Tuesday, April 5, 2011

Dodd-Frank: Regulations Only a Government Could Love

            The Dodd-Frank Law was hastily passed by Congress last year with the stated objective of preventing another financial crisis like the one precipitated by the mortgage industry activities which came to a head in late 2007 and 2008.  Like many politically-motivated laws, the Dodd-Frank regulations don’t address the root of the problem, but instead add an enormous burden to the business community resulting in some absurd compliance requirements at enormous cost to tax payers and consumers. 
            It has become clear over the past several years that the primary cause of the housing bubble and inevitable mortgage debacle was the peeling away over the years of sound credit standards.  This approach was pushed by Congress to promote home ownership for all.  It was implemented by Fannie Mae and Freddie Mac, quasi government agencies created by Congress, and the nation’s largest purchasers of home mortgages originated by mortgage companies and banks. Unfortunately, the Dodd-Frank bill does nothing to address Fannie Mae and Freddie Mac. 
            Instead, for instance, it requires collection of ever more data from banks and mortgage companies.  The Home Mortgage Disclosure Act (HMDA) required collection and reporting of 28 pieces of data for each residential mortgage loan originated by mortgage lenders even before Dodd-Frank.  Dodd-Frank has increased reporting requirements by adding another 13 required data points.  It is unclear what the government does with all of the data or how it relates to preventing future problems.  What is clear is that it is a costly process in both time and money.  Those costs are ultimately borne by all of us.
            Another requirement mandates that the mortgage loan officer working with the borrower cannot be the person ordering the property appraisal.  That task must be accomplished by someone further removed from the transaction. Once the appraisal is received by the financial institution it now, thanks to Dodd-Frank, must be reviewed by someone other than the loan officer and other than the person who ordered it.  In the event the person reviewing the appraisal is another lender who may typically have a vote on approval of mortgage loan, he and the lender cannot participate in the vote.  Keeping track of all of this is not only another costly administrative challenge, it removes the original lender from accountability for the mortgage he originates, and it adds to the time and cost of making a mortgage loan.
            These are relatively minor examples picked from many in the 5,000 pages of regulations stemming from the Dodd-Frank Law.  Instead of addressing the problems directly, and reviewing effectiveness and enforcement of existing regulations, Congress is smothering the financial services industry with regulatory overkill. Bernie Sanders, Pat Leahy, and Peter Welch supported this legislation.  They should be held accountable to all of us Vermonters who will be paying higher taxes and higher costs to obtain a mortgage.          

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