Inside Financial Services

Regulators’ Latest Clampdown Is Going To Be Bad For Banks

And borrowers, too, for that matter

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American Banker reports the feds are about to unleash a new regulatory onslaught on the banks:

Regulators recently offered a rare behind-the-scenes glimpse of what areas they are targeting for enforcement, saying that potential fair lending violations and how mortgages are priced and serviced remain top priorities for the future.

Speaking at a mortgage conference last week, top enforcement officials from the Department of Justice, Consumer Finance Protection Bureau, and Office of the Comptroller of the Currency said they have ramped up investigations of the mortgage lapses. [Emph. added]

I’ll spare you the details, but essentially regulators are planning to spank the banks if, in the physical presence in which the banks operate, there are disparate outcomes—regardless of the lender’s intent or what the relevant rules and law actually say–in  how minority borrowers are treated vs whites in areas such as loan availability, pricing, and servicing:

[Steven] Rosenbaum [chief of housing and civil enforcement in the DOJ’s Civil Rights Division] listed two areas of concern for the department, both related to fair lending: when lenders “redline” minority communities regardless of whether it was intended and when lenders use price discretion on mortgages to attract investors.

Oh, and there’s this:

“We do not regulate you. We do not supervise you. We do sue you,” said  . . . Rosenbaum.

How reassuring. Let’s taken it as given, first, the federal regulators’ policy toward mortgage lending is schizophrenic. In the wake of the subprime blowup, regulators have forced lenders to tighten lending standards severely: borrowers’ credit scores are up and lending terms are tighter. Mortgage credit is thus harder to get these days than it has been in just about anyone’s memory. On the other hand, regulators are still determined that subprime borrowers—the segment that caused most of the problems in the first place, recall—still have more access to mortgage credit than they deserve solely based on their  creditworthiness. In resolving this contradiction, regulators will follow a strategy that’s incoherent. “Rosenbaum . . . noted that the way the Justice Department examined for redlining cases goes beyond just confirming compliance with the Community Reinvestment Act,” the Banker reports. “In such an exam, investigators compare where banks do business, what products they’re offering, to whom, and the pricing of these products and services within the communities. Rosenbaum said banks ‘need to be mindful’ that the Justice Department is comparing those areas of a bank to their peers in that community.” So following the law will no longer be enough, and pursuing a strategy that’s different from your competitors won’t be allowed either. Banks should essentially be expected to offer all their products to all comers at the same price.

This is insane. A basic tenet of the banking business is pricing for risk—and the feds seem to be indicating they won’t allow that. A basic tenet of banking (of any business) is picking and choosing what markets to target—and the feds are saying they won’t allow that, either. And a basic tenet of banking is the optimal mitigation of credit losses—and the feds seem to think that’s no good either:

The OCC has . . . begun taking an interest in mortgage modifications, particularly in potential discrimination among minorities who may not have received a modification as a similarly situated white borrower.

Since when in this country did loan mods become a constitutional right? The borrower signed a contract. He didn’t live up to its terms. If the lender believes it can reduce its eventual loss by changing the terms of the deal, it should change the terms of the deal. If not, then it shouldn’t. Besides, unlike standard mortgages, all loan mods are different. How is a regulator even going to be able to tell if they’re being granted on a discriminatory basis?

If I’m reading them right, federal regulators essentially want bankers to stop being true bankers—that is, prudent, risk-managing suppliers of capital–and prefer they become money-losing public utilities that hand out money to a favored political group. The result of this coming regulatory clampdown is predictable: less credit is going to be available to everybody. If a bank worries that, in making a loan to a standard-issue prime borrower, it will be accused of somehow discriminating against a minority subprime borrower across town, it’s not going to make the prime loan in the first place. At a banking conference I hosted last week, the CEO of a top-10 bank commented that, even when the nominal economics of sub-prime lending starts to look attractive again, his bank won’t return to that segment. Reason: new regulations requiring what the bank has to do should the loan go bad are so expensive (both in dollars and reputation) that the whole thing won’t be worth the effort. This is a great example of what he was talking about.

The credit panic happened in 2008. Since then, bank balance sheets have been overhauled, lending standards tightened, and bankers, having been burned by subprime, have regained their sober sanity. Six years on, it seems it’s the regulators who are the ones who are still out of their minds.

What do you think? Let me know!

7 Responses to “Regulators’ Latest Clampdown Is Going To Be Bad For Banks”

  1. Ralph DeGroff

    This move is very discouraging. It should have the effect of eliminating the mortgage business.

  2. swpilgrim

    Perfect. More government “Jobs” for otherwise Burger-flippers.

  3. Ken Greenberg

    There are too many regulations… and way too many regulators. The infamous CFPB has more than 1,100 employees. Doing what?!? This is nuts.

  4. Sceptical

    Sure, over-regulation is a hindrance to trade. But are you suggesting that redlining is a fine and fair thing for banks to do? It’s fair for a bank to price its products according to true risk, but if a bank’s practice is to offer mortgages at 5% to a 700 FICO score borrower who happens to live on the ‘wrong side of the tracks’, yet offer 4% to a 700 FICO score borrower in a ‘good’ neighborhood, then that’s a hindrance to humanity.

    • johnM

      No hindrance to humanity. I suppose your hypothetical will ignore that despite the same credit scores, one borrower has a 20% debt to income ratio and the person the ‘wrong side’ of the tracks has 35%, or one LTV is 50% and the other is 75%? Can you differentiate on rate or is everything presumed to be discriminatory until the burden shifts to the bank’s team of lawyers to prove up every single mortgage isn’t? THis is nuts.

      • johnM

        …. or are banks allowed to price into their paper that upon a default, on one side of the street the bank might have to foreclose in a metro county where it might take two years simply to get marketable title, versus the neighboring county that takes 6 months? Try to foreclose on a mortgage in Cook County, Illinois versus the neighboring DuPage. Same state, same laws, years of a difference. Cost account that. Is that discrimination? Economics 101?

  5. Mark

    I’ve been a small town bank mortgage lender since 1987 and generally enjoyed it as a worthwhile career. I’m wondering if I can make it to retirement. Starting to think I can’t.

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