PERFIL PROFESIONAL DE LA PERSONA A

As already mentioned, mortgage intermediaries have a central role in the mortgage sales process. For some 60% of mortgages sales, borrowers will primarily deal with the

intermediary not the lender. It is likely that the first evidence of serious failures in the underwriting process or gaps in the ability to repay assessment will be found in the mortgage intermediation system. As mentioned earlier the current US regulatory system divides the regulation and supervision of mortgage intermediaries between States and the CFPB. The latter sets minimum standards on disclosure of information, non-discriminatory policy and ability to repay regulations. Everything else, including the licensing of

intermediaries, is a matter for individual States. Too often this is restricted to basic 122 licencing procedures covering criminal record checks and training requirements with little proactive supervision of individual broker conduct.123The CFPB appears to have limited its own role in this area and has not sought to become involved with how intermediaries interact with borrowers. Moreover the CFPB does not appear to seek information from 124 State supervisors on what is happening at a local level in the mortgage origination

market. It is possible that this approach has been adopted to make the best use of 125

Mortgage Nationwide Licensing System, ‘Mortgage industry report’, (Q2 2015 Update), 402,468

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individuals and 10,149 companies were licensed by Federal bodies (eg Federal Reserve, Office of the Comptroller of the Currency and FDIC while at State level 36,563 companies, 45,873 branches and 351,940 individuals were licensed as mortgage originators)

Keith Ernst, Debbie Bocian and Wei Li, ‘Steering wrong: brokers, borrowers and subprime loans’, (8th

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April 2008), Centre for Responsible Lending, 8

CFPB, ‘Supervisory highlights’, (Fall 2015), Issue 9

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CFPB, ‘Semi-annual report’, (Spring 2015)

limited resources. In addition, the conceptual structure of US regulation leaves local 126 regulation and supervision to individual States while regulation at a national level falls to Federal agencies. Clearly there are risks; for example, States working in their own 127 interest contrary to the national objectives, the “capture” of States by local interest groups, uncoordinated actions and the expectation that the nation state will pay for local individual State failures. Nevertheless, State-level experimentation is a missed opportunity. It is 128 possible that States are experimenting with innovative forms of regulation and supervision which may be usefully employed more widely and States may well have information on market practices which could be disseminated across the country. For example,

Washington State’s Department of Financial Institutions, which supervises aspects of the operations of mortgage originators, issues regular “best practice” statements on mortgage intermediaries. Other States do the same. The CFPB is in a unique position to 129

undertake this coordination role and to assess the efficacy of each approach without stepping on State prerogatives.

5.9 Conclusion

This chapter primarily considers the importance of understanding the recent major

changes to mortgage conduct of business regulations in the context of the overwhelming desire in the US to support a broad popular aspiration to own ones’ home. This approach to regulation seeks to balance supporting wide-spread homeownership, and all the civic benefits this brings, with the need to protect both borrowers and the wider financial system

As discussed in chapter 4, the FCA have adopted a similar approach and concentrate almost all their

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supervision resources on few lenders rather than the many intermediaries

James Madison, Alexander Hamilton and John Jay, ‘The Federalist Papers’, (published 1788, Penguin

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Books, London, 1987). Here the authors state that the “powers delegated ... by the Federal government are few and defined. Those which are to remain in the State governments are numerous and infinite...The powers reserved to the several States will extend to all the objects which... concern the lives, liberties and properties of the people [of that State].” (page 296)

Federalism is often seen as encouraging economic development via competition between States within

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the federalist system. See Friedrich Hayek, ‘The economic conditions of interstate federalism’ and Charles Tiebout, ‘A pure theory of local expenditures’, quoted in Barry Weingast, ‘The economic role of political institutions: market-preserving federalism and economic development’, (1995) 11 Journal of Law, Economics and Organization, 1, 5. It is also seen as a control on central government appropriation of regulation best left to local bodies, Yingyi Qian and Barry Weingast, ‘Federalism as a commitment to preserving market

incentives’, (1997) Journal of Economic Perspectives, Vol.11, Number 4, 83

Department of Financial Institutions, ‘FYI financial news - updates from DFI's Consumer Services’,

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from over-borrowing. The context is a high-level of government intervention supporting access to homeownership.

First, built into the conduct of business of regulations is a level of “risk tolerance” in the interest of promoting wider homeownership for public policy reasons. It accepts that borrowers and lenders will make mistakes. This is evident in the regulatory protection given to the standardised “qualifying mortgage”. Some 23% of this type of mortgage, written just before the financial crisis, defaulted. Ultimately, it is a political and regulatory 130 decision balancing the risks to the individual of over-borrowing and the costs to the

financial system against a range of socio-economic and political beneficial objectives. Whether this approach could be transferred to other jurisdictions may be difficult. It requires both political and regulatory will. In the US the benefits of homeownership are a bi-partisan objective and embedded in the legislation and form part of the “American Dream”. Regulation follows this underlying concept.

Second, the CFPB places too much faith on the efficacy of mortgage information disclosure. It is important that the potential borrower is informed in the most effective manner possible of the mortgage’s key points. However, the behavioural evidence suggests that only limited reliance can be placed on disclosure regulations.

Finally, as mentioned above, the best documentation and information may be undermined by the actions of lenders and intermediaries. The US regulatory and supervisory system attempts to balance both State-level and Federal perspectives'. Whether or not the balance is struck in the right place, it nevertheless, provides opportunities for information and best practices to be shared between States and the Federal authorities. The new regulatory approach contains built-in known risks. These need to be monitored and reported regularly to check that balanced judgements remain sound.

Supra, note 66, (Chatlos), 148

CHAPTER 6

The political legitimacy of the Financial