Federal regulators are rolling out a new slate of mortgage rules designed to halt the risky lending practices that spawned a national housing meltdown and helped thrust the U.S. into recession.
The new rules are meant to ensure lenders verify the finances of would-be homeowners and that borrowers have enough income and assets to repay their loan.
The so-called Ability-to-Repay rule, issued ahead of a Jan. 21 deadline set forth in the Dodd-Frank financial regulation legislation, also bars lenders from using teaser rates to qualify borrowers that otherwise would not be eligible.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” Bureau Director Richard Cordray said.
In issuing the rules, the consumer agency is laying out guidelines for “qualified mortgages,” criteria aimed at preventing bad lending practices. Banks that adhere to the criteria would enjoy “safe harbor” protection from lawsuits.
Qualified mortgages would restrict certain points and fees tacked onto loans, and other risky features including terms that exceed 30 years, interest-only payments and negative-amortization, where a borrower’s principal actually increases with each payment.
Would-be borrowers whose debt amounts to more than 43 percent of their income would not be eligible for qualified mortgages under the new rules. That provision, however, would not take effect right away.
Industry groups said they were still analyzing the new rules and offered a mixture of tempered praise and concern about how they would affect the marketplace.
National Association of Federal Credit Unions (NAFCU) President and CEO Fred Becker said that his group has concerns about the rule, even though "we have strongly urged that the final qualified mortgage provisions include a safe harbor to limit civil actions against lenders that fully comply with the qualified mortgage standard."
"We are concerned that the rule could curtail lending by credit unions and, ultimately, negatively impact consumers by limiting the choices of prudent lenders in the mortgage market," he said.
He expects the rule to more greatly affect smaller credit unions and will seek an exemption for those.
Bill Cheney, president and CEO of Credit Union National Association, said his group supports the agency's steps to "minimize disruptions in the availability of mortgage credit for consumers" while providing "maximum legal protection to credit unions."
Debra Still, chairman of the Mortgage Bankers Association (MBA), commended the CFPB for considering a broad range of concerns from the financial community but expressed concerns that a any further tightening of credit could require the CFPB "to quickly revisit the rule to avoid harming the housing recovery.”
"This approach should allow lenders to offer sustainable mortgage credit to a great number of qualified borrowers without having to risk unreasonable and overly punitive litigation and penalties," Still said.
“This is a very complex rule. We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers."
The Independent Community Bankers of America (ICBA), which pushed for the CFPB to structure the qualified mortgage standard as a legal safe harbor with clear, well-defined standards, said it is encouraged by the final rule.
“ICBA and the nation’s community bankers have been strong advocates for tailored rules that will address the problem actors in the mortgage industry while not inhibiting community banks’ ability to provide mortgages to their customers,” said Camden Fine, ICBA's president and chief executive.
“Excessively rigid rules would threaten to force community banks out of the mortgage market, making it harder for Main Street consumers to get a home loan and slowing the nation’s housing recovery. ICBA appreciates CFPB’s recognition of community banks as common-sense, relationship lenders that help their communities thrive.”
The rules are expected to take effect in January of next year.
Some groups balked at the timeline. Among them, the Financial Services Roundtable, which represents 100 financial service companies.
“Unfortunately, one year may not be a sufficient period of time to enable institutions to put policies and procedures in place to protect consumers, especially as some parts of the rule are not yet final,” the Roundtable wrote in a statement issued Thursday. “We urge the CFPB to review this aspect of the rule and give the industry more time to comply."