Trump’s Executive Order Takes Aim At Dodd-frank Rules For Mortgage Lending

President Donald Trump targeted bank regulations that have long been Republican aims in one of his Friday night executive orders.

Trump signed an order directing several federal agencies to revise rules and restrictions on mortgage lending. The goal is to "modernize" several rules in a way that encourages more lending from smaller financial institutions—those with less than $100 billion in assets.

It has more targeted proposals aimed at "community" institutions, which are under $30 billion in assets, as well.

"My Administration will reduce these regulatory burdens to ensure that these creditworthy borrowers can access the capital required to purchase a home," Trump's executive order says.

It came just a day after the Senate pushed through the major bipartisan housing package, the 21st Century Road to Housing Act. The Senate and the House must reconcile their versions of the bill before Trump can sign it.

Republicans have long criticized bank rules put forth in the Dodd-Frank Act, following the subprime mortgage crisis in the Great Recession. At the time, lawmakers intended to curb bank investment in risky real estate investments. But lawmakers argue those rules chased many small lenders out of the mortgage market entirely.

The rules were in their crosshairs during the First Trump administration as well.

Banks originated about 60% of mortgages and held servicing rights to about 95% of mortgage balances in 2008, according to data from the Financial Stability Oversight Council. By 2023, banks originated just 35% of mortgages and serviced about 45% of balances.

Dodd-Frank and the 'distorted' mortgage market

The executive order blamed banking regulations since 2008 for driving up mortgage costs. That includes Dodd-Frank, which "increased the compliance costs of mortgage origination and servicing and distorted the structure of the mortgage market," the order says.

The order presses the Consumer Financial Protection Bureau to tailor mortgage banking rules to smaller banks and credit unions. That includes streamlining regulatory and documentation requirements.

Federal regulators should revise supervisory information "to focus on prudent underwriting, rather than overly technical process-oriented approaches to lending," the order states. That means reforms that "remove undue burdens on lending," including risk weights and appraisal regulations.

And, CFPB will modernize Home Mortgage Disclosure Act reporting requirements. These create compliance costs, the order says. Meanwhile, HUD, FHFA, and other agencies should also modernize some signature requirements and allow more digital and electronic sign-offs, saving time.

The order also encourages more construction-related financing, especially for community banks.

Rep. French Hill of Arkansas, the House Committee on Financial Services chairman, praised the order in a joint statement with Housing and Insurance subcommittee Chairman Rep. Mike Flood of Nebraska. The two Republicans were leaders in negotiating the housing bill.

The order's provisions "closely align with the bipartisan work that our Committee members have been working on this past year," they said.

Bank regulations: What are they for?

The regulations were an "over-correction in a crisis," Brian Brooks, CEO of New York–based Meridian Capital Group and former acting comptroller of the currency, said in a House Financial Services Committee hearing last month. Banks were "scared away from home lending" as a result of added scrutiny, he said.

But Dodd-Frank's defenders have argued they were put in place to prevent the same kind of unsafe banking practices that caused the subprime mortgage crisis in the first place.

"Deregulation was the root of the speculation that caused the housing crisis," Darrick Hamilton, a professor at the New School and chief economist for AFL-CIO, said at the House hearing last month.

Michelle Bowman, a member of the Fed's Board of Governors and vice chair for supervision, signaled an interest in reform as well. She said last month some major reforms could "address legitimate concerns about mortgage market structure while maintaining appropriate prudential safeguards."

Bob Broeksmit, CEO of the Mortgage Bankers Association, praised the order, saying both administrative and legislative reforms were needed for housing affordability.

So, too, did Scott Simpson, CEO of the American Association of Credit Union Leagues. The rules could encourage more of those credit unions to lend as well, he said.

"We support efforts to increase bank participation in mortgage lending and servicing, and the goal should be to revise overly burdensome rules for lenders of all sizes and business models," Broeksmit said. “MBA strongly supports efforts to reform appraisals, ease construction regulations, and encourage homebuilding to help address the structural challenges driving up housing costs."