Five years ago, the Dodd-Frank Act was implemented among the 2008 credit and real estate crisis in the United States.
This ushered in scores of new rules regarding lending practices that had far-reaching effects, some of which only coming to light as time passed.
Safer loans, but less access
After the 2008 crash, it was obvious that something needed to be done. Obama’s administration was not only focused on fixing the current issue but wanted to enact a system that would prevent something like this (or the Great Depression) from happening again. The biggest change is, of course, the creation of the CFPB. Previously, the enforcement and oversight of financial rules were scattered across agencies. The CFPB consolidated all the functions to protect consumers. Much debate has swirled over whether or not this task of protecting consumers is moving forward, but many agree that the CFPB does a good job of busting the bigger banks and high-risk loans.
The average FICO credit score on loans is the highest in history, reflecting their safety, but also, their absence from many middle to lower class families to which credit is no longer accessible. The ability to repay rule has taken out many candidates and, as a result, the homeownership rate remains low. The desire to alleviate some of this stress to open up mortgages to more families is high, but many say we must resist.
Rise of Nonbanks
Bottom line: credit is “tight” which also results in the current trend of nonbanks rising to the lending process over bigger banks. Large banks are tired of all the grunt work and paperwork that they could previously overlook before Dodd-Frank. The time it takes to process the average loan now has grown exponentially. Banks have been forced to shell out loads of money for constant technology and software updates and labor in order to stay compliant under new rules of operation. Private lenders have the capacity to focus all their energy onto this process since it is all they do. Banks, however, are pulling out of the game.
Michael Barr, who played an integral role in the Dodd-Frank act had this to say about banks’ response to the new regulations, “[Banks] saw that they wouldn’t be able to trade derivatives in the shadows the way they had in the past, that firms like Lehman Brothers and AIG would be regulated by the Fed instead of avoiding meaningful consolidated supervision”.
What’s to come?
TRID is set to become the next tricky rule set in compliance for banks and lenders, as amendments to the TILA and RESPA acts are included under Dodd-Frank. As the original reason for Dodd-Frank was to simplify and unify mortgage disclosures, TRID (once adjusted to) will have a profound impact. Amidst TRID fervor and buzz, it is important for the public to ask if a rollback on reforms would be prudent. Dodd-Frank is helping the US financial system see the light, and easing up regulations may push everything back into the shadows.