Nov. 28: Dodd-Frank rulemaking “progress” & its impact on small banks; lenders grappling with the LE

I know that most won’t folks be reading this until Monday. But there are some important topics out there that are worthy of a little attention.


“Rob, are you hearing that we are done seeing Dodd-Frank rules put into place?” Short question, long answer. No, we’re not done. It has been 5+ years since Dodd-Frank was signed into law. As of the end of Q3, Davis Polk reports 271 rulemaking deadlines have come and gone, resulting in finalized rules for 71%, with 17% more that had rules proposed but not yet finalized. That still leaves 12% to go.


Lincoln’s Gettysburg Address was 272 words; the Declaration of Independence was about 1,100 words, so it is more interesting that an analysis from a couple years ago found 14,000 pages of regulations had already been written by that time, with an estimated 20,000 more to absorb before it is all done. Yes, big banks have big staffs (no sophomoric humor intended) to wade through all of that, and pass the costs on to consumers and shareholders, but community and regional banks don’t. Small institutions are drowning in it – this TRID chart just one small example (press cancel when prompted for a password).


As if that weren’t enough, the costs of adhering to new regulations range from the need to hire in-house compliance experts, to increased reliance on external compliance experts and a massive employee time drain. In response, community banks have been re-examining product offerings and looking for areas they may need to exit given just too much regulation. As we are seeing across the nation one business line that many community banks have either exited, or are considering leaving, is residential mortgage lending. Here, things have become particularly arduous because of so many changes required over the past few years.


Unfortunately, the simple fact here is that many community banks with limited staffing are just overwhelmed by regulations and many say they have been forced to change or alter as many as 50 of the guidelines, policies and processes they previously relied on for identifying solid loan candidates and for documenting and underwriting loans. When you combine this with fears of inadvertently violating rules, a growing number of community banks seem to be preparing to head for the exits when it comes to single family residential lending activities.


If this occurs, as Steve Brown from PCBB writes in a note to bankers, “that is bad news for everyone given community banks provide close to 16% of residential mortgage lending. Further, community banks operate in 1,200 US counties with no other bank, according to research. That is important because there are only 3,007 counties in total, so we are talking about 40% of counties that have only community banks. No matter what business lines your bank decides to continue doing or discontinue, know you play a key role in the country so whatever you do will set in motion a series of events in the industry that will reach far wider than just the local communities your bank supports every day.”


Along those lines I received a note from New Jersey. “TRID, by any verbiage, is a disaster. Anyone claiming it is not a complete failure is either a CFPB Employee, playing politics, or is ignorant. The problems lie with not only the forms, but also the Rules surrounding the forms that have complicated the burden of a mortgage to the point borrowers have become despondent to the process. This brings to mind 1984: ‘The way in which the government in this future dystopia keeps control over its people is through a combination of manipulation and fear. There is of course the ever-present threat of the Thought Police who are able to watch everybody all the time and see into their minds.’


“We cannot regulate away ignorance, so we need to educate the consumer. TRID fails miserably in that aspect. The CFPB dropped the ball on a ‘once in a lifetime’ opportunity to create a simplified and effective means to educate the mortgage borrower. And now we, as an industry, must contend with upset clients. Everything is taking longer, clients are complaining about the extra work they have to do, most do not feel comfortable using the electronic receipts or the intrusions it poses, and the system has bogged down. We have clients telling Realtors they have applied for a mortgage and the MLO stating, ‘No, I do not have the required items to proceed.’ Forget the software issues on a number of platforms that the consumers never see. I’m not saying Ms. Warren’s ideas originally were bad, they were not. They needed tweaking and implementation, but I cannot believe anyone imagined the CFPB becoming the uninformed behemoth it has become. This is irresponsible government at the forefront. The irrational are leading the Regulatory environment. That TRID flow chart is a perfect example of the irrational understanding of the mortgage process.”


Continuing in that vein Jeff Reeves penned, “The most egregious way in which the LE confuses the borrower is by requiring the lender to quote the full rate on a lender’s policy on a purchase when such a circumstance almost never exists. I think it’s a substantive part of the problem. My motivation for emailing you in the first place is that I’m naive enough to still believe that if enough of us start talking about this then perhaps we’ll see a positive change on this in the future.  And if not, oh well, at least I was able to self-medicate by throwing my two cents into the conversation.


“Recent TRID talk made me think of the following truth:  sometimes almost getting it right is far worse than getting it completely wrong. Such is the case with TRID, particular the LE. Initially, I was one of few actually looking forward to October 3rd. On the surface the LE seemed vastly more helpful to the consumer than the hastily put-to-together GFE 2010 as it actually communicated the relationship between closing costs and cash to close. I am embarrassed to admit that it wasn’t until just a few weeks before the launch of TRID, while we were making last-minute tweaks with our document preparation company, that I learned that the regulation doesn’t permit the inclusion of the aggregate adjustment into Section G, Initial Escrow Deposit, on the LE. That omission, on top of the omission of common POC items such as the appraisal and credit report from the cash to close calculation on the LE, meant that on our average loan we would be overstating the cash to close by $400 to $600 depending on the size of the aggregate adjustment.  I could only imagine the conversation with our borrowers, ‘Hey, I know that this very official looking form says that you need to bring in $623 to close on your refinance but your cash to close is really zero. Trust me on that.’


“After muttering the four-letter ‘CFPB under my breath I began googling the logic behind the omission of the aggregate adjustment. The only thing I could come up with was that rule makers believed that calculating the aggregate might be too complex a task for some originators at this point in the process. Really? Are the rule makers assuming that the average MLO is using a typewriter and an HP calculator to produce the LE? Seriously, what loan origination software in today’s world cannot produce an aggregate adjustment? The same data inputs needed to compute the rest of Section G are the exact same inputs needed to produce the aggregate adjustment. As a national lender I am expected to estimate with perfection the exact transfer tax on a property in an obscure county three thousand miles away (a free that is often not directly related to the extension of credit), but I am apparently not competent enough to calculate an aggregate adjustment.


“If omitting the aggregate and POC items from the LE weren’t bad enough, the regulation creates an even larger source of confusion by requiring the lender to quote the full rate on a lender’s title insurance premium on a purchase even if the lender is simultaneously quoting an owner’s policy, which in many states dramatically reduces the cost of the lender’s policy to as little as $10. I understand the intent here: the CFPB wants the consumer to know how much the lender’s policy would cost if there was no owner’s policy being issued. Unfortunately, these good intentions do more harm than good. What makes this impractical and confusing for the borrower is that it is extremely rare that an owner’s policy is not issued on a purchase transaction (I would say that an owner’s policy is issued on more than 99% of our purchase transactions). So, imagine this conversation with a borrower buying a home in Texas where the sales price is $250,000, and he is putting 5% down. In reality, the true cost of his lender’s policy will end up being $100, but according to the CFPB, I need to list $1,634 as the cost of her lender’s policy even though I was also quoting an owner’s title policy. Ultimately, the problem with over-quoting this is the affect it has in presenting a false cash to close calculation on the LE.  ‘Hey, Mr. 95-LTV borrower, for whom cash is always a major concern, I know that your LE says that you’re coming in with $2,300 extra in closing costs, but trust me on this one, you’re not really…’”


Jeff’s note wraps up with, “The irony of all of this is that we, like many others, have now produced our own disclosure (of course by regulation it can’t look anything like the LE) to help our customers know what their real cash to close is.   So now our clients get to receive two disclosures when they get an LE from us, both of which look completely different and both of which differ not only on the fees disclosed but on the cash to close as well. Somehow I don’t think this is what the CFPB intended when they created the LE. But as is so often the case with government intervention, otherwise well-intended regulation to clarify a transaction for a consumer ironically only muddies the water. In this case, I think it would have been better had the CFPB gotten it completely wrong than almost getting it right.”



A Touching Golf Story

Jim stood over his tee shot on the 450 yard 18th hole for what seemed an eternity.

He waggled, looked up, looked down, waggled again, but didn’t start his back swing.

Finally his exasperated partner asked, “What the hell is taking so long?”

“My wife is watching me from the clubhouse balcony,” Jim explained. “I want to make a perfect shot.”

His companion said, “You don’t have a chance in hell of hitting her from here.”



(Please, no comments about correlation to negotiating with the CFPB on enforcement actions.)

Duck Hunting In Iowa

He shot and dropped a bird, but it fell into a farmer’s field on the other side of a fence.

As the lawyer climbed over the fence, an elderly farmer drove up on his tractor and asked him what he was doing.

The litigator responded, “I shot a duck and it fell in this field, and now I’m going to retrieve it.”

The old farmer replied, “This is my property, and you are not coming over here.”

The indignant lawyer said, “I am one of the best trial attorneys in Iowa and, if you don’t let me get that duck, I’ll sue you and take everything you own.”

The old farmer smiled and said, “Apparently, you don’t know how we settle disputes in Iowa.  We settle small disagreements like this with the ‘Three Kick Rule.'”

The lawyer asked, “What is the ‘Three Kick Rule’?”

The Farmer replied, “Well, because the dispute occurs on my land, I get to go first.  I kick you three times and then you kick me three times and so on back and forth until someone gives up.”

The attorney quickly thought about the proposed contest and decided that he could easily take the old codger.

He agreed to abide by the local custom.

The old farmer slowly climbed down from the tractor and walked up to the attorney.

His first kick planted the toe of his heavy steel toed work boot into the lawyer’s groin and dropped him to his knees!

His second kick to the midriff sent the lawyer’s last meal gushing from his mouth.

The lawyer was on all fours when the farmer’s third kick to his rear end, sent him face-first into a fresh cow pie.

The lawyer summoned every bit of his will and remaining strength and very slowly managed to get to his feet.

Wiping his face with the arm of his jacket, he said, “Okay, you old codger. Now it’s my turn.”

The old farmer smiled and said, “Nah, I give up. You can have the duck.”





(Copyright 2015 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)

Rob Chrisman