Vincent Di Lorenzo, Professor of Law and Senior Fellow at the Vincentian Center for Church and Society, recently published an article, “Three Years after Dodd-Frank: Sacrificing Safety to Maximize Access to Credit,” in the Bureau of National Affairs, Banking Report, January 7, 2014, 102 BBR 30 (2014). The following is an abstract of the article:
On January 10, 2014 new regulations take effect that define what constitutes a “qualified mortgage” under the Dodd-Frank Act. Regulations defining “qualified residential mortgages” under the Act were re-proposed on August 26, 2013 and may be finalized in the early part of 2014. As these regulations wound their way through the rulemaking process, the long-term goal of safety was comprised for the short-term goal of maximizing access to credit.
The Dodd-Frank Act was a response to market failure. It sought to substitute governmental requirements aimed at ensuring safe underwriting for the prior reliance on market forces to achieve that goal. Curiously, after three years of regulatory debate over required underwriting standards we face a situation in 2014 in which the market, and not government regulations, are ensuring the safety of mortgage underwriting practices. Government regulators rejected maximum loan-to-value ratios, minimum credit scores and conservative, maximum debt-to-income ratios. As a result, lenders enjoy a safe harbor from liability, and will likely enjoy exemption from risk retention requirements, without complying with underwriting requirements that the federal agencies have admitted reflect prudent and safe underwriting. In the short-term internal bank policies have led to safer underwriting requirements. This has been bolstered by the secondary market’s current requirements. However, in the long-term, when market requirements are relaxed, Dodd-Frank has not put in place safe regulatory underwriting requirements – requirements that must be complied with before lenders are shielded from liability or loss.