The Cost & Impact of Dodd/Frank Housing Virginia Symposium 06/14/2013
Dec 16, 2015
The Cost & Impact of Dodd/Frank
Housing Virginia Symposium06/14/2013
Disclaimer The content of this presentation represents
contains information from independent 3rd party firms. The statements made by the presenter are opinions and do not necessarily represent the views of the VBA, VMLA, or other related organizations. Nothing in the presentation represents legal advice. If you need specific advice (for example, medical, legal, financial or risk management) please seek a professional who is licensed or knowledgeable in that area.
1. Provide insight into the state of the banking /mortgage finance system
2. Discuss the impact of Dodd-Frank
Today’s Purpose
State of Banking & Mortgage Finance System
You can observe a lot, just by watching…-Yogi Bera
Industry Consolidation Continues…
0
2,000
4,000
6,000
8,000
10,000
12,000
'94 '96 '98 '00 '02 '04 '06 '08 '10 Q3-12
Commercial Banks Savings Institutions
Source: FDIC
The total number of institutions in VA has steadily declined since 1989 as well.
198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020110
20
40
60
80
100
120
140
160
180
200
182 178 174 170165 164
157 154 151 152147 143
138130
125 125 128
111104 103 106 104 101
Source: FDIC
Total Commercial Branches - US
Source: FDIC
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Total Commercial Branches - VA
Source: FDIC
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
500
1,000
1,500
2,000
2,500
3,000
Consumers Reduce Borrowing
0%
2%
4%
6%
8%
10%
-10%
-5%
0%
5%
10%
2006 2007 2008 2009 2010
Source: Federal Reserve
Recession*Revolving Credit(left axis)
Unemployment Rate(right axis)
Year-
Over-
Year
Perc
en
t C
han
ge
Skyline Capital Strategies, LLC © All Rights Reserved 2012
Industry has taken massive net C/Os …
1990
1994
1998
2002
2006
2010
$-
$40,000,000
$80,000,000
$120,000,000
$160,000,000
$200,000,000
Net Loan & Lease C/Os$’s in ooo’s
Net Loan & Lease C/Os
Source: FDIC
Skyline Capital Strategies, LLC © All Rights Reserved 2012
Asset quality is slowly improving
Skyline Capital Strategies, LLC © All Rights Reserved 2012
14
Nonperforming Loans/Total Loans
Banking and Public Opinion
Source: Gallup
Congress
HMOs
Big business
Organized labor
Banks
Television news
Newspapers
The criminal justice system
Public schools
The presidency
The Supreme Court
The medical system
Church/Organized religion
The Police
Small business
The military
0 10 20 30 40 50 60 70 80
Changes in Confidence in Institutions, 2007 vs. 2012
20072012
Banking and Public Opinion
65% of consumers do have a favorable opinion of their own bank
70% have never heard of Dodd-Frank
Only 3% believe most of TARP has been repaid
Source: ABA
The Impact of Dodd-Frank
Unintended Consequences
“Climate is what we expect. Weather is what we get.” -Mark Twain
Consumer Financial Protection Bureau
Richard Cordray
CFPB’s role Write rules, supervise companies, and
enforce federal consumer financial protection laws
Restrict unfair, deceptive, or abusive acts or practices
Enforce laws that outlaw discrimination and other unfair treatment in consumer finance
Ability to Repay New Servicing Guidelines MLO Comp Rules New Appraisal Guidelines HOEPA Rules “High Priced” Mortgage Loan Escrow Rules
Finalized in January 2013
QRM RESPA/TILA Integration
To Be finalized later in 2013
General Rule. A creditor must make a reasonable good faith determination that a consumer has the ability to repay the mortgage loan.
Ability to Repay
A loan is a Qualified Mortgage if it does not have:
– Negative amortization – Interest-only payments – Balloon payment – Term of more than 30 years – Points and fees that exceed 3% of loan
amount (higher thresholds for loans under $100,000)
Ability to Repay /Qualified Mortgage (QM)
Qualified Mortgage – Three alternative standards to meet requirements:
1. Total (“back-end”) DTI ratio cannot exceed 43%, 2. For now, a loan that is eligible to be purchased by
Fannie Mae or Freddie Mac (or eligible to be insured/guaranteed by FHA or VA);
3. Certain loans with a balloon payment, made by small creditors
QM Generally
A creditor that makes a Qualified Mortgage that is a “prime” loan (APR exceeds the APOR by 1.5% or less for first lien and 3.5% or less for second lien loan) has a “safe harbor” that it has complied, if challenged.
Safe Harbor for “Prime” loans
A creditor that makes a Qualified Mortgage that is not a prime loan, has a “rebuttable presumption” that it has complied, if challenged.
Rebuttable Presumption
Lenders must retain at least 5% skin in the game UNLESS they make a “QRM” loan
Qualified Residential Mortgage (QRM)
No balloon mortgages, interest only, negative amortization
Max DTI of 28 / 36% 80% Max Loan-to-Value for purchase loans 70% Max LTV for Refinance No 60-day delinquency in past 2 years Other specific provisions relating to
mortgage servicing
QRM as proposed
QM & QRM
Fair Lending LawsDisparate Treatment
Disparate ImpactPredatory LendingUnfair & Deceptive
Practices
Unintended Consequences
?
?
Alternative QRM Proposal
QRM Proposal
Pre-2008 Housing Crash
Interest Only
Sub-prime
2009-2012 Market
QM Prime (Less than 1.5% above APOR)
QM-Non Prime (More than 1.5% above APOR)
QM/QRM & Credit Availability
GSE / Underwriting Changes/ Restrictions
And there are other types of challenges
Two Key Forms◦ The loan estimate ◦ The Closing Disclosure
RESPA/ TILA Proposal
The lender must give the form to the consumer within 3 business days after consumer “applies” for a mortgage loan
Lender can’t charge fees until form is delivered
Lenders can still provide early estimates with disclaimer
The Loan Estimate
Replaces the HUD-1 and recently revised Truth-in-lending disclosure
Contains additional new disclosures per D/F Must be delivered at least 3 Business days
before closing “Changes” require a new form to be
delivered Debate still over who can deliver (lender or
settlement agent, or both)
The closing disclosure
The process of implementing just 1 new rule
What will D/F Cost?
For Dodd/Frank, the direct implementation
cost estimates range from $6- $22 billion for the whole banking industry.
What WILL it cost in total?
Annual labor hours to comply with current new rules under Dodd/ Frank: 2,260,631
Number of work weeks required to meet the burden of Dodd /Frank: 56,516
Number of Americans who will have to work all year, every year solely on Dodd/ Frank Compliance: Over 10,000
The Cost of Dodd/ Frank
Source: Financial Services Committee Presentation – One Year Later: The Consequences of the Dodd-Frank Act
A First Data study estimates a $6 billion increase in compliance costs for year-end 2012
2010 Actual 2012 Projected $-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$26,000,000
$32,000,000
Compliance Costs$’s in 000’s
Compliance Costs
Source: First Data
Congressional Budget office estimates $27 billion cost to economy over next 10 years
Over all, the budgetary cost for Dodd-Frank will exceed $1.25 billion dollars in 2012
Tax Cost
Source: Financial Services Committee Presentation – One Year Later: The Consequences of the Dodd-Frank Act
FY 2010 FY 2011 FY 2012
Total Budget 9.2 Million 142 Million 329 Million
Total FTE 0 342 1225
CFPB Direct Cost
Source: Financial Services Committee Presentation – One Year Later: The Consequences of the Dodd-Frank Act
2.9 Million job projected to be lost in the US (or 5.8 Million if reforms implemented rapidly)- Institute for International Finance
US GDP is projected to be 2.7% lower or 5.7% lower if implemented rapidly
Lending rates are projected to have increased by 4.7% or as much as 7% if reforms are implemented rapidly
Economic Impact / Unintended Consequences
Source: Financial Services RoundtableJune 2012
OCC reported that Dodd/Frank margin rules on derivatives trades may require US banks to set aside $2 trillion in collateral
Economic Cost
Source: Financial Services Committee Presentation – One Year Later: The Consequences of the Dodd-Frank Act
What does all of this mean?
Higher Compliance Costs = higher rates and more fees
Otherwise credit-worthy borrowers denied access to credit solutions
Fewer providers & product options More confusion over choices & options Financial literacy has never been more
important
Potential impacts to our customers
How do we solve for these challenges?
It is not necessary to change. Survival is not mandatory. ~W. Edwards Deming
Questions
Virginia Mortgage Lenders AssociationRichard OwenSVP-VBA-MSIExecutive Director, VMLAPh: (804) [email protected]