Consumer Financial Protection Bureau Guidelines
U.S. Consumer Watchdog to Issue Mortgage Rules
Published: January 10, 2013
WASHINGTON — Banks and other lenders will be prohibited from making home loans that offer deceptive teaser rates or require no documentation from borrowers, and will be required to take more steps to ensure that borrowers can repay, under new consumer protections to be announced on Thursday.
Brendan Hoffman for The New York Times
Richard Cordray is the director of the Consumer Financial Protection Bureau.
The rules, being laid out by the Consumer Financial Protection Bureau and taking effect next January, will also set some limits on interest-only packages or negative-amortization loans, where the balance due grows over time. Banks can make such loans, but the new rules would not protect them from potential borrower lawsuits if they do so.
And mortgage originators will in most cases be restricted from charging excessive upfront points and fees, from making loans with balloon payments and from making loans that load a borrower with total debt exceeding 43 percent of income.
With the sweeping rules, financial regulators are trying to substantially overhaul the market for home mortgages by creating a legal distinction between “qualified” loans that follow the new rules and are immune from legal action, and “unqualified” mortgages that continue practices that regulators have frowned on. The new rules are also aimed at getting banks to lend again, something they have been slow to do since the financial crisis and since the Dodd-Frank Act required new limits on bank activities.
Gone, the regulators hope, will be the unbridled frenzy that encouraged lenders to ignore whether borrowers could repay as long as the lenders could sell the mortgages to third parties, usually investment firms that sliced them up and resold them as part of complex financial derivatives.
By following the new rules, banks will be given a “safe harbor,” which ensures that they cannot be successfully sued for reckless or abusive lending practices, federal officials said Wednesday. Lenders must document a borrower’s ability to repay a loan; one way of doing that is to follow several guidelines issued Thursday that make a loan a “qualified” mortgage.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said Richard Cordray, the director of the consumer bureau. “Our ability-to-repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”
Mortgage bankers generally applauded the new regulations, saying that they clear up uncertainty that has hung over the home lending business since the financial crisis. In fact, most of the types of loans now being restricted, which were rampant during the inflation of the housing bubble, have been relatively rare in the last couple of years because many banks have tightened lending since the financial crisis.
“These rules offer protection for consumers and a clear, safe environment for banks to do business,” David Stevens, chief executive of the Mortgage Bankers Association, said in an interview. “Now everybody knows if you stay inside these lines, you are safe.”
He added that he believed the consumer bureau “did a great job listening to stakeholders” in shaping the rule.
The new rules will not necessarily lead to an immediate expansion of credit, Mr. Stevens said, because nearly all mortgage loans being made currently are being sold to government-sponsored enterprises like Fannie Mae and Freddie Mac. Their underwriting standards are not affected by the new rules.
In certain circumstances, the new lending rules can be bypassed for up to seven years, regulators said. New loans can be considered to be a “qualified loan” even if the borrower has a debt-to-income ratio of more than 43 percent as long as the loan is eligible for purchase or guaranteed by Fannie Mae or Freddie Mac, for example, or by one of several executive branch agencies, like the Department of Veterans Affairs.
The consumer bureau said that the exception was created “in light of the fragile state of the mortgage market as a result of the recent mortgage crisis.” Without the exception, the bureau said, “creditors might be reluctant to make loans that are not qualified mortgages, even if they are responsibly underwritten.”
Similarly, the new rules allow balloon payments in mortgages that are originated by and retained in the portfolio of small lenders that operate primarily in rural or underserved areas.
The legal protections offered to lenders by the qualified mortgage rule are not absolute. Lenders do not receive complete immunity from lawsuits in all circumstances. Some higher-priced loans, given to consumers with weak credit, can be challenged if the borrower can prove that he did not have sufficient income to pay the mortgage and other living expenses. And the rules do not affect the rights of consumers to challenge a lender for violating other federal consumer protection laws.
“We believe this rule does exactly what it is supposed to do,” Mr. Cordray said in a statement prepared for delivery Thursday morning in Baltimore, where the rules are being announced. “It protects consumers and helps strengthen the housing market by rooting out reckless and unsustainable lending, while enabling safer lending,” he said.
Thanks to New York Times