Are all the consumer protection changes really protecting the consumer?

Are all the consumer protection changes really protecting the consumer?

Those of us that have been in the industry for a while (over 2 decades for me) have seem many changes come and go. Some of the regulations designed to protect the consumer have been good, but so many of them have either created additional confusion or made it very difficult for even a qualified borrower to obtain home financing.


I decided that it would be “fun” to revisit some of the changes, either regulations or form requirements that were done to protect consumers when obtaining a mortgage but, in my opinion, accomplished the opposite.

So here is the list of my “favorite” topics. 

All Mortgage Lenders must use the same form to provide fees and information on home loans to the consumer.

Great! So the handy dandy Good Faith Estimate was revamped. Now a consumer does not have to look at 5 different GFEs trying to match up fees.  You know what else the consumer doesn’t have to look for? The answer is a good one but lengthy so Read on

A mortage lender must never have direct contact with the home appraiser and all appraisals must be ordered by a third party agency.

I understand the reasoning behind the rule.  Just like with most changes made to protect consumers, this rule also came out of misconduct of some people in the mortgage industry.  However, the all or nothing that was initially adopted was a total knee jerk reaction.  

Lenders were left to employ a third party agency who not only randomly picked appraisers but also took a cut of the appraisal fees.  This hurt the consumer trying to purchase or refinance a home in two ways

  1. Appraisers were being assigned appraisals out of their “home area” which meant that that they were less familiar with the micro markets that exist in many cities. Appraisals were coming low because the proper comparable sales were not used, or adjustments based on area standards were not made.  In some cases, the value was challenged and the issue resolved, but not before adding additional stress, time and sometimes costs (lock extensions, second appraisals etc) to the process.
  2. Appraisers not willing to work for their usual fee would not take any assignments and waited for a more lucrative offer to come up. You see, as a lender, we dictate to the agency how much the maximum appraisal fee can be. If our company is our consumers are willing to pay $400 and another company is offering $450, our order stays on the queue until someone is willing to take it. This again created additional potential costs in lock extensions. Reseting time

All fees on a mortgae loan must not exceed a certain percentage

In their infinite wisdom, the law makers decided that there must be a maximum in fees on a loan.  Great! Costs should not be an open ended thing.  What is not great is that they set the maximum as a percentage of the loan amount.  

So why is it not good? Because some of the fees in a home loan transaction are not based on the size of the loan amount or even the sames price.  Escrow companies don’t charge fees based on a percentage of the loan amount. They have set fees.  A notary doesn’t care if your loan is $50,000 or $5,000,000 – the cost of notarizing your documents is based on the number of signatures.  An appraisal for a $20,000,000 home may be slightly more, but there will be no difference when appraising a $100,000 home or a $300,000 home.

The end result is that those purchasing lower priced homes will have a more difficult time in finding financing where the lender will either have to largely discount fees or offer to pay for some of the fees in order to come in below the “High Cost Loan” limits.  The consumers who’s income only allows them to purchase lower priced homes are basically disenfranchised by this rule.

And to make it even better, there is additional regulation coming about.  The Consumer Financial Protection Bureau (CFPB) has issued the Qualified Residential Mortgage (QRM) and Qualified Mortgage (QM) rules which are expected to further negatively impact the consumer and the mortgage industry.

So bottom line, the saying, it’s the thought that counts does not apply here.  The ideas may have been good on paper, but the practical application results in hindering the consumer, not protecting them which in turns harms our economy.  Will common sense ever reign supreme in Capital Hill? I won’t hold my breath.

Won't hold my breath

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