflict of interest introduced by affiliated business arrangements could count against a mortgage in certain circumstances in determining whether it would be exempt. Specifically, the fees paid to a mortgage originators' affiliated settlement service businesses count toward a proposed 3% cap on fees for qualifying mortgages, while fees paid to independent third party settlement service businesses do not count toward that cap.
According to the Real Estate Service Providers Council (RESPRO)-- an advocacy group for affiliated business-- without the legislative relief from the "discrimination" against affiliated businesses under the proposed rules, the effect would be restricted credit to lower and middle income borrowers. RESPRO envisions that mortgage companies with affiliated title businesses, for example, would not be able to offer their title services on qualifying loans-- reducing their competitiveness, especially on lower balance loans, causing them to cease offering these loans.
The National Association of Independent Land Title Agents (NAILTA) claims that the use of a non-affiliated, independent title insurance provider is a necessary criteria for a low-risk loan, given the "uncommon degree of control" that referrers of businesses have over title underwriting practices when affiliated businesses are used-- a force which NAILTA claims has "reduced the historical norms of proper title underwriting in an effort [by lending institutions] to build market share." NAILTA cites no-search title insurance products offered by affiliated title businesses as evidence of the degradation in title underwriting standards.
HR 4323 is sponsored by Republican Bill Huizenga of Michigan and is co-sponsored by Republican Ed Royce of California and Democrats William "Lacy" Clay Jr. of Missouri and David Scott of Georgia. All four are members of the House Financial Services Committee. No hearing is currently scheduled for HR 4323 on the House Financial Services Committee calendar.