Broker v. Banker: Regulation Forces Consumers to Choose Higher Priced Loan Options
Double Counting of Fees and Misleading Disclosure Rules Lead Consumers to Choose Higher Priced Mortgage Options
Due to "double counting" of fees under the Dodd/Frank final rule, published in the Federal Register June 12, 2013, effective January 10, 2014, consumers will be driven to choose higher priced loan options when selecting between independent originators and lenders. "Double counting" in this description, defines what occurs when compensation is included in the rate AND the concurrent originator compensation for the purposes of calculating disclosures and regulatory limits.
Higher Rates for Consumers
While the Dodd-Frank Rule intends to create transparency, it only impacts loans originated by a small percentage of originators, leading consumers to choose higher rate mortgages.
Consumer confusion causes the customer to choose between the higher of two identical loans. This scenario offers a moderate comparison of the costs; at 5%, the total payments are $347,860 while at 5.125% the total payments are $352,847 - a difference of $4,967 in extra compensation for the lender.
Higher Fees for Consumers
Consumers are forced to choose higher priced mortgage options under the new rules. This is required by the disclosure of originator compensation under the CFPB Final Rule, and limits of compensation under Qualified Mortgage Standards (Truth-in-Lending Act, Regulation Z), by including non-borrower paid costs in the disclosures and limits.
The Devil is in the Details
These illustrations represent the facts and not exaggerations. As clear examples of unintended consequences, one can see that the issue results from misunderstanding the technical details of the workings of the mortgage business. In attempting to regulate every aspect of the mortgage industry at a granular level, the well-meaning Congress and the Consumer Financial Protection Bureau have lost sight of their goal: "How do we help consumers?"
"If it Ain't Broke..."
The pre- Dodd-Frank Reform disclosures did this effectively for 50 years. The pre-2010 Good Faith Estimate allowed consumers to see the interest rate, the loan terms and the bottom line costs. A consumer could choose between two competing offers and decide which one suited his or her needs best.
One reform helped all industry participants. HUD's "Lock-in" of closing costs, once disclosed, ended the practice of giving one disclosure initially that bore no resemblance to the final closing costs. Congress, HUD, Sean Donovan, and the CFPB could have stopped there and declared victory.
Today's disclosures do more to conceal costs than they do to illustrate them. The 2010 Good Faith Estimate does not provide a breakdown of the total monthly payment. It includes costs that the borrower or buyer does not pay, and excludes costs and fees that borrowers do pay. The new Truth-in-Lending disclosure rules require advanced algebra to understand. I am a mortgage industry professional, an instructor and author - I have a hard time understanding the rules. How does this help consumers?
Congress has an opportunity to roll-back these provisions before they become effective. Contact your Congressman and Sentor and express your disappointment at the new rules. If he or she is an advocate of transparency and fairness, they will support HR 1077 and S.949. In addition, they should advocate for the abolition of the Qualified Mortgage under Dodd-Frank, as it simply costs consumers too much money.
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