LenderNews by Rob Chrisman
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Feb. 11: Notes on blockchain & regulation; Trumps moves roiling the Fed & regulatory environment – Tarullo resigns

February 11, 2017

Under the category of, “I don’t know what it is, but I think it’s a good idea,” according to a survey of 200 financial and technical senior managers in the US and Europe, the vast majority said they believe in blockchain technology’s potential and that it would be in daily use by 2026. However, 70% of respondents say their companies still lack specialist blockchain expertise, per the survey, which the TABB Group conducted for Synechron. My cat Myrtle thinks it will be here long before 2026. But what does she know? She’s still fascinated with rotary dial telephones.
 
It’s a hot topic out there – something that goes beyond whether or not to capitalize the “t” in Fintech/FinTech. At the “Global Interdependence Center’s Payment Systems in the Internet Age” Conference, Philadelphia Fed President Patrick T. Harker said that regulating the evolving FinTech industry benefits not only consumers, but also the innovators. While Harker did not speculate as to whether the Fed will become involved in FinTech regulation, he stated that it is in the best interest of FinTech companies “to have an established framework in which to operate.” He cautioned, however, that “all financial systems are a matter of trust” and thus FinTech firms will “need that trust the same as any other bank or financial institution.” Harker noted that regulations will help determine which companies can survive the “down side” of a credit cycle, but implementing regulations after a “crisis. . . could mean tighter strictures and less room for innovation.”
 
One can’t pick up a newspaper or watch a news show on TV without seeing the news filled with the new administration’s moves. Want a legal take on how things are going with executive orders potentially impacting residential lending? There is a “Consumer Financial Services Review” blog post by Mayer Brown lawyers that analyzes President Trump’s executive order establishing “Core Principles” for regulating Dodd-Frank and explains how the Core Principles compare to the key principles of the CHOICE Act.
 
Yesterday, on February 10, the Fed announced that Daniel K. Tarullo submitted his resignation as a member of the Board of Governors of the Federal Reserve System, effective on or around April 5. Mr. Tarullo—who has been a member of the Board since January 28, 2009—was appointed to the Board by President Obama for an unexpired term ending January 31, 2022. During his time on the Board, he served as Chairman of the Board’s Committee on Supervision and Regulation. He was also Chairman of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation.
 
Law firm BuckleySandler spread the word that, “On February 2, the OMB Acting Administrator of the Office of Information and Regulatory Affairs (OIRA) released a memorandum providing interim guidance for implementing President Trump’s January 30 Executive Order entitled ‘Reducing Regulation and Controlling Regulatory Costs.’ Among other things, the memorandum clarifies that the January 30 Order (i) does not apply to agencies defined as an ‘independent regulatory agency’ by 44 U.S.C. § 3502(5), which include the CFPB; (ii) applies only to significant regulatory actions that have an annual effect on the economy of at least $100 million or result in other material effects as defined in Executive Order 12,866; and (iii) applies only to significant regulatory actions issued between noon on January 20 and September 30, 2017.”
 
But wait, eliminating regulations is not quite so simple! Public Citizen, the Natural Resources Defense Council, and the Communications Workers of America—sued the Trump administration over the President’s “eliminate two for every one new regulation” proposal. The action seeks to have the Executive Order declared unconstitutional and enforcement thereby stayed. Among other things, the complaint asserts that the President’s Executive Order unlawfully forces agencies to make decisions based on an “impermissible and arbitrary choice—whether to issue a new standard at the cost of the loss of benefits of two existing standards.” To repeal “two regulations for the purpose of adopting one new one, based solely on a directive to impose zero net costs and without any consideration of benefits,” Plaintiffs argue, “is arbitrary, capricious, an abuse of discretion, and not in accordance with law.” 
 
And no governing body wants to be left behind. This week the National Credit Union Administration (NCUA) published a notice of proposed rulemaking to expand the types of investment capital that federally insured credit unions could use to meet certain regulatory requirements. NCUA is considering whether to allow credit unions to use investment capital (that would be uninsured capital subordinate to all other claims) to satisfy the risk-based net worth ratio requirement. Currently, only low-income designated credit unions can use secondary capital to satisfy two regulatory requirements: the net worth ratio and the risk-based net-worth ratio. BuckleySandler reports, “Although any changes to the definition of net worth would require an act of Congress, the NCUA asserted in the proposal that it has broad authority to adjust the risk-based net worth ratio requirement and therefore may choose to allow credit unions that are not ‘low-income designated’ to use alternative capital to meet this requirement.”
 
Menlo’s Rick Roque writes, “It appeared that the House Financial Services Committee may move forward with the Financial choice act to amend Dodd-Frank and create a commission leadership at the CFPB. Senate Republicans released a smaller bill aimed to be getting putting this process in place.
 
“In my opinion it is likely, once rolled back, along with other regulatory reforms, CRA requirements, capital and asset requirements, may inspire mortgage banking startups. The cost of warehousing is likely to go down while access to warehousing may broaden with less onerous borrowing ratios to encourage small business growth. The impact of this is far reaching as the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission CFTC), the Federal Deposit Insurance Corporation (FDIC), and the Consumer Financial Protection Bureau (CFPB) have developed hundreds of new rules that, taken together, attempted to limit risks on residential products, portfolio programs, and consumer risks in the financial system. The issue is, the financial system is built on taking and hedging risk. The modification of Dodd Frank may lower the threshold for mortgage companies to take risks, expand credit and product ‘boxes,’ and expand access to money for consumers across all FICO and income bands.
 
“I believe that several major aspects that may be rolled back and modified. The Volker Rule, prevented commercial banks from engaging in speculative activities and proprietary trading for profit- the upside to this in balance is, new trading instruments and products that translate into more flexible loan products for consumers.
 
“The CFPB and Consumer Protection, may be relegated to state enforcement and to a smaller bipartisan committee of regulators and advisors at the Federal level. This would broaden Trump’s support amidst the Fin sectors as this would be the most welcome set of changes. The Federal Reserve set new standards for the amount and type of capital that banks and other depository institutions must have to protect against their exposures.  The effect of this was banking consolidation across every non-depository depository banking groups – updating the standers and making them less onerous could inspire new bank growth.
 
“The Financial Stability Oversight Council (FSOC) and designations were created to provide added oversight to nonbanks – rolling this back will help expand nonbanking institutional growth. The Dodd-Frank Act gave the Securities Exchange Commission and the Commodities Futures Trading Commission authority to regulate ‘over-the-counter’ derivatives trading. (‘Over-the-counter’ refers to a type of financial trade that is negotiated and carried out by private parties, rather than on a formal exchange, such as the New York Stock Exchange.) Again, reforming this will expand capital and credit risks to nonbank mortgage lenders. 
“So, it’s likely a slew of reforms will take place. The ones in the financial sector do not like his lack of clarity in the rules – in the era of the CFPB, like a clarity revolves around enforcement – on the flipside of de-regulation, the absence of where the new regulations will go in a more lenient a direction, still is riddled with lack of clarity. This will be remarkably confusing for regulators trying to regulate against the current rules, and lenders who are attempting to run their businesses according to current regulations.”
 
From Rich in California comes this note about borrower’s options in a high LTV world. “Regarding less than 20% down products, there is a very cost-effective option to the scenario: LPMI, or Lender Paid Mortgage insurance. Every time I simply do the math compared to getting MI this option wins all the time, and the rate difference is about .25% to .375% in rate. So the P and I payment plus MI is always more than the higher rate plus nothing. Borrowers care more about payment rather than rate if you simply do the math for them and give them the choice. The simple fact is that with a 1st and 2nd, the borrowers NEVER pay off the 2nd mortgage unless they refinance out of it at a later date. If you do not find a competitive lender for LPMI look around – there are sources that blow away the competition.”
 
 
A little old couple walked slowly into McDonald’s that cold winter evening. They looked out of place amid the young families and young couples eating there that night. Some of the customers looked admiringly at them.
You could tell what the admirers were thinking: "Look, there is a couple who has been through a lot together, probably for 60 years or more!"
The little old man walked right up to the cash register, placed his order with no hesitation and then paid for their meal. The couple took a table near the back wall and started taking food off the tray. There was one hamburger, one order of French fries and one drink.
The little old man unwrapped the plain hamburger and carefully cut it in half.
He placed one half in front of his wife. Then he carefully counted out the French fries, divided them in two piles and neatly placed one pile in front of
his wife. He took a sip of the drink; his wife took a sip and then set the cup down between them.
As the man began to eat his few bites of hamburger, the crowd began to get restless. Again, you could tell what they were thinking: "That poor old couple. All they can afford is one meal for the two of them."
As the man began to eat his French fries one young man stood and came over to the old couple’s table. He politely offered to buy another meal for the old couple to eat.
The old man replied that they were just fine. They were used to sharing everything.
Then the crowd noticed that the little old lady hadn’t eaten a bite. She just sat there watching her husband eat and occasionally taking turns sipping the drink.
Again, the young man came over and begged them to let him buy them something to eat. The man again explained that no, they were used to sharing everything together.
As the little old man finished eating and was wiping his face neatly with a napkin, the young man could stand it no longer. Again, he came over to their table and offered to buy some food. After being politely refused again, he finally asked a question of the little old lady: "Ma’am, why aren’t you eating? You said that you share everything. What is it that you are waiting for?"
She answered, "The teeth."
 
 
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Are You Sure that Rates are Going Higher?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
Rob
 
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2017 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)