How the rollback of Obama-era financial regulations could affect you
The 2010 Dodd-Frank law provided additional regulation for banks and credit unions
A new banking bill won’t just impact the big banks like Chase (JPM) and Wells Fargo (WFC) — if it becomes law, it will impact most Americans too.
The Senate approved a bill last week that will roll back some aspects of the Dodd-Frank banking reform bill, which was passed in 2010 after the financial crisis. It will make many small and midsize banks exempt from parts of Dodd-Frank. The bill was sponsored by Mike Crapo, a Republican senator from Idaho. It will now move to the House, where it could be amended further.
Under the new rules, smaller banks (those with less than $250 billion) won’t have to participate in yearly Federal Reserve “stress tests” that determine where they’re equipped to handle economic and market downturns. Those smaller banks say they would get relief from restrictive rules and that will encourage more lending
But opponents of the rollback say it will hurt consumers and increase risk, given that those banks won’t have as much oversight (http://www.marketwatch.com/story/senate-passes-bill-to-roll-back-dodd-frank-for-smaller-banks-2018-03-14). “There is no doubt that if passed into law, this bill would encourage the finance industry to engage in the types of reckless lending that pulled Americans into a Great Recession,” said Yana Miles, the senior legislative counsel for the Center for Responsible Lending, a nonprofit based in Durham, N.C.
Here are ways the bill could affect you:
Changes aimed at helping smaller lenders could put consumers at risk
The new bill exempts banks that extend 500 mortgages per year or fewer from the Home Mortgage Disclosure Act (HMDA) requirements, meaning they do not have to report information about the demographics of consumers they lend to. Those regulations were designed to prevent discrimination in the housing market, particularly based on race and ethnicity.
Critics argue though that this change would limit the government’s ability to determine whether discrimination is actually happening. A recent analysis of HMDA data from the Center for Investigative Reporting (https://www.revealnews.org/article/for-people-of-color-banks-are-shutting-the-door-to-homeownership/) found that lenders continue to discriminate in making mortgage decisions regarding people of color across 61 metro areas nationwide, even after controlling for income, loan amount and neighborhood.
The bill would exempt 85% of the mortgage industry from these reporting requirements, said Scott Astrada, the director of federal advocacy at the Center for Responsible Lending. “Modern red-lining is still part of our reality — it is illegal on paper but the data shows that black and Latino [customers] get denied mortgages at higher rates,” Astrada said. “The only reason we know that is HMDA data.”
Critics say loosening restrictions may lead to more predatory lending
Additionally, the bill would exempt lenders with less than $10 billion in assets from having to prove a borrower’s ability to repay their loan and from facing other regulatory scrutiny if they keep the loans on their books. Advocates of these changes say they will expand access to credit.
Critics are worried that loosening these restrictions could lead to a re-emergence of predatory lending behaviors that were prominent before the financial crisis — particularly because of the increased competition among home buyers in the housing market.
”There’s going to be a strain to find more exotic products to offer borrowers,” Astrada said. “That increases the likelihood that consumers will get stuck in riskier or unaffordable mortgages.”
Supporters of the new bill, however, argue that these regulatory requirements drove up costs for smaller banks and credit unions and made it prohibitively expensive for them to continue in mortgage lending, prompting many of them to stop doing so.
As a result, reforming these policies could help boost home-buying activity in parts of the country, including the Midwest and South, which haven’t recovered as swiftly from the housing crisis.
Veterans would receive extra protections from predatory lending
In recent years, many veterans have fallen victim to predatory lending practices perpetrated by some lenders involved in the Department of Veterans Affairs home-mortgage program. These lenders will lure veterans with teaser rates, such as two months free from payments or lower short-term floating rates.
Often times, these consumers end up shelling out a lot of money in fees to the lender for little to no reward — in some cases, the veterans even see most of the equity they built up in their home stripped through the transaction.
The bill states it would impose a “net tangible benefit” test that lenders would need to provide borrowers that outlines the financial impact of a refinancing and restricts some of the problematic approaches lenders would use to entice veterans.
Mortgage lenders would consider more scores beside the FICO score
The new bill would require mortgage finance providers Fannie Mae (FNMA) and Freddie Mac (FMCC) to consider more forms of credit scores when they determine borrowers’ creditworthiness. Some lenders are concerned that it could lead to less creditworthy individuals getting loans, while others say it will bring more transparency and fairness to the process.
Currently, the agencies only use consumers’ FICO scores, a form of credit score named after Fair Isaac Corporation (FICO). FICO scores were used in more than 90% of lending decisions made in 2016, according to Mercator Advisory Group, a research firm that specializes in the payments and banking industries.
But other scores, including a newer version of FICO called FICO 9.0 and the VantageScore, incorporate more information than FICO scores, which can help consumers who have “thinner” files with less information about a credit history in them, said Brian Riley, the director of credit advisory services at Mercator Advisory Group. Using those scores could help younger, lower-income and minority borrowers get mortgages more easily.
The traditional FICO score requires consumers to have at least six months of credit history and at least one financial account reported to credit agencies within the last six months. VantageScore only requires one month of credit history and one account reported within the past two years.
“This additional data makes a huge difference for their ability to qualify for a mortgage,” said Karan Kaul, a research associate at the Urban Institute, a non-profit organization that focuses on social and economic policy. VantageScore, for instance, claims that 215 million people would be able to get a score, versus just 185 million with the traditional FICO score.
Alternative credit scores won’t necessarily lead to more home buyers
If lenders were to begin using these alternative credit scores, more people might be able to qualify for a mortgage — but that’s not a given. “It really depends on how it’s implemented,” said Tendayi Kapfidze, chief economist at LendingTree.
Lenders want scores that are “well-established” and will likely still be cautious when determining which scores to use, Riley said. Because the new bill wouldn’t require lenders to use the newer credit scores, lenders may continue to defer to the traditional FICO. “They may just correlate FICO with the alternative credit score,” Kapfidze said. “That means the standards would still be the FICO standards.”
Plus, lenders may view borrowers with alternative credit scores as more risky. They would then likely charge a higher interest rate to account for that risk, said Joe Melendez, chief executive of ValueInsured, a company that insures down payments for mortgage borrowers. “You’re actually cancelling out the benefit of these loans because they’ll become too expensive,” he added.
And while the credit score is an initial hurdle, it doesn’t change the rest of the mortgage process, Kapfidze said. Case in point: Income and existing debt could still be disqualifying.
After a major data breach at Equifax, all credit freezes could be free
Another important change: The bill contains an entire section called “Protecting Consumers’ Credit,” and it would require credit reporting agencies to place a security freeze on consumers’ credit reports for free (if the consumer requests one). Consumers use these freezes to prevent identity thieves from taking out loans or lines of credit in their names.
Currently, states determine the cost of credit freezes. In some states it is free, but in others it costs up to $10. Consumers must pay that fee separately at each of the three credit bureaus, (TRU), Equifax (EFX) and Experian (EXPN.LN), so it could cost them up to $30 each time (https://www.transunion.com/credit-freeze/credit-freeze-information-by-state) they want to freeze or unfreeze their credit.
That became a sore spot for consumers after a breach at Equifax exposed more than 145 million American adults’ personal information to potential hackers. Equifax took the blame for the breach and temporarily provided free freezes. TransUnion and Experian, however, did not make freezing free.
Given the frequency of data breaches and incidents of identity theft in recent years, more consumers are likely to ask to freeze their credit, said Nick Clements, the cofounder of the personal-finance website MagnifyMoney, who previously worked in the credit industry. “This type of offering is almost inevitable,” he said.