Documentation Requirements
I get it. What we make and how much we have in the bank are two pieces of information that we rarely ever share. Now your applying for a mortgage and the person you know nothing about is asking you to expose yourself completely. Today I’ll share some light on how we got here and just as important, what lead to this over burdensome situation.
You know it’s bad when a frustrated client shouts out “next they’ll want a blood sample”. It wasn’t that bad until just a few years ago. In 2010 congress passed the Dodd-Frank Wall Street Reform and Consumer Protect Act. That act set up the federal agency now known as the CFPB (The Consumer Financial Protection Bureau). Unlike any agency created by congress before, Dodd-Frank allowed a bunch of non-elected bureaucrats to write their own rules and regulations. President Obama tasked a little-known regulator at the FDIC to lead this project that would have some of the greatest impact on our financial system ever. That persona was Elizabeth Warren.
If you have followed any of the presidential primary coverage, you’ll know that Elizabeth Warren believes that big business and Wall Street are evil. That was the philosophy at the CFPB. This isn’t a slam on Warren and her views, but I am trying to give some context as to why so many consumers are frustrated today when applying for a mortgage. When regulators take the position that banks are out to screw consumers, they will institute tough regulations that unfortunately have some unintended negative consequences.
A good example of this is a regulation known as ATR, or the Ability to Repay. Simply put, banks are required to perform specific tasks to ensure that before they lend you money, you have the ability to repay your debt. Okay, that sounds logical and also redundant. Why wouldn’t a bank make sure you can pay the loan back before they lent you the money? There are lots of examples of loans with small mortgage balances in relation to tons of equity, or consumers with perfect credit demonstrating their ability to manage their finances. But it makes no sense if you believe the banks are out to steal your property or that a consumer can’t decide for themselves if that mortgage payment is manageable. In the old days, if you borrowed money and couldn’t pay it back, you lost your property and moved on. It wasn’t the bank’s fault you couldn’t fulfill your obligation. For whatever reason, circumstances unfortunately didn’t turn out well – people moved on. But in today’s world the government regulators view consumers as a bunch of idiots. We don’t know how to take care of ourselves or know if that $2,200 mortgage payment is too much to handle. Their view is that without strict government regulations banks will always take advantage of unknowing consumers.
So now in 2020 what we have are thousands of pages of regulations that all in lending must follow to prevent us from screwing you over. With the ATR regulation banks must scrutinize your income to make sure you are not being foolish and overextending yourself. With the Patriot Act, banks must comb through your assets to make sure you’re not a terrorist buying a vacation rental condo in Kona. The penalties imposed by the Feds on lenders who fail to do these things are harsh. Penalties range from millions in fines to the worst-case scenario of loan forgiveness.
For those sitting in front of your computer, while in the midst of a mortgage application – reading an email from the lender asking for tons of documentation, don’t blame the banks. All they are doing in making sure they don’t get fines for not doing their job as required by the feds. Because of the added burden placed on lenders, they are now spending thousands on every loan just to fulfill the regulatory and reporting requirements of the CFPB. Those added costs are passed on to you, the consumer, in higher fees and interest rates.
I am not advocating for the wild west with no regulation, but I strongly believe that with proper disclosure of fees and terms, consumers should be allowed to determine if they will be able to handle the obligation of the loan they are requesting. It is then the bank’s choice if they want to take that risk. I find it an insult for the government to feel they need to protect me from myself.
