Treasury’s mortgage reforms reminiscent of pre-crisis mentality

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The U.S. Department of the Treasury recently issued a report calling for reforms aimed at modernizing and expanding access to mortgage lending services.

While these goals are laudable, in reality, many of the proposed reforms will put homeowners at risk, and disturbingly, they echo the mindset that led our country into a foreclosure crisis 10 years ago.

{mosads}The proposal’s sweeping deregulatory measures will roll back crucial protections for borrowers, and they exclude consumers from the policymaking process. If we want to avoid another meltdown, it’s imperative that lawmakers put consumers first. 

One of the most alarming component of the department’s proposed reforms is its insistence on curtailing the application of the False Claims Act, as well as the consequences faced by lenders who violate the law.

Under the Obama administration, the U.S. Department of Justice relied on the False Claims Act to hold lenders accountable when they knowingly originated and underwrote mortgages that failed to meet Federal Housing Administration standards.

By deterring bad actors, the False Claim Act afforded homeowners greater protection from loans that could potentially leave them in debt and at risk of foreclosure. 

The Department of Justice’s (DOJ’s) prior willingness to identify and punish lenders for negligent practices also reinforced economic stability by providing a bulwark against the predatory lending practices that upended the global markets in 2008.

The Treasury Department’s proposed reforms would limit its ability to hold lenders accountable and allow lenders to avoid punishment by claiming plausible deniability.

The Treasury Department has attempted to delineate this call for deregulation as an attempt to improve transparency among lenders and regulators. Lost in this explanation of the department’s intention to boost the lending industry is any regard for the needs and interests of American families.

Treasury’s failure to prioritize homeowners is apparent not only in its retreat from the False Claims Act but also in its efforts to accelerate digital adoption.

The proposal calls for a framework to establish “regulatory sandboxes” that would allow banks and fintech companies to work hand-in-hand with regulators to develop and launch digital lending products.

Regulatory sandboxes are designed to make life easier for lenders, creating a safe haven from non-compliance and helping them to bring digital products to market at a faster pace. 

But once again, consumers are left with little to safeguard them against potential risks. A regulatory sandbox would essentially integrate regulators into the daily operations of the very institutions they are supposed to hold accountable.

In turn, regulators are prone to losing the impartiality and perspective needed to ensure compliance and protect consumers. The result is a regulatory framework built on tightly intertwined relationships with the potential to corrupt legitimate oversight.

The existing framework for mortgages is far from perfect. Working-class and middle-income families, particularly those of color, often struggle to receive approvals for mortgages when they should be able to qualify, and we need more lenders in the marketplace.

It is also true that technology has a big role to play in the continued development of the lending infrastructure and could make our processes more accessible and more efficient. However, policymakers cannot afford to achieve these goals by ignoring consumer protections.

Ten years ago, we witnessed the consequences of prioritizing the financial sector’s profits over the needs of consumers firsthand.

The Center for NYC Neighborhoods and Neighborhood Housing Services of New York City responded to the financial crisis with immediate, on-the-ground assistance to New York homeowners in danger of foreclosure.

With these new proposed reforms to mortgage lending, the Treasury Department threatens once again to sideline critical homeowner protections. As they look to relax regulations, there is no mention of funding for critical legal and counseling services for low- and middle-income families seeking affordable homeownership in their communities. 

In the months ahead, consumers must have a seat at the table to shape the future of mortgage lending to avoid a new round of predatory lending that could erode our communities and trigger economic catastrophe in the long run.

Christie Peale is the executive director and CEO of the Center for NYC Neighborhoods, which advocates on behalf of middle- and working-class families for affordable housing.

Susan M. Ifill is CEO of Neighborhood Housing Services of New York City, Inc., a nonprofit housing counseling agency. 

Tags economy Finance Financial crisis of 2007–2008 Foreclosure Loans Money Mortgage industry of the United States Mortgage loan Predatory lending Systemic risk United States housing bubble Urban politics in the United States

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