What impact could a Dodd-Frank rollback have on the mortgage lending industry?
According to President Trump, “Dodd-Frank is a disaster”.
Throughout his election campaign, Trump promised to reform financial regulations, and in the last few weeks, he has delivered on these promises by signing executive orders to get the ball rolling on dismantling the act. Trump has been vocal in expressing his desire to revoke legislation around lending in particular, arguing that Dodd-Frank does not achieve what it set out to do, instead labeling it as means for the government to control and restrict banks unnecessarily.
Supporters of the legislation welcomed tightening the rules around lending in the wake of the 2008 financial crisis, as one of the main reasons for the collapse was the abundance of subprime mortgages. When the recession hit, it wasn’t just homeowners with unsustainable mortgages that were affected – everyone was. This type of predatory lending has been virtually eliminated under Dodd-Frank, with the housing market and the economy both recovering.
In contrast, many are predicting what the benefits of rolling back Dodd-Frank could be. The costs of complying with Dodd-Frank for banks is reported to have totaled more than $10.4 billion and 73 million hours in paperwork during 2016 alone, and while larger banks can absorb these costs, smaller lenders, who do not have the money or resources available, are being negatively impacted.
Less restrictive directives would enable smaller community banks to compete, thus increasing competition, resulting in better deals for consumers. Although the Dodd-Frank act has been unpopular with smaller lenders who struggled to meet the burdening regulatory standards, consumers have benefited from one of the key components of the act, in the form of protection provided by the Consumer Financial Protection Bureau (CFPB). Despite this, the CFPB is expected to have its budget cut in 2018, with some fearing that it will be eliminated completely. Many of the CFPB regulations were designed to not only protect homeowners as they obtain mortgages for their homes, but over the life of the mortgages. If these safeguards are eliminated rather than being reformed and replaced, consumers who default on their mortgage payments may see their property being repossessed.
If the CFPB is dissolved, and other legislation around lending is scaled back, there is the risk of a rise in unscrupulous entities offering subprime products, resulting in a repeat of the abusive practices and events that lead to the last financial crash. The CFPB included the Ability to Repay and the Qualified Mortgage rules, and by abolishing them, banks and mortgage lenders will be free to issue loans to homebuyers – whether they can reasonably afford to repay them, or not.
Despite concerns, a number of key players in the financial services realm approve Trump’s plans to reform Dodd-Frank. The complete scrapping of Dodd-Frank regulations is very unlikely to pass, as while certain aspects have been deemed problematic, protecting the core principles that underpin the legislation remains of the utmost importance. Lenders will need to keep a close eye on what happens next with Dodd-Frank, as it looks likely that huge parts of it will be shaken up in the not so distant future if President Trump gets his way.