Commentary: Ready for Tougher Underwriting and to Pay More for Your Mortgage?

There are some new rules coming down the pike for banks that will drastically alter the lending landscape. What are they, and should you care?

I’m amazed that there has not been more talk regarding a big change in banking regulation. There are new regulations being phased in that will impact every 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 these data begin in 2018, with the first reports coming out 2019. With the new rules, 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, yes—but the issues lurk in the details.

Why should a bank care? The Denver Post ran an article, “Qualifying for a Mortgage Is Getting Easier, but Minority Applicants Still Face Higher Denial Rates.” (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 $2 million). The bank gets 10 applicants from people under 30; of those, only two qualify for a loan. The statistics look terrible. I can see the headlines: “Bank X Discriminates Against Young Borrowers Since 80 Percent of All Applications Were Turned Down.” You can substitute the word “young” for a specific 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 lawsuits help ensure banks are lending fairly? In theory, yes—but in practice, the results of these changes will definitely not help consumers.

Here are three side effects of the new regulation for banks. All three will negatively impact consumers.

  1. Lending costs will increase. As banks’ risk (lawsuits, etc.) to lend increases, so will the costs on consumers. Banks will basically build in perceived risks/costs associated with litigation for all borrowers. The banks will not simply absorb the new costs—someone will have to pay! This will be a pass-through cost that every borrower will now pay with increased lending fees (or higher rates).
  1. Compliance costs will increase. 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 costs to borrowers.
  1. Underwriting will change. 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, a borrower would likely get rejected, since this information would surely be used against a bank. The headlines would read “Bank Approved Loans for Chickens With Low Credit Scores, but for Pigs the Average Credit Score to Get a Loan Was X Percent Higher.” The data can easily be parsed to make a case that a bank 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. Though 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, 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.

Glen Weinberg is COO of Fairview Commercial Lending, serving Colorado, Florida and Georgia.

This article is intended for informational purposes only and should not be construed as professional advice. The opinions expressed in this article are those of the author and do not necessarily reflect the position of RISMedia.

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