Dodd-Frank Wall Street Reform & Consumer Protection Act: A Brief History for Homeowners
A common misconception about the appraisal process is that because you own the peroperty, and paid for the report, the end appraisal report should be yours, right? Not quite, unless you ordered the report yourself, it belongs to whoever is listed as the “Client” on the report - most times this is a lender. Since it’s their money behind the mortgage, the report ulitmately belongs to them. Keep reading to learn a little bit more about where the Dodd-Frank Act came from, how it has changed, and how it protects consumers and appraisers alike.
The Dodd-Frank Act is introduced
Prior to the 2007-2008 financial crisis, lenders practiced predatory lending that targeted low-income homebuyers, meaning that the financial institutions were taking on extra risk with their investments. These excessive risks along with the popping of the United States housing bubble resulted in the passing of the Dodd-Frank Wall Street Reform & Consumer Protection Act.
On July 21, 2010, President Obama signed The Dodd-Frank Wall Street Reform & Consumer Protection Act. This 350,000 word bill tackled the lack of consumer protections across the United States financial system by introducing a consumer protection agency. The Bureau of Consumer Protection boasts 8 divisions: Division of Privacy and Identity Protection, Division of Advertising Practices, Division of Consumer & Business Education, Division of Enforcement, Division of Marketing Practices, Division of Consumer Response & Operations, Division of Financial Practices, and the Division of Litigation Technology and Analysis.
The Bureau of Consumer Protection helps to simplify consumer information pertaining to credit cards, student loans, mortgages, overdraft programs, and other programs financial institutions may oversee or create. They also create, set, and enforce federal rules by providing oversight of banks and other financial companies that help to prevent future practices that are abusive, deceptive, or otherwise unfair.
The Dodd-Frank Act included the Volcker Rule, a rule prohibiting banks from short-term proprietary trading and limits them from investing in hedge funds and private equity funds, meaning they aren’t taking on excessive risks for more profit gains.
The Dodd-Frank Act 12 Years later
Created in 2010 during the Obama administration, the Dodd-Frank Wall Street Reform & Consumer Protection Act, the Consumer Financial Protection Bureau (CFPB) is an independent bureau within the Federal Reserve. It is responsible for protecting consumers in the financial sector. CFPB’s jurisdiction covers banks, credit unions, payday lenders, mortgage-servicing programs, foreclosure relief services, and many other financial companies operating within the United States. The CFPB uses technology tools to monitor financial entities and how they utilize social media and algorithms to target their consumers.
In 2018, a partial repeal was signed into law by President Trump: The Economic Growth, Regulatory Relief, and Consumer Protection Act. This repeal raised the threshold for banks that are deemed too big to fail from $50 billion to $250 billion. It also removed the Volcker Rule for small banks with less than $10 billion in assets.
Protecting Homebuyers
Legal Definitions
An unfair act or practice is likely to cause monetary harm to the consumer, which they cannot easily avoid. The harm must also not be outweighed by any offsetting benefits.
A deceptive act or practice is likely to mislead the consumer regarding important information. The interpretation of the act or practice must be considered from a reasonable consumer’s perspective.
An abusive act or practice interferes with a consumer’s ability to understand the terms and conditions of a product or service. It takes advantage of their lack of understanding, inability to protect their best interests, or reliance on others to act in their interests.
Legally speaking, there are differences between unfair, deceptive, and abusive lending practices. See the legal definitions on the right for each:
The CFPB created the “Know Before You Owe” mortgage initiative with the intent to help homebuyers better understand their mortgage options, avoid costly surprises at closing, and to assist homebuyers in shopping for the right loan. Consolidating a four-form disclosure into two forms, consumers have an easier time digesting their mortgage options between the loan estimate and the closing disclosure.
Balloon payments for qualified mortgages are not allowed anymore. While allowing for more financial flexibility at first, the ending lump sum is a risky move for borrowers as it can end up being more than twice the monthly payment. The Dodd-Frank Act prohibits these mortgages from being sold on the secondary mortgage market.
While a lender can educate you on the different mortgages, the Dodd-Frank Act made it unlawful for lenders to direct borrowers to particular mortgages without considering their qualifications or ability to repay the loan. This act is called steering, and as well as being unlawful to prey on risky borrowers, lenders aren’t allowed to direct borrowers to mortgages that would directly benefit the lender unless the transaction would also be in the borrower’s best interests.
Certain loans now require an escrow account. The monthly payments for these loans includes the principal and the interest ensuring that the borrowers will have enough funds to pay for property taxes, homeowners insurance, and mortgage insurance each year.
Dodd-Frank Act & Appraisals
Before the Dodd-Frank Act, predatory lending practices weren’t the only attributing factor to the 2007-2008 financial crisis, the 2009 Home Valuation Code of Conduct (HVCC) required mortgage lenders to use third party appraisers and also prohibited the lender from speaking directly to the appraiser during the appraisal process. The third parties being hired were the appraisal management companies (AMCs). While not a standard practice, many AMCs were hiring out-of-area appraisers without local market knowledge at bargain prices, which in turn helped inflate the housing bubble.
The Dodd-Frank Act corrected this “loophole” with guidelines intended to ensure that home appraisals being done are accurate, fair, and realistic while also prohibiting brokers from pressuring appraisers to provide higher valuations. These appraiser independence requirements (AIRs) replaced the HVCC and were designed to prevent undue conflicts of interest. With AIRs in place, the Dodd-Frank Act ensures AIRs violators can be prosecuted and fined.
The end Report
So, who does the homeowner get a copy of the appraisal report from? From their lender! Asking the lender for a copy once the appraisal is complete is all a homeowner needs to do to get a copy of that report.
It seems counterintuitive, but your lender is required to provide a copy (per the Dodd-Frank Act) to the borrower. From the appraiser’s end, we aren’t legally allowed to share that report with anyone other than the “Client” in the report. This can become a frustrating game of back and forth sometimes for borrowers.. It’s confusing because you’ve met the appraiser, they came into your home and probably conversed with you, they might have even left a card. It feels weird asking someone who didn’t write the report for a copy of it - but at the end of the day, this process helps protect consumers, appraisers, and our economy.
