As the different facets of the real estate industry continue to work through regulatory changes and wait for the economy to improve, they look to the federal financial regulators to see where the next significant change in their regulator environment will come from. And all are waiting to see how the Consumer Financial Protection Bureau (CFPB) will fit into the mix.
The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the CFPB established from it, will be felt for years to come by all segments of the financial services industry, changing the way everyone does business from now on. In the first of a two-part series on the impact of the Dodd-Frank Act, The Legal Description looked at the provisions that would significantly impact the title industry.
In the second part, we look at the bigger impact, looking at the overall effect the new law will have on the title industry, its lender customers and consumers.
Title insurance: the deeper impact
While many in the title insurance industry understand that oversight and enforcement of RESPA will be different once the bureau takes the reins from the Department of Housing and Urban Development (HUD), they feel they have dodged a bullet by being exempt from additional oversight. Some industry experts, however, said the industry should not be celebrating yet.
During an industry conference this summer, Jeff Arouh, a partner with New York-based Holland & Knight, warned title insurance professionals to not count themselves out of the new legislation just yet.
"Who's covered by the Act? A covered person is anybody who engages in offering or providing a consumer financial product. I take that to mean any of us — any lender, any title insurance provider, any broker," he said.
Arouh noted that there are exceptions to the covered-persons list, but this is where lines become gray. "Interestingly, the way the exemptions work is not quite as straight forward as one might think," he said.
Arouh explained that anyone regulated by a state insurance commission is exempt. This, he said, may make one think that title insurers are exempt."My view on that is not so fast. The exemption is, as I read it, anybody that is engaged in the business of insurance and subject to regulation by a state insurance regulator, but only to the extent that the person acts in such capacity. So that means, the way I'm interpreting it, is that only the insuring activities are exempt from coverage under the Act."
Arouh pointed out other activities by title insurers that would be covered, such as if a title company is engaged in a marketing agreement, workshare agreement or operates an affiliated business arrangement.
"Those activities may very well not be exempt because they are not the kind of activities that one would consider to be, in my judgment, acting in the capacity of an insurer. Makes a big difference," he commented.
David Townsend, president and CEO of Agents National Title Insurance agreed that the impact on the title industry could be more wide-spread than industry members realize.
"Everyone is aware that, for the most part, title and settlement services were eliminated from [the CFPB], but what we do is so far-reaching that the true impact on us won't be known we get about a year into it," Townsend said. "It will be impacting us, but in minor ways that will add up to cause major changes eventually."
He said that while the act of writing a title insurance policy might not be covered, other aspects of the business are also impacted by consumer protection laws and other auxiliary products and services the industry performs, such as 1031 exchanges, might not fall under the exemption.
Townsend also pointed out that the Dodd-Frank Act increases the enforcement teeth of RESPA.
"The title industry must work together with lenders to make sure that the whole industry follows proper procedures because lets say down the road RESPA changes to put the burden of maintaining tolerances not only on the lender, but on the settlement agent as well," he said. "That would open up the settlement services industry to the purview of the CFPB. So you change a few RESPA regulations and the next thing you know, everything we are doing as far as settlements fall under the purview of the CFPB."
Concerns of lender clients
While the title industry and its real estate partners emerged relatively unscathed by the Dodd-Frank Act, the mortgage industry was significantly impacted by the legislation, and is waiting to find out what regulations will come out of the bill so they can work toward implementation.
Among chief concerns is the provision concerning loan originator compensation. It establishes prohibitions against steering consumers and gets rid of yield spread premiums and other compensation based on the terms of the mortgage loan. Compensation could be provided to lenders based on the principal amount of the loan or through incentives based on the number of loans originated within a certain period of time. Compensation could be financed through the loan's rate, but it could not be based on the loan's rate nor could the originator receive any other compensation.
"That is a pretty big concern of mine," said Mike Anderson, president of Essential Mortgage Co. and chair of the National Association of Mortgage Broker's Government Affairs Committee. He noted that there has been talk about working with the regulators to adjust for smaller sales prices and loan amounts, but he said he hasn't participated in any of those conversations yet.
The legislation also provides a new definition of a qualified mortgage, as well as new risk retention requirements. The federal banking agencies and the Securities and Exchange Commission are charged with prescribing rules requiring securitizers to retain economic interest of at least five percent of credit risk of assets they securitize.
"It would be difficult, since you are now having to have skin in the game, for your non-qualified mortgages," said Kevin Breeland, general manager and loan officer for Residential Mortgage of South Carolina LLC and the president of the Real Estate Settlement Provider's Council. "How much of that will actually be done?"
Breeland said these changes will impact the way mortgage lending is done from now on.
"I think there will be a real change in how home mortgages are done going forward," he said. "I don't think that there will be much variety in the way of products being offered because, for example, if you are a company the size of Bank of America, you don't want to find yourself in a position where you have to leave 5 percent on the table for a very large pool. That can be very expensive for anybody."
Impact on consumers
While campaigning for reform and crafting the legislation, the most important thing on the minds of legislators and members of the Obama administration was consumer protection. However, some industry members feel that consumers may ultimately be harmed by provisions of the bill.
"If you had to pick winners and losers, the losers will be the consumers," Anderson said.
He said that provisions of the bill, including the increase in the cost of Federal Deposit Insurance Corp. insurance, will cause the mortgage industry to go to the consumers to recoup their losses. He said this will ultimately cause consumers to spend more money.
RESPA reform has already proven that regulatory reform can end up costing consumers significantly. Bankrate's 2010 Closing Costs Survey showed that estimated closing fees on a $200,000 mortgage this year totaled $3,741 compared to $2,732 in 2009, a 36.6 percent increase. Fees charged directly by lenders went up 22.8 percent, while fees charged by third-party providers rose 47.2 percent, according to the results. One of the reasons for such a dramatic rise in the average estimated closing costs across the nation was related to the RESPA changes implemented on Jan. 1. This rise was anticipated by HUD.
"HUD recognized that initially it would be more costly for consumers to get mortgage loans when they revised the RESPA rule," said Loretta Salzano, founding partner of Franzen and Salzano. "But they also said they thought that over time, that would net out and it would be more economical because people would learn it and costs would be lowered and consumers would be in a better position to shop. I don't know if that is true or not."
Thanks to the compensation rules, it might be harder for consumers with smaller loans to get served. Salzano said that if loan officer compensation, loan officers may not want to work on difficult loans or smaller loans if the only way their compensation can vary is based on loan amount.
Shrinking volume?
Not only might it cost more for consumers to get a loan, it might just be harder for them to be accepted for one in the first place, causing volume to drop significantly.
"I worry that at the end of the day, a lot of people won't be able to get loans at all and volume will continue to drop at a time when we don't need volume to be continuing to drop," Salzano said. She said that the government could come in and provide some assistance, but overall the new criteria about credit may make it even more difficult for borrowers to get accepted for loans.
Breeland agreed. "My opinion is once this is all lined up and moves forward, if there is very little change to the bill as we see it now, I think there is no doubt there will be a tightening of credit," he said. "And that tightening of credit won't be just mortgages. It will be all consumer lending, car loans, credit cards, personal loans. This is a wide-sweeping bill that will effect every person that has a banking relationship whatsoever."
Feedback? Contact Andrea Golby at [email protected].