Mortgage Reform and Consumer Protection Act

Tuesday, 24 August 2010, 22:02 | Category : Mortgage News, Published Home Financing articles
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President Obama recently signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (AKA, the “Financial Reform Act”).  It is difficult to predict all of the ramifications of the Financial Reform Act because many of the provisions provide for future regulatory measures.  The Obama Administration has made it clear that they want to remodel the mortgage loan industry.  They want to penalize mortgage lenders and brokers and make it criminal to commit mortgage fraud.  The administration wants to reduce bad mortgages and foreclosure prevention scams.

mortgage reform

Establishment of New Oversight to Financial System

  • Establishes a Financial Stability Oversight Council (the “Council”) to monitor potential threats to the financial system and regulate nonbank financial companies and financial activities that the Council determines pose a risk to financial stability.
  • Establishes an Office of Financial Research to support the Council.
  • Requires large financial companies to periodically submit plans for rapid and orderly shutdown.
  • Establishes an orderly liquidation authority for companies that the pose a risk to financial stability if the Secretary of the Treasury and two other federal regulators agree that such liquidation is necessary to mitigate serious adverse effects on financial stability. Costs of the liquidation will be borne by shareholders and unsecured creditors and, if necessary, by risk-based assessments on large financial companies, but not by taxpayers.

Oversight Responsibilities

  • Transfers the functions of the Office of Thrift Supervision to the Office of the Comptroller of the Currency to supervise federal thrifts.
  • Transfers the functions of the Office of Thrift Supervision to the Federal Deposit Insurance Corporation (“FDIC”) to supervise state-chartered thrifts.
  • Transfers the functions of the Office of Thrift Supervision to the Federal Reserve Board to supervise thrift holding companies.
  • Revises the FDIC’s assessment base for deposit insurance and makes permanent the increase in deposit insurance to $250,000.
  • Establishes offices of Minority and Women Inclusion by the Treasury Department.

Regulation of Investment Advisors                                                                           

  • Eliminates the “private advisor” exemption in the Investment Advisors Act of 1940, thereby requiring advisors to private funds to register with the Securities and Exchange Commission (“SEC”) within one year, with certain exemptions.
  • Raises the asset threshold for federal regulation of investment advisors from $30 million to $100 million in recognition of strong state supervision.

Insurance Industry Regulation

  • Establishes the Federal Insurance Office in the Treasury Department to provide a source of information on and monitoring of the national insurance marketplace and consulting on international insurance matters.
  • Provides for reform in the areas of non-admitted insurance and reinsurance.

Volcker Rule

  • Allows for regulation to provide significant limitations on banks, savings associations and their holding companies regarding proprietary trading and sponsoring and investing in hedge funds or private equities funds (the Volcker rule). Certain restrictions will also apply to nonbank financial institutions supervised by the Federal Reserve.

Transparency and Accountability for Derivatives

  • Provides for regulation regarding supervision of nonbank subsidiaries of holding companies, restrictions on transactions with affiliates, and limits on derivatives and securities lending credit exposure.
  • Provides regulators the authority to impose capital and margin requirements on swap dealers and major swap participants.
  • Authorizes the Commodity Futures Trading Commission and the SEC to adopt rules for swap and security based swaps markets, including mandatory clearing and trading of swaps and security based swaps and public reporting.
  • Prohibits federal assistance for swaps and to security based swap entities.
  • Requires disclosure by swap dealers and major swap participants of material risks and characteristics of a swap, including conflicts of interest and material incentives.
  • Prohibits a bank from converting its charter to escape an enforcement action

Risk Management Standards

  • Promotes uniform risk management standards for systemically important financial institutions and systemically important payment, clearing and settlement activities conducted by financial institutions which will be established by the Board of Governors of the Federal Reserve Board, the SEC and/or the Commodity Futures Trading Commission.

Investor Protections

  • Creates an Office of Investor Advocate and an Ombudsman to assist investors in dealing with the SEC, as well as an Investor Advisory Committee at the SEC.
  • Increases the SEC’s authority to conduct investigations and assess penalties for violation of the securities law.

Credit Rating Agencies

Broadens the SEC’s power to regulate nationally recognized statistical rating organizations and establishes the Office of Credit Ratings which will (1) write regulations requiring credit agencies to create internal controls for ratings determinations, (2) establish independent boards of directors, (3) make greater disclosures to the public, and (4) develop universal ratings classifications across asset classes and types of issuer.

  • Prohibits compliance officers from working on ratings and prevents employees from both marketing ratings services and performing ratings.
  • Provides that ratings organizations can be deregistered for providing bad ratings.
  • Allows investors to bring private rights of action against rating agencies for a knowing and reckless failure to conduct a reasonable credit analysis.

Asset-Based Securitization Process

  • Requires securitizing companies to retain an economic interest of a material portion (at least 5%) of the credit risk for any asset that securitizers transfer, sell or convey to a third party. Regulations will determine specific risk retentions requirements.

Management of SEC

  • Requires several reports designed to assess SEC performance and provide recommendations for improvements.

Municipal Financial Advisors

  • Requires the registration of municipal financial advisors with the SEC which will create the Office of Municipal Securities. Municipal financial advisors will be subject to rules promulgated by the Municipal Securities Rulemaking Board and enforced by the SEC.

Consumer Protection

  • Establishes the Bureau of Consumer Financial Protection (the “Bureau”) which will be an independent bureau within the Federal Reserve System and will ensure that existing consumer protection laws and regulations are comprehensive, fair and enforced. The Bureau will also have the power to issue rules, including, but not limited to, rules under the Truth in Lending Act, the Equal Credit Opportunity Act and the Real Estate Settlement Procedures Act.
  • Revises the standard used to preempt state consumer protection law.

Federal Reserve Governance

  • Limits the Federal Reserve from making 13(3) emergency loans to individual firms.
  • Provides that the Government Accountability Office will conduct an audit of Federal Reserve 13(3) emergency lending since December 1, 2007.

Improving Access

  • Expands access to safe and affordable bank accounts, credit and financial information for low-income, minority and other underserved persons.

TARP Funds

  • Reduces the amount authorized under TARP from $700 billion to $550 billion and prohibits the use of repaid TARP funds for purposes other than deficit reduction.

Mortgage Reform

  • Sets minimum standards for mortgages by requiring lenders to establish that consumers have a reasonable ability to repay at the time the mortgage is issued.
  • Prohibits financial incentives that may encourage mortgage originators to steer consumers to higher cost mortgages.
  • Establishes penalties for lenders and mortgage brokers who do not comply with new standards.
  • Requires escrow accounts and appraisals in connection with higher risk mortgages.
  • Provides $1 billion for loans to homeowners who lose their jobs to help make mortgage payments during their unemployment.

Interchange Fees

  • Requires the Federal Reserve to issue rules that ensure that fees charged to merchants for debit transactions are reasonable. 

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