Had there been a federal watchdog consumer protection agency on duty during the early years of this decade, could it have prevented the housing boom and bust that put millions of homeowners into foreclosure and sucked trillions of dollars of equity wealth from just about everybody else?
Nobody can answer that question. But when the House passed the massive Wall Street Reform and Consumer Protection Act on Dec. 11, Congress took the first step toward creating a national watchdog for home buyers and mortgage borrowers for any future boom cycles.
The 1,279-page bill covers a vast amount of financial territory. But for ordinary consumers looking to apply for a home loan, what it says is this: Next time around, the federal government isn't as likely to be asleep at the wheel. You'll be less likely to encounter an environment in which unregulated pitchmen can sell you loans requiring no money upfront, no documentation, hyped-up appraisals and payment plans that drag you deeper into debt.
For buyers, the core of the legislation is its creation of a Consumer Financial Protection Agency, with broad powers to oversee and evaluate the consumer-safety features of mortgages and equity credit lines offered by banks, mortgage companies, brokers and others nationwide.
Though no specific types of loans are prohibited in the legislation itself, the CFPA almost certainly would limit or closely regulate mortgages with extra layers of risk -- teaser rates, adjustable payments, negative amortization and options for borrowers to pay as little as they want per month.
The agency would also play a pivotal role in spotting discriminatory patterns in mortgage pricing, underwriting and marketing, including the steering of minorities and seniors into higher-cost loans and unfair denials of credit on racial or other prohibited grounds. The CFPA would essentially take over federal responsibility for the Equal Credit Opportunity Act and fair lending programs, and function as the go-to agency on unfair and deceptive trade practices in the financial arena.
On top of all this, it would monitor home real estate closing practices to prevent under-the-table payoff schemes among realty agents, lenders, title companies, lawyers and others in exchange for business referrals. It would also get prime responsibility for making disclosures of loan terms to consumers meaningful and understandable, including a first-ever combined truth-in-lending and good-faith-estimates disclosure for all mortgage transactions.
The CFPA would have general oversight on home real estate appraisals and would be required to adopt rules and standards to guarantee "appraiser independence" from pressures by lenders, realty agents and others.
Once the revised appraisal rules go into effect, the controversial Home Valuation Code of Conduct mandated this year by Fannie Mae and Freddie Mac would be terminated. That code has been widely criticized for leading to lowball appraisals and valuations by inexperienced appraisers operating far beyond their areas of geographic competence.
Significantly, the legislation requires mortgage lenders to "compensate appraisers at a rate that is customary and reasonable for appraisal services" in their local markets. This is a direct response to sharply reduced fees now being paid to many appraisers by "appraisal management companies" that have mushroomed under the Fannie-Freddie code.
The CFPA would come with a full set of teeth: strong powers to subpoena, mount joint investigations with federal and state agencies, file lawsuits in federal courts and seek damages, civil money penalties and restitution. Its penalties could range from $5,000 a day per infraction to $1 million a day.
Consumer organizations and fair-lending groups generally welcomed House passage of the bill, while banks and mortgage industry trade groups tended to be critical, seeing the proposed reforms as regulatory overkill.
Travis Plunkett, legislative director for the Consumer Federation of America, said that had the new agency been in existence in 2001, it "would have been collecting data and complaints from consumers very early on" and could have restricted high-risk mortgages.
David Berenbaum, executive vice president of the National Community Reinvestment Coalition, said the creation of the CFPA "is going to place consumer protection on mortgage and financing issues into the hands of a single regulator at the federal level" -- something that was absent during the rolling tragedy of the boom and bust.
Plunkett and Berenbaum say passage of final legislation is far from a sure thing. Action now shifts to the Senate, where industry lobbyists hope to either kill the measure or remove its teeth.
Distributed by the Washington Post Writers Group.