WASHINGTON — Despite widespread fears by lenders that a 800-page rule released Thursday by the Consumer Financial Protection Bureau would end mortgage lending as we know it, the final regulation appeared to be significantly less onerous than many expected.
Among other things, the CFPB broadened the definition of what could be considered a "qualified mortgage" and granted a strong legal safe harbor to most such loans.
As a result, observers said the rule may allay concerns that it would tighten mortgage credit and impair the secondary market.
"The rule is a little less restrictive than what lenders feared, especially" with the safe harbor protection, said Leonard Bernstein, partner and chair of the Financial Services Regulatory Group at Reed Smith. "The safe harbor is very helpful for the prime market and should please lenders."
Faced with lenders who demanded a full safe harbor protection and consumer groups who wanted a lesser "rebuttable presumption," the CFPB mostly sided with banks. Under the rule, a loan has a safe harbor so long as it is prime and meets the other criteria of a qualified mortgage. A subprime loan with QM characteristics will receive only a "rebuttable presumption."
The decision to split the issue largely pleased the banking industry.
"We commend the bureau for recognizing the need for a safe harbor to prevent a reduction in credit availability and unwarranted lawsuits that ultimately drive up the cost of loans for consumers," Frank Keating, president and CEO of the American Bankers Association, said in a statement.
But it alarmed consumer groups, which continue to argue that the bureau is making a mistake on safe harbor. They still commended the overall rule, however.
"Even those with prime qualified mortgages can inherit discrimination," Lisa Rice, vice president of the National Fair Housing Alliance, said during a panel discussion hosted by the CFPB in Baltimore on Thursday. "We have to be ever mindful and watchful with this system to make sure that a tiered system does not perpetuate a situation where we have … a dual market."
During the public comment period at the CFPB event on Thursday, Rev. Gloria Swieringa, who serves on the Prince George's County Commission for Individuals with Disabilities, expressed similar concerns.
"We need to see a safe harbor that adequately extends access to sufficient protection over the borrower," said Swieringa, who called herself a "predatory lending survivor." "Or down the road, we're going to find the fox is back in the henhouse."
The CFPB said in its materials released on the rule that consumers still have the right to litigate a mortgage, even if it has a safe harbor. CFPB representatives also noted that consumers can still challenge a lender on other consumer-related federal rules like fair lending.
"No standard is perfect, but this standard draws a clear line that will provide a real measure of protection to borrowers and increased certainty to the mortgage market," CFPB Director Richard Cordray said during the public field hearing in Baltimore.
One of the likely areas of dispute is expected to center around CFPB's proposed debt-to-income requirement to attain qualified mortgage status. Under the rule, a borrower must have no more than 43% debt-to-income.
But David Moskowitz, deputy general counsel at Wells Fargo, said during a panel discussion that the DTI ratio was consistent with how uniform underwriting standards should be "embraced."
"The result is approval of a loan application only when a lender believes a consumer has the ability to repay," he said. "It's basic underwriting 101."
But because of the added restrictions on higher-risk loans, some observers worry it will curtail credit in those areas, including more specialized loans like jumbo mortgages.
"We believe high dollar loans are likely to be the most impacted by the QM rule," said Jaret Seiberg, managing director at Guggenheim Partners, in a note released Thursday. "We do not believe that lenders will be able to run these high dollar loans through the automated underwriting system."
Although the QM rule appears relatively benign, some observers also said other pending regulations, including on mortgage servicing, will create other problems.
The safe harbor "does not relieve lenders from compliance with a plethora of other lending laws and fair lending," Bernstein said. "I do not expect immediate loosening of credit as there are other factors like GSE reform that need to be addressed."
Financial Services Committee Chairman Jeb Hensarling said in a statement that, given the continued fear of tighter credit, the committee would closely watch such rules from the CFPB.
"We have already started to see a consolidation in this market as participants, including banks and other mortgage loan originators, pull back from offering their products and services," Hensarling said. As the committee "examines this and other mortgage rules, we will look to see how they will impact a community financial institution's ability to compete and offer sustainable, affordable mortgages, or whether they will cause a further consolidation toward our nation's perceived 'too big to fail' banks."