The Start of a New Era

Wall Street Reform is enacted, putting an end to free-wheeling mortgage underwriting.

September 1, 2010

It was an anticlimatic end to the Wild West days of mortgage financing. In July President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, a 2,300-page bill that increases regulatory oversight of financial institutions and creates a new bureau to watch out for Americans’ financial interests.

The bulk of the law deals with the arcane world of hedge funds, derivatives markets, and the nuts and bolts of regulating the country’s financial institutions, big and small. But it also contains provisions that touch on real estate financing, including a section dedicated to reinventing the way subprime and other nonstandard loans are regulated.

"The mortgage industry did away with underwriting standards that we had for so long," says Peyton Norville III, GRI, of LAH Real Estate in Birmingham, Ala., and chair of the NATIONAL ASSOCIATION OF REALTORS®’ Conventional Finance and Lending Committee. "The government had to step in."

Among the changes imposed by the law are sharp curbs on yield-spread premiums and other financial incentives that were given to mortgage originators for steering borrowers into certain types of loans. The law also restricts the use of prepayment penalties to keep borrowers locked into bad loans.

Significantly, nonconventional loans, including those underwritten on the basis of stated income, continue to be allowed.

But now the onus is on lenders to ensure that borrowers who apply for such loans have the ability to repay; lenders that fail to make these assurances face penalties. It also requires lenders that package nonconventional loans into securities to retain 5 percent of the credit risk.

New Entity to Oversee RESPA

Beyond mortgage reform, the law consolidates consumer-protection regulations under a single roof: the new Consumer Financial Protection Bureau. It’s housed in the Federal Reserve but authorized to independently regulate predatory and misleading financial services practices.

This bureau will assume oversight of the Real Estate Settlement Procedures Act, now overseen by the U.S. Department of Housing and Urban Development, and the Truth in Lending Act, now overseen by the Fed.

NAR analysts say the change in oversight won’t by itself change settlement services requirements, as the law includes a well-defined firewall between financial services practices and real estate brokerage. "We wanted a bright line between these two," Norville says.

Up Next: Fannie, Freddie

Left unaddressed in the law is the long-awaited overhaul of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. But the law does include hard-target dates for starting the overhaul process. In January 2011 policy makers are to submit their initial reform proposal. That promises to make next year pivotal in what the mortgage finance environment will look like in the future.

What it means

Download or play back our free webinar, in which analysts walk you through the most relevant provisions for real estate. Go to

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.