The broad powers to be vested in a proposed Consumer Financial Protection Agency and the ability of states to draft their own, tougher rules for mortgage lenders continue to trouble the lending industry.

A draft bill floated by Rep. Barney Frank, D-Mass., would create an agency along the lines of a proposal put forward by the Obama administration, while attempting to address some lending industry concerns.

The broad powers the Obama administration would vest in a proposed Consumer Financial Protection Agency — and the intention to allow states to draft their own, tougher rules for mortgage lenders — continues to trouble the lending industry.

A draft bill floated by Rep. Barney Frank, D-Mass., would create an agency along the lines of the proposal put forward by the Obama administration in June, while attempting to address some lending-industry concerns.

Unlike the Obama administration’s proposal, for example, Frank’s bill would not give the agency the power to require that lenders offer "plain vanilla" mortgages.

Although it might seem counterintuitive, requiring lenders to offer plain vanilla loans would harm, not help, community banks, if there were also higher regulatory hurdles to offering other types of loans, said Michael Menzies Sr., chairman of the Independent Community Bankers of America.

Any incentive the agency creates, intentionally or otherwise, to offer such loans "will amount to a disincentive for community bankers to offer anything but those products,"  Menzies said in his prepared testimony to Frank’s House Financial Services Committee at a hearing Wednesday.

Frank’s draft bill also makes it clear that certain businesses that are not part of the financial industry — including real estate agents and brokers — would be exempt from the Consumer Financial Protection Agency’s authority.

Title insurers and other settlement services providers, however, would fall under the agency’s umbrella. It would take over from the Department of Housing and Urban Development "all powers and duties" now vested with HUD relating to the Real Estate Settlement Procedures Act (RESPA).

The U.S. Chamber of Commerce has claimed that as proposed by the Obama administration, the Consumer Financial Protection Agency would regulate a wide range of businesses that have little connection to the financial industry, such as butchers and bakers who extend credit to customers.

Groups representing banks welcomed some of the changes in Frank’s proposal, but were still alarmed that, like the Obama administration’s plan, the bill would protect the ability of states and local government to enact their own, stricter fair-lending regulations. Critics say that will create a patchwork of laws that will increase industry costs and reduce the availability of loans.

"We clearly have national markets for consumer financial products and services, and we need to be able to apply national standards," said Edward Yingling, president and CEO of the American Bankers Association, in his prepared testimony.

Yingling cited loan disclosures as an example of the need for federal preemption of state laws. Both Frank and the Obama administration propose that the Consumer Financial Protection Agency draft a single mortgage disclosure form that meets the requirements of both the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). …CONTINUED


That’s a step the lending industry has long advocated, arguing that requirements for separate TILA and RESPA loan disclosures only confuse consumers.

But if state and local governments aren’t preempted from drawing up their own rules, homebuyers will still be faced with "page after page of disclaimers and disclosures about all the differing state and local laws," Yingling said.

Yingling also claimed that the language proposed by the Obama administration to create a Consumer Financial Protection Agency is so vague it would create an agency "with vast and unprecedented new powers" to "legislate its own rules."

Consumer groups like the Center for Responsible Lending say they support the creation of a single federal consumer protection agency — but in addition to, not instead of state and local regulations.

Michael Calhoun, president of the Center for Responsible Lending, said in his prepared testimony that the group won’t support any proposed overhaul of the regulatory system that calls for federal preemption of state and local laws.

Court decisions that allowed federally chartered lenders to claim exemption from state fair lending laws contributed to some of the worst excesses in lending during the boom, he said. Federal banking regulators not only defended lending practices that hurt consumers, but intervened to prevent state authorities from taking action themselves, Calhoun maintained.

During the housing boom, federal banking regulators at the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) "came to view the banks they regulate as their paying customers," Calhoun said. OTS and OCC were reluctant to take action that would cause their "customers" to switch their charter to another regulator, he said.

In 1994, Congress gave the Federal Reserve Board the authority to prohibit unfair or deceptive practices by all financial institutions, including non-bank mortgage lenders. But the Fed didn’t move to exercise that power until July 2008, Calhoun said.

"It is unrealistic to suggest that federal enforcement alone is adequate," Calhoun said. "Consumer protection is a traditional state function, and states have considerably more experience in enforcement than the federal financial regulators. This right should be an essential feature of this reformed system."

Yingling said the ABA supports numerous regulatory reforms, including the creation of a systemic risk oversight agency, and a system for resolving problems created when companies become "too-big-to-fail." Regulatory gaps for derivatives, hedge funds, mortgage brokers and others should be closed, Yingling said, and consumer protections improved.

But there’s "simply no justification for imposing significant new burdens on heavily regulated banks that never made one subprime loan, nor contributed to the causes of the financial crisis," Yingling said.

Banks are already subjected to 1,700 pages of regulations and guidelines for their dealings with consumers, he said.

The fundamental weakness of the Home Ownership and Equity Protection Act — the 1994 law that increased the Federal Reserve’s oversight powers — was that there was no provision for enforcement against non-bank lenders, Yingling said.

Calhoun rejected the argument that banks didn’t participate in the excesses of the boom.

Four of the top seven alt-A loan originators during the housing boom had federal charters, Calhoun said, enjoying "both the benefits of preemption, and light touch (federal) regulation."

"Neither federally chartered banks nor their federal supervisory regulators can credibly deny that they did not participate" in the mortgage meltdown, he said.


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