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As the mortgage industry girds for life under the Dodd-Frank Act, two legislated products are capturing bankers' attention.
May 7
WASHINGTON — The Consumer Financial Protection Bureau faces one of its biggest challenges in how to finalize a rule that would require a lender to verify a borrower's ability to repay a mortgage loan.
The fledgling agency inherited the plan from the Federal Reserve Board, but now it faces a litany of complaints that it might restrict consumer access to credit, or, alternatively, open them up to a wide range of abusive lending practices.
With bankers and consumer groups already feuding over how the final rule should look, industry observers agree the CFPB will have to walk a careful line.
"We have experienced a cataclysm as a result of excessively liberal lending that included using collateral instead of the ability-to-repay standard," said JoAnn Barefoot, a co-chairman of Treliant Risk Advisors. "The question of what should replace that and how tight it should be, and at what point somebody's best interest is served by stretching to get a loan versus a completely solid low-risk situation — it's not an easy thing."
The disagreement between banks and consumer groups is centered primarily on whether lenders should receive some safe harbor protection from liability if they — in lieu of verifying the ability to repay — make a so-called qualified mortgage that meets certain criteria.
The Dodd-Frank Act amended the Truth in Lending Act to apply the ability-to-repay standards to all mortgage loans, and enhance penalties for violations, including extending the statute of limitations and allowing consumers to recover special damages and use violations as a defense in foreclosure proceedings.
Under the law, however, regulators were supposed to establish "qualified mortgages" which would be exempt from the ability-to-repay standard.
In a speech to American Banker's Regulatory Symposium last month, Raj Date, the bureau's de facto chief, said CFPB plans to issue a final rule by early next year.
The Fed proposal offers two alternative definitions for a qualified mortgage.
One would establish the safe harbor protection banks are seeking, and would require the loan to meet four specific criteria. The other would establish a rebuttal presumption of compliance — not as strong as a safe harbor — and would require a creditor to meet the four criteria as well as five additional underwriting criteria.
Given the increased exposure to liability, the industry is pushing hard for the safe harbor, arguing the final rule should include clear definitions and means of compliance.
"Clear 'bright line' requirements will ensure the provision of sustainable mortgage credit to the widest array of qualified borrowers at affordable costs," David H. Stevens, the president and chief executive of the Mortgage Bankers Association, wrote in a comment letter to the Fed. "If these requirements are implemented incorrectly, however, we are deeply concerned that far too many borrowers will be excluded from affordable mortgage credit and/or will be subject to unreasonably increased financing costs, in turn harming the very people Dodd-Frank was intended to protect and undermining the nation's economic recovery."
The American Bankers Association is pushing the agency to keep in mind its responsibility — made explicit by the Dodd-Frank Act — to ensure that all consumers have access to markets for consumer financial products, and that those markets are fair, transparent and competitive. The purpose of the legislation was also to ensure that consumers receive loans on terms they can repay, while ensuring that affordable mortgages remain available, Robert Davis, an executive vice president at the American Bankers Association, wrote in a letter to the Fed.
"A good regulatory structure would both protect consumers and guard against systemic risk of poorly underwritten loans," Davis said. "These regulations must, however, also ensure that the mortgage finance system continues to provide all the mortgage credit required by creditworthy families across America."
"ABA believes that any final rule pursuant to this proposal must be carefully calibrated to ensure that these two vital interrelated goals are met," he added.
Industry representatives also said that the rule is likely to drastically alter the foundation of the mortgage lending system, and will likely serve as the basis for its sister rule, the qualified residential mortgage. They urged the Fed to keep in mind that, under the threat of enhanced penalties, bankers will avoid making any loans outside of the QM category.
"Regulators must craft a safe harbor structure that is not only protective, but also broad enough to sustain the major percentages of mortgage lending necessary to satisfy the nation's housing and financing demands," wrote Steven L. Philpott, the executive vice president and general counsel of the $11.4 billion-asset Umpqua Bank in Roseburg, Ore.
The industry even suggested using a stricter definition of qualified mortgage in exchange for the safe harbor protections.
At a press conference Thursday, Rep. Scott Garrett, R-N.J., the chairman of the House Financial Services subcommittee on capital markets and government-sponsored enterprises, called on strengthening the "qualified mortgage" safe harbor by repealing the additional legal liability imposed by Dodd-Frank. The suggested change is part of his latest proposal to support the secondary mortgage market in a post Fannie Mae and Freddie Mac world.
Consumer advocates, however, said that Dodd-Frank does not give the bureau the authority to create a safe harbor protection.
In a joint letter from the Center for Responsible Lending, the National Consumer Law Center, the Consumer Federation of America and the National Association of Consumer Advocates, the groups argued that the safe harbor proposal was a phrase in a caption left over from proposed legislation in 2007.
"That legislation ultimately evolved into Section 1412 of Dodd-Frank, and during that process, the concept was buried in 2009," they wrote. "The bureau does not have the legal authority to resurrect it."
Even if the bureau did have the authority, the groups argued that Dodd-Frank intended to hold creditors to a much higher standard than the safe harbor alternative, and to provide homeowners avenues to seek relief.
They also rejected the notion that lenders will be unable to offer certain products unless they are granted a legal safe harbor.
"Consumers were subjected over the last 10 years to a wide range of abusive lending practices," Barry Zigas, the director of housing policy for the Consumer Federation of America, wrote in a separate comment letter. "The evidence is clear that without strict guidelines and consumers' ability to pursue relief where lending standards have been ignored or applied inappropriately, weak and even fraudulent underwriting can victimize consumers."
Zigas said his organization also does not think the penalties that lenders will face under the law are so harmful, or even so likely to be applied, that they represent a meaningful risk to lenders.
Banks registered other concerns: they said the CFPB should use a higher loan threshold when determining limits on points and fees for qualified mortgages, raise the proposed 3% fee cap, and exclude employee compensation from fee calculations. Rural banks also encouraged the bureau to expand the definition of "rural and underserved" when determining which banks may continue to make balloon-payment mortgages and still meet the ability-to-repay requirements.
Despite the requirements for the new rules in Dodd-Frank, lenders still tried to argue the regulations are over-burdensome and unnecessary, especially at a time when many bad actors have left the lending space and the toxic products the rule aims to restrict have all but disappeared.
Rhonda Castaneda, a compliance officer at the Bank of Fayette County in Moscow, Tenn., said a bank wouldn't make a loan unless it expected to be repaid.
"If and until the customers actually read and understand the disclosures provided to them, no one can force them to make good credit decisions no matter how many regulations are enacted," she wrote. "It is time to stop trying to make banks responsible for customer's credit decisions."
