There are some new rules coming down the pipe for banks that will drastically alter the lending landscape and impact everyone in real estate. What are they and should you care?
I’m amazed that there has not been more talk regarding a big change in banking regulation coming down the pipe. There are new regulations that were issued (during Dodd/Frank). They are being phased in beginning in 4 months and will impact every bank, mortgage broker, and borrower in a big way.
What is the new rule? The CFPB issued a new HMDA (home mortgage disclosure act) rule in October 2015, which vastly expands the data points and fields that are required to be collected and reported. The new data fields include very specific information about the borrower and the property. In a nutshell, the new items include race, gender, age, credit scores, cost of the loan, etc….
The collection of all this data begins in 2018 with the first reports coming out 2019. With the new rules/ data now you will be able to find out at the bank level what loans were made based on age, race, gender, etc… in any given year.
Shouldn’t this be great since the primary purposes of the Home Mortgage Disclosure Act (HMDA) are to help authorities monitor discriminatory and predatory lending practices, as well as to ensure government resources are allocated properly to enforcement. Like many government plans, on the surface this rule looks great but the issues lurk in the details.
Why should a bank care? The Denver Post ran an article titled: “qualifying for a mortgage is getting easier, but minority applicants still face higher denial rates” In this article specific banks were not named, since the data was analyzed at a city level. Under the new rules, let’s say for example there is a bank in a high end resort town that does 100 loans a year (each loan is over 2m). This bank gets 10 applicants from people under thirty, of those, only two qualify for a loan. The statistics look terrible. I can see the headlines: “Bank xxx discriminates against young borrowers since 80% of all applications were turned town”. You can substitute the word “young” for minority, gender, etc… This is definitely not a time where the bank wants to be in the news! You can quickly see where this is going to be problematic for lenders.
Why should you care? 2019 will also be the year of the lawsuits for banks. It will not take long for attorneys to begin filing suits based on gender, age, credit score, minority status, zip code, etc…. Shouldn’t the lawsuits be good to help ensure that banks are lending fairly? In theory yes, but in practice the results of these changes will definitely not help consumers.
Here are 3 side effects of the new regulation for banks. All three will negatively impact consumers.
- Lending costs will increase: as banks risk (lawsuits, etc..) to lend increases so will the costs on consumers, they will basically “build in” the perceived risks/costs associated with litigation for all borrowers. The banks will not simply absorb the new costs, someone will have to pay! Basically, this will be a “pass through” cost that every borrower will now pay with increased lending fees (or higher rates).
- Compliance costs: Every lender will have to update their systems to collect more data, the HMDA rules have been in effect since 1975 so a number of programs/systems/processes will have to be updated. This all costs money that must come from somewhere and will further increase the lending costs to borrowers
- Change in underwriting: The new rules will substantially alter underwriting. Banks will increase the requirements on all borrowers. To avoid litigation, standards will be increased along with automated underwriting. If a borrower doesn’t fit the box perfectly, they will not get a loan. Banks will work to take any remnants of the “human touch” out of the process since this will provide cover from a wave of lawsuits. For example, let’s say borrower X was a little low on their credit score due to extenuating circumstances, but had 2 million sitting in a bank account for reserves. Under the old rules a bank would likely make an exception. Unfortunately, under the new rules that borrower would likely get rejected since this information would surely be used against a bank. The headlines would read: banks xxx approved loans for Chickens with low credit scores but for Pigs the average credit score to get a loan was x% higher. As we all know there were extenuating circumstances but the data can easily be parsed to make a case that bank X has a history of discriminating against pigs since they require higher credit score.
With all the new data points, it will be very easy to distort the data in whatever snapshot works for the situation. This will be especially true for smaller banks/credit unions/lenders that don’t have as much volume as a billion-dollar bank. Although I understand the intent of the rule is to help make lending more accessible to all borrowers, the actual real-life implications will be just the opposite as costs will increase for all borrowers and underwriting requirements will also become more stringent.
The new rules remind me of another recent piece of legislation that increased the minimum wage with the intent to increase the living wage of all workers. The impact was the opposite of the law’s intent (see: How Seattle’s “grand wage experiment” worked out) leading to less hours for workers and an overall decline in wages. The new HMDA rule will have a similar result and ultimately lead to more conservative lending that will further leave behind the groups the law was intended to help.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).