Treasury Proposes Ways to Streamline Mortgage Industry Regulation

Written By: Joel Palmer, Op-Ed Writer

The U.S. Treasury Department has made more than 80 recommendations designed to create a streamlined regulatory environment for mortgage underwriters and processors to use technology more in the mortgage process. 

The department also said its recommendations will enable traditional lenders to better compete with nonbank mortgage providers.

The recommendations were contained in the recently released report: “A Financial System
That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation.”

“Treasury’s recommendations are designed to facilitate U.S. firm innovation by streamlining and refining the regulatory environment. These improvements should enable U.S. firms to more rapidly adopt competitive technologies, safeguard consumer data, and operate with greater regulatory efficiency,” read a press release announcing the report.

The recommendations for the mortgage industry are based in part on the growing market share of nonbank financial firms. These entities now account for half of new mortgage originations, according to the report.

The report suggests that the regulatory environment following the 2008 financial crisis is partly to blame for this trend. In addition, nonbank lenders have been better adopters of financial technology that speeds up and simplifies the mortgage process for borrowers. 

“Policymakers should address regulatory challenges that discourage broad primary market participation and inhibit the adoption of technological developments with the potential to improve the customer experience, shorten origination timelines, facilitate efficient loss mitigation, and generally deliver a more reliable, lower cost mortgage product,” read the report.

The report contains a lengthy section titled “Updating Activity-Specific Regulations.” Within that section is a 25-page overview and recommendations dedicated to mortgage lending and servicing. 

According to an accompanying fact sheet, this section recommends “promoting changes to accommodate an end-to-end digital mortgage, including acceptance of digital promissory notes, recognition of modern digital notary standards, and automated property appraisals.” 

Specific recommendations include:

Ginnie Mae should accept electronic promissory notes, known as eNotes. This would include developing greater digital capabilities, which would require Congressionally approved funding.

According to the report, eNote deliveries represented less than 1 percent of 2017 GSE acquisition volumes. One of the reasons cited in the report is the lack of acceptance by key secondary marketing participants. 

“For federally insured mortgages from the FHA and VA, lenders generally prefer to securitize and issue Ginnie Mae mortgage securities. However, Ginnie Mae stated in an All Participant Memorandum in February 2014 that it was concerned with maintaining the liquidity and negotiability of its pools and would not allow electronic signatures or electronic documents on promissory notes, security instruments, or loan modification agreements.”

Agencies should be promoting more automated appraisals. The report recommends that Congress review and update Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which governs property appraisal standards for federally related real estate transactions. The report suggests this would enable more automated and hybrid appraisals.

Treasury also recommends that FHA and other government loan programs develop “automated appraisal capabilities to improve origination quality and mitigate the credit risk of overvaluation.” Agencies should also “consider providing targeted appraisal waivers where a high degree of property standardization and information about credit risk exists to support automated valuation.”

States and the federal government should create modern digital notary standards. The report calls for states that do not yet allow online notarization to do so through legislation. Treasury also recommends that states align their notarization practices and that Congress also consider legislation to provide uniform national standards. 

There should be less utilization of the False Claims Act (FCA). There has been greater use of this Civil War era statute against lenders of government mortgages since the financial crisis. 

According to the report: “The cost of FCA liability for lenders and servicers, and the ongoing fear of future action by the government is often cited as a factor in the shift away from depositories and toward non-depository mortgage banks in the government mortgage loan market. The departure of depositories from federally insured mortgages has likely had negative impacts on borrower access to credit by reducing the available lending universe and encouraging remaining lenders to add credit and risk overlays to their underwriting to mitigate lower credit quality, but nonetheless creditworthy, borrowers.”

Among its detailed recommendations for FCA enforcement, Treasury recommends that HUD establish more transparent standards for determining FCA violations to pursue. 

Finally, the report on activity-specific relation recommends:

•    Aligning federal mortgage loss mitigation standards.
•    A model foreclosure law, or modifications deemed appropriate to existing state model laws.
•    Expansion and alignment of reporting requirements on nonbank counterparty financial health.

This was the fourth report issued by Treasury in response to an executive order issued by President Trump in February 2017. The executive order called on Treasury to “identify laws and regulations that are inconsistent” with the administration’s principles for financial regulation. 

Treasury released its first report for Banks and Credit Unions last summer. Last fall came reports on Capital Markets and Asset Management and Insurance.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.