Crapo Act is more than a deregulatory party for banks

The Economic Growth, Regulatory Relief, and Consumer Protection Act, often referred to as the Crapo Act, has been lauded as the most sweeping financial services reform legislation since the Dodd-Frank Act in 2010.

Signed into law by President Trump on May 24, the Crapo Act has gained significant attention for its banking reforms that reduce certain regulatory burdens on financial institutions.

{mosads}For example, the Crapo Act raises the threshold for financial institutions to qualify as “systemically important,” and therefore their subjugation to enhanced regulations, from $50 billion or more in assets to $250 billion (and gives the Federal Reserve the option to apply certain prudential requirements to institutions with between $100 billion and $250 billion in assets).

It also exempts from the Volcker Rule insured depository institutions with $10 billion or less in assets and total trading assets and liabilities that are 5 percent or less of their total assets.

These changes are a welcome relief for the affected financial institutions and will certainly impact the banking regulatory landscape. The Crapo Act, however, is not simply a banking bill. Largely flying under the radar are certain significant consumer finance reforms from which consumers and participants in the industry stand to gain.

One such provision targets mortgage lending to military veterans. The Crapo Act adds new requirements to the Department of Veterans Affairs (VA) Loan Guaranty program to protect veterans who refinance their home loans.

The act requires that the VA refinance loan be in the veteran’s financial benefit and that a veteran borrower recoup the fees and costs of the refinance loan within 36 months of loan issuance. The act also limits how quickly a veteran may refinance a VA-guaranteed loan by imposing a loan seasoning requirement.

The VA will not guarantee a refinance loan as a result of the Crapo Act until the later of 210 days after the date on which the first monthly payment is made on the initial loan and the date on which the sixth monthly payment is made on the initial loan.

These changes to VA lending aim to eradicate “loan churning,” a practice whereby lenders repeatedly refinance VA-guaranteed mortgages, often without credit underwriting, in search of reductions to the veteran’s monthly mortgage payment.

Regulators have been concerned that repeated financing does not benefit the borrower. Not only does refinancing often involve additional fees to the borrower with each new loan, but early prepayment of these loans pooled into mortgage-backed securities can result in lower prices on these securities and ultimately higher interest rates for borrowers.

Consistent with Congress’ stated commitment to military veterans, this provision is designed to protect a veteran’s financial investment in homeownership and is a significant shift in the origination requirements for VA mortgage lenders.  

The act also amends the SAFE Mortgage Licensing Act to make a change to the licensing requirements for mortgage loan originators (MLOs) who are the individuals that take mortgage loan applications from consumers and shepherd consumers through the loan origination process.

The SAFE Act requires MLOs working for a depository institution, such as a bank, or its controlled subsidiary to be registered at the federal level, currently the Consumer Financial Protection Bureau (CFPB).

MLOs employed by other licensed lenders, such as a non-bank mortgage lender, generally must obtain a license in every state in which he or she originates mortgage loans.

Prior to the Crapo Act, MLOs moving their employment from a depository to a non-depository institution or seeking to do business in new states were unable to begin working and originating loans until they obtained a state license, which could take weeks or months.

The act grants those MLOs with unblemished licensing records temporary authorization to engage in loan origination activities while their license is being processed, eradicating the lag time in between jobs or expansion of business activities into new states.

In addition to these two provisions, the Crapo Act contains other important provisions relating to consumer finance, including, among others, protections for student loan borrowers and cosigners of private loans, as well as servicemembers in default on their mortgage loan.

While most of the consumer finance changes in the Crapo Act are significant to consumers and the industry alike, they are generally not controversial, and the Crapo Act leaves many tough, contentious issues unaddressed.

It left alone any changes to the CFPB’s structure as an independent agency and does not address a retooling of the CFPB’s funding. The Crapo Act also does not include major reforms related to data privacy or the TILA-RESPA Integrated Disclosure rule, despite several congressional bills that would impact these areas.

Nevertheless, the act’s impact on consumers and industry participants should not be overlooked. Even the non-controversial changes in the act, which are often overshadowed by the banking reforms, will have important consequences for consumer finance.

Holly Bunting and Steven Kaplan are partners in Mayer Brown’s Financial Services Regulatory and Enforcement practice group. Elyse Moyer is an associate in Mayer Brown’s Financial Services Regulatory and Enforcement group.