The Cost & Impact of Dodd/Frank

Housing Virginia Symposium06/14/2013

Disclaimer The content of this presentation represents

contains information from independent 3rd party firms. The statements made by the presenter are opinions and do not necessarily represent the views of the VBA, VMLA, or other related organizations. Nothing in the presentation represents legal advice. If you need specific advice (for example, medical, legal, financial or risk management) please seek a professional who is licensed or knowledgeable in that area.

1. Provide insight into the state of the banking /mortgage finance system

2. Discuss the impact of Dodd-Frank

Today’s Purpose

State of Banking & Mortgage Finance System

You can observe a lot, just by watching…-Yogi Bera

Industry Consolidation Continues…

0

2,000

4,000

6,000

8,000

10,000

12,000

'94 '96 '98 '00 '02 '04 '06 '08 '10 Q3-12

Commercial Banks Savings Institutions

Source: FDIC

The total number of institutions in VA has steadily declined since 1989 as well.

198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020110

20

40

60

80

100

120

140

160

180

200

182 178 174 170165 164

157 154 151 152147 143

138130

125 125 128

111104 103 106 104 101

Source: FDIC

Total Commercial Branches - US

Source: FDIC

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Total Commercial Branches - VA

Source: FDIC

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

500

1,000

1,500

2,000

2,500

3,000

Consumers Reduce Borrowing

0%

2%

4%

6%

8%

10%

-10%

-5%

0%

5%

10%

2006 2007 2008 2009 2010

Source: Federal Reserve

Recession*Revolving Credit(left axis)

Unemployment Rate(right axis)

Year-

Over-

Year

Perc

en

t C

han

ge

Skyline Capital Strategies, LLC © All Rights Reserved 2012

Industry has taken massive net C/Os …

1990

1994

1998

2002

2006

2010

$-

$40,000,000

$80,000,000

$120,000,000

$160,000,000

$200,000,000

Net Loan & Lease C/Os$’s in ooo’s

Net Loan & Lease C/Os

Source: FDIC

Skyline Capital Strategies, LLC © All Rights Reserved 2012

Asset quality is slowly improving

Skyline Capital Strategies, LLC © All Rights Reserved 2012

14

Nonperforming Loans/Total Loans

Banking and Public Opinion

Source: Gallup

Congress

HMOs

Big business

Organized labor

Banks

Television news

Newspapers

The criminal justice system

Public schools

The presidency

The Supreme Court

The medical system

Church/Organized religion

The Police

Small business

The military

0 10 20 30 40 50 60 70 80

Changes in Confidence in Institutions, 2007 vs. 2012

20072012

Banking and Public Opinion

65% of consumers do have a favorable opinion of their own bank

70% have never heard of Dodd-Frank

Only 3% believe most of TARP has been repaid

Source: ABA

The Impact of Dodd-Frank

Unintended Consequences

“Climate is what we expect. Weather is what we get.” -Mark Twain

Consumer Financial Protection Bureau

Richard Cordray

CFPB’s role Write rules, supervise companies, and

enforce federal consumer financial protection laws

Restrict unfair, deceptive, or abusive acts or practices

Enforce laws that outlaw discrimination and other unfair treatment in consumer finance

Ability to Repay New Servicing Guidelines MLO Comp Rules New Appraisal Guidelines HOEPA Rules “High Priced” Mortgage Loan Escrow Rules

Finalized in January 2013

QRM RESPA/TILA Integration

To Be finalized later in 2013

General Rule. A creditor must make a reasonable good faith determination that a consumer has the ability to repay the mortgage loan.

Ability to Repay

A loan is a Qualified Mortgage if it does not have:

– Negative amortization – Interest-only payments – Balloon payment – Term of more than 30 years – Points and fees that exceed 3% of loan

amount (higher thresholds for loans under $100,000)

Ability to Repay /Qualified Mortgage (QM)

Qualified Mortgage – Three alternative standards to meet requirements:

1. Total (“back-end”) DTI ratio cannot exceed 43%, 2. For now, a loan that is eligible to be purchased by

Fannie Mae or Freddie Mac (or eligible to be insured/guaranteed by FHA or VA);

3. Certain loans with a balloon payment, made by small creditors

QM Generally

A creditor that makes a Qualified Mortgage that is a “prime” loan (APR exceeds the APOR by 1.5% or less for first lien and 3.5% or less for second lien loan) has a “safe harbor” that it has complied, if challenged.

Safe Harbor for “Prime” loans

A creditor that makes a Qualified Mortgage that is not a prime loan, has a “rebuttable presumption” that it has complied, if challenged.

Rebuttable Presumption

Lenders must retain at least 5% skin in the game UNLESS they make a “QRM” loan

Qualified Residential Mortgage (QRM)

No balloon mortgages, interest only, negative amortization

Max DTI of 28 / 36% 80% Max Loan-to-Value for purchase loans 70% Max LTV for Refinance No 60-day delinquency in past 2 years Other specific provisions relating to

mortgage servicing

QRM as proposed

QM & QRM

Fair Lending LawsDisparate Treatment

Disparate ImpactPredatory LendingUnfair & Deceptive

Practices

Unintended Consequences

?

?

Alternative QRM Proposal

QRM Proposal

Pre-2008 Housing Crash

Interest Only

Sub-prime

2009-2012 Market

QM Prime (Less than 1.5% above APOR)

QM-Non Prime (More than 1.5% above APOR)

QM/QRM & Credit Availability

GSE / Underwriting Changes/ Restrictions

And there are other types of challenges

Two Key Forms◦ The loan estimate ◦ The Closing Disclosure

RESPA/ TILA Proposal

The lender must give the form to the consumer within 3 business days after consumer “applies” for a mortgage loan

Lender can’t charge fees until form is delivered

Lenders can still provide early estimates with disclaimer

The Loan Estimate

Replaces the HUD-1 and recently revised Truth-in-lending disclosure

Contains additional new disclosures per D/F Must be delivered at least 3 Business days

before closing “Changes” require a new form to be

delivered Debate still over who can deliver (lender or

settlement agent, or both)

The closing disclosure

The process of implementing just 1 new rule

What will D/F Cost?

For Dodd/Frank, the direct implementation

cost estimates range from $6- $22 billion for the whole banking industry.

What WILL it cost in total?

Annual labor hours to comply with current new rules under Dodd/ Frank: 2,260,631

Number of work weeks required to meet the burden of Dodd /Frank: 56,516

Number of Americans who will have to work all year, every year solely on Dodd/ Frank Compliance: Over 10,000

The Cost of Dodd/ Frank

Source: Financial Services Committee Presentation – One Year Later: The Consequences of the Dodd-Frank Act

A First Data study estimates a $6 billion increase in compliance costs for year-end 2012

2010 Actual 2012 Projected $-

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$26,000,000

$32,000,000

Compliance Costs$’s in 000’s

Compliance Costs

Source: First Data

Congressional Budget office estimates $27 billion cost to economy over next 10 years

Over all, the budgetary cost for Dodd-Frank will exceed $1.25 billion dollars in 2012

Tax Cost

Source: Financial Services Committee Presentation – One Year Later: The Consequences of the Dodd-Frank Act

FY 2010 FY 2011 FY 2012

Total Budget 9.2 Million 142 Million 329 Million

Total FTE 0 342 1225

CFPB Direct Cost

Source: Financial Services Committee Presentation – One Year Later: The Consequences of the Dodd-Frank Act

2.9 Million job projected to be lost in the US (or 5.8 Million if reforms implemented rapidly)- Institute for International Finance

US GDP is projected to be 2.7% lower or 5.7% lower if implemented rapidly

Lending rates are projected to have increased by 4.7% or as much as 7% if reforms are implemented rapidly

Economic Impact / Unintended Consequences

Source: Financial Services RoundtableJune 2012

OCC reported that Dodd/Frank margin rules on derivatives trades may require US banks to set aside $2 trillion in collateral

Economic Cost

Source: Financial Services Committee Presentation – One Year Later: The Consequences of the Dodd-Frank Act

What does all of this mean?

Higher Compliance Costs = higher rates and more fees

Otherwise credit-worthy borrowers denied access to credit solutions

Fewer providers & product options More confusion over choices & options Financial literacy has never been more

important

Potential impacts to our customers

How do we solve for these challenges?

It is not necessary to change.  Survival is not mandatory.  ~W. Edwards Deming 

Questions

Virginia Mortgage Lenders AssociationRichard OwenSVP-VBA-MSIExecutive Director, VMLAPh: (804) 819-4715rowen@virginiamla.com