How changes to Dodd-Frank may affect New Yorkers and our real estate market
Among the many changes the Trump administration is expected to make to Obama-era programs, a tweak to the Dodd-Frank financial reform law seems to be at the top of the list. While experts agree that the president is unlikely to repeal the law altogether, he is expected to loosen some of its regulations.
What is Dodd-Frank?
Dodd-Frank is a complex law that covers myriad aspects of the financial industry, but, generally speaking, it was created in response to the foreclosure crisis of 2008 to rein in the banks' then-loose lending practices, which are widely believed to have led to the financial crash. Restrictions were placed on banks in various ways, "from balance sheet requirements, proprietary changes, and importantly, restrictions of mortgage lending practices," explains Victoria Shtainer, a NYC real estate veteran, and agent with Compass.
While critics have blamed Dodd-Frank for hindering business because of lending restrictions, most economists and real estate industry insiders agree it helped the market correct itself. And, believe it or not, even the banks don't want Dodd-Frank repealed, since they’ve adapted to, and spent millions of dollars adapting to, all these rules, says Mark Zandi, an economist with Moody's. "There are parts of it they don’t like and they think are overboard, but to be honest, even the Obama administration wanted to make some changes to it, too," says Zandi.
"All of these horror stories that you hear about all these regulations being imposed on Wall Street are not borne out by reality," says Jacob Inwald of Legal Services NYC. "Banks are doing just fine. Complying with regulations has not been affecting their balance sheets."
Inwald says the biggest change to come out of Dodd-Frank, as far as homeowners are concerned, was the creation of the Consumer Financial Protection Bureau (CFPB), which is designed "to address fairness in financial transactions." The CFPB is responsible for enforcing several laws that govern the mortgage process, including the Truth in Lending Act (TILA), which requires lenders to provide disclosures about what a customer is being charged with their credit, as well as the Real Estate Setttlement Procedures Act (RESPA), which, Inwald explains, "also has disclosure requirements and procedures designed to give borrowers tools to access infomation on their loans and the servicing of their loans."
The CFPB also closely monitors how mortgage servicers (intermediaries between the banks and borrowers, which collect monthly payments) conduct business. "There were always some rules regarding servicing, but they're much more comprehensive under Dodd-Frank," he says. "Servicers have often done a terrible job at helping those facing foreclosure," says Inwald, "and Dodd-Frank's regulations on mortgage servicers protect against abuses."
Under Dodd-Frank, the CFPB also set up a Consumer Response Unit, an online/phone portal where customers could complain about the banks' handling of mortgages, credit cards, and other consumer financial issues. The banks were obligated to respond to comments in the CRU, and the data was made public. "The banking industry was incensed at the notion of this sort of transparency," Inwald says, and adds that this particular feature of consumer protection brought by Dodd-Frank is threatened by the CFPB’s enemies.
What would loosening up restrictions mean for real estate consumers?
Outside the banking world, Zandi thinks changes made in the future to Dodd-Frank won't likely affect consumers, especially those looking to get loans, in any substantive way, meaning that it won't immediately become easier for borrowers to be approved. Nonetheless, he says there are atmospheric changes likely underway. If, for example, regulators, including the Federal Reserve, loosen up their rules on lending for multi-family housing units (for example, residential buildings), you could see another development boom in New York City. In that case, though, you'd "also be more likely to have a boom and a bust," says Zandi.
Inwald, who oversees foreclosure prevention for clients in Queens, Brooklyn, the Bronx, and Staten Island through Legal Services NYC, fears that loosening up Dodd-Frank rules will lead to more foreclosures across the city. He notes that there were 34,000 new filings across the state in 2016 alone, despite perceptions of recovering real estate markets, and that mortgage servicing rules administered by the CFPB are an important tool for distressed homeowners and their advocates.
"What got us into the mess to begin with was irresponsible lending, with buyers not knowing what they were getting into," he says. "Dodd-Frank required that much better information be given to borrowers so they wouldn't saddle themselves with predatory loans, and it put much stronger regulations on the lenders." If the CFBA’s authority is weakened and there’s pressure put on the agency to make rules less protective, that will have "a direct impact on consumers," says Inwald, who reports that he and his colleagues are "concerned. And we're all alarmed at the prospect of a CFPB with less independence and less interest in enforcing the law."
As for whether rollbacks to Dodd-Frank will actually make borrrowing easier, Miller Samuel's Jonathan Miller, an appraiser and market watcher, thinks it could. "Theoretically, I think it will help ease credit by reducing over-regulated lending conditions. But it's a fine line," he says. "The mortgage world needs a hybrid between the nominal regulations of the credit/housing bubble era and a reduction of excessive regulations today."
For now, as is the case with a lot of issues in this brand new administration, we may just have to wait and see.
"We will have to pay attention to what changes the administration proposes," says Compass' Shtainer, "and I highly encourage anyone considering a mortgage to follow this story and stay educated on the topics." While she opposes a repeal, she says if the changes are "minor and allow slight restrictions on lending, this could be a positive as it could extend access to more potential buyers that a bank might not lend to under the current, highly strict, lending guidelines."
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