Lenders fear squeeze from mortgage rules

Financial institutions are pressing Congress and federal regulators to scale back sweeping new mortgage rules for fear they could impede the housing market’s recovery. 

Credit unions in particular are seeking an exemption from the regulations and have asked Congress to protect them from punishment while they work to comply with the more than 5,000 pages of rules.

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They say their low delinquency and default rates should be all the evidence that the Consumer Financial Protection Bureau (CFPB) needs to carve them out of the qualified mortgage rules. 

The Credit Union National Association (CUNA) on Monday suggested that Congress take a closer look at any legal liabilities that could arise as financial institutions put the new rules into practice. 

Many credit unions have indicated they would not be able to comply with the regulations on time.

To that end, the CFPB has said it is taking a light-handed approach by issuing warnings rather than penalties as the industry adjusts.

In remarks last year to the American Bankers Association, CFPB Director Richard Cordray noted that the agency had published detailed examination procedures for the rules six months before they were to take effect so that no one would be caught by surprise.

“Let me also assure you that our oversight of the new mortgage rules in the early months will be sensitive to the progress made by institutions that have been squarely focused on making good-faith efforts to come into substantial compliance on time,” he told the bankers.

Ron Haynie, senior vice president for mortgage finance policy at the Independent Community Bankers of America, says the regulations could have a chilling effect on lending.

“Lenders are going to be cautious,” he said. “What if you just make an honest mistake? I mean, my God, what’s going to happen?”

Haynie said the uncertainty caused by the rules will “definitely dampen” the housing market.

The new rules, which went into effect on Friday, are aimed at making the mortgage industry safer by ensuring borrowers only receive loans they can afford. 

Under the regulations, banks assess the ability of borrowers to repay their loans by verifying several factors, including credit history, assets, income and debt. A mortgage cannot push a borrower’s total debt load past 43 percent of income.

Lenders are free to issue loans that don’t meet the requirements, but they will lose out on “safe harbor” protection from lawsuits.

Consumer watchdog groups counter that the new regulations are exactly what was required to prevent a repeat of the foreclosure meltdown that helped thrust the country into recession in the late 2000s.

“Millions of Americans lost their homes during the past recession because of reckless lending practices,” said Norma Garcia, manager of the financial services team at Consumers Union. “These new rules will help promote more responsible lending and borrowing and ultimately benefit both homeowners and the economy.” 

But CUNA and other housing groups warn that the rules could tighten the availability of credit and create paperwork headaches for lenders.

Michael Coleman, director of regulatory affairs at the National Association of Federal Credit Unions, said he’s confident that most of the loans credit unions write will meet the ability-to-repay requirements because they already fall within their usual underwriting standards.

But credit unions will still need to decide whether to take the risk and loan outside of the new rules. 

“These are very complicated rules and it’s very difficult for credit unions to digest,” he said. 

“It’s a giant regulatory burden.”

Still, Coleman said he couldn’t shake a crystal ball to see how the rules would pan out.

“There are a lot of mortgage-related rules coming down at the same time,” he said. “We won’t know their effect for awhile.”

Although the housing recovery was uneven through 2013, housing experts are predicting acceleration this year as builder confidence rises, sales pick up and prices moderate.

But the market still faces some hurdles from tight lending and the possibility of rising mortgage rates, which remain around historic lows.

Joe Ventrone, the vice president for regulatory and industry relations at the National Association of Realtors, predicted it would take about six months before it will be known whether the mortgage rules have problems. 

He said there would probably be changes that should clarify some provisions, especially on mortgage points and fees, which will need a legislative fix. 

So far, the CFPB has shown that “it is flexible and amenable to making mid-course corrections,” Ventrone said.

David Stevens, head of the Mortgage Bankers Association, said that the elimination of bad practices in the industry, such as no-document and no-interest loans, has erased 95 percent of all default risk in the market.

With those loans gone, he predicted the CFPB would eventually realize that the 43 percent debt-to-income ratio requirement simply isn’t needed.

Regulators argue that all but 5 percent of loans wouldn’t meet the debt-to-income requirement, but even that amount is causing concern for mortgage industry experts who fear shutting out a significant number of potential borrowers.

On the whole, the CFPB expressed confidence that the housing market is ready for the new regulatory system.

“We certainly will be monitoring the market as the rule goes into effect, but we feel good about where the rule is,” said Peter Carroll, the CFPB’s assistant director for mortgage markets.

After issuing the draft regulations in January, the bureau spent 2013 conducting extensive outreach in an effort to ensure the industry was ready to comply, officials said. 

“We certainly appreciate how important this rule is, we understand that it has significant implications, both for consumer protections as well as ensuring consumers have access to credit on an ongoing basis,” Carroll said. 

“That’s a responsibility we take very seriously.”

Ben Goad contributed.