Archive for July, 2012

Frank Talk

Financial Literacy at the Library concluded its Speaker series on July 16 with a standing- room only crowd gathered to hear Congressman Barney Frank discuss Financial Reform and the Economy.

Congressman Frank highlighted the consumer protection laws that have been enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)  such as the creation of the Consumer Financial Protection Bureau (CFPB).

Under the current leadership of  Richard Cordray, the CFPB was established to “ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.”

As part of Dodd-Frank, the CFPB  oversees mortgage settlement rules and enforces compliance under the Real Estate Settlement Procedures Act (RESPA).   It is now simpler for consumers  to compare mortgage fees and closing costs before committing to a lender and settlement day surprises are far less likely.  It also prohibits institutions from providing a mortgage that the  borrower cannot repay.

Frank offered some history on the causes of the financial crisis.  He cited two primary sources: securitization and information technology.

Securitization refers to the conversion of mortgages into bundled  securities (mortgage-backed securities or MBS) which are then sold on the secondary market.  With securitization, banks no longer keep mortgage loans, but sell them shortly after creation.  Consequently, they become less concerned with the ability of the borrower to repay the loan. Loan quality suffered and the subsequent mass defaults led to a crisis in the financial markets which had been gobbling up the “low risk” mortgage-backed securities.

Reform under the new law requires that the securitizer (packager) retain a portion of the investment risk as an incentive to produce a higher quality MBS.

Information Technology made securitization possible by enabling the expeditious packaging of  thousands of loans to create and market as attractive investments.

For a good summary of the Dodd-Frank act, click here.

To see a video of Congressman Frank’s talk, please visit the Newton Free Library YouTube page or check our catalog for the DVD.

Financial Literacy at the Library is grateful to all those who participated in our monthly Speaker series, as audience members,  staff and consultants.  We would like to express a particular thank you to Roberto Mighty and Michael Yip of Celestial Media whose expert filming of our events extended our ability to provide financial education outside the walls of the Newton Free Library to the virtual world.