New consumer protection bureau takes bold step on mortgage rules

Housing rules unveiled by the administration's new consumer watchdog agency on Thursday would insert the government into the housing market in a manner unseen for decades. 

The set of regulations unveiled by the 18-month-old Consumer Finance Protection Bureau (CFPB) will impose sweeping new restrictions on lenders and borrowers, potentially making it more difficult for would-be homeowners, especially in pricier markets like New York, California and Washington, D.C.

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But with the country still smarting from a subprime mortgage debacle that pushed the economy into recession, consumer groups, lawmakers and the housing industry mostly accepted the changes as workable.

“It was the most important thing the government could do to actually let the market function,” said Kathleen Day, spokeswoman for the Center for Responsible Lending. “There’s a cop on the beat looking out in real time for consumers.”

The rules, required by the Dodd-Frank financial regulation bill, force banks to verify borrowers’ finances and prohibit so-called “no-doc” loans that became commonplace during the late 1990s and early 2000s. Also banned is the practice of using deceptive teaser interest rates that allowed lenders to mask the true costs and qualify borrowers who would not otherwise be eligible.

Sentiment among financial institutions ran generally positive about the CFPB's role in drawing up the rule after weighing input from a broad range of financial institutions. Much of the credit was bestowed on CFPB Director Richard Cordray, whose recess appointment by President Obama last year drew fire from Republicans.

Karen Thomas, senior executive vice president for government relations and public policy for the Independent Community Bankers of America (ICBA), said her group is encouraged because CFPB made the rule less rigorous for community banks that might struggle to meet the stringent requirements.

Thomas said the group is still examining the final rule, which was released late Thursday afternoon. But the group appreciated the agency's "open-door policy" in weighing its concerns.

"We're pleased that the bureau took measures to recognize community banks in the model and expand the provisions so more of our banks can offer qualified mortgages," she told The Hill.

Thomas argues that community banks have maintained high lending standards and, because of that, encountered low default rates throughout the housing crisis.

That is similar to the stance taken by credit unions, which argued with CFPB that they would have to deal with more regulations even though they did not cause the housing crisis.

Fred Becker, president and CEO of the National Association of Federal Credit Unions (NAFCU), said he is encouraged by how CFPB listened to stakeholders before acting on the rule.

In talks with Cordray, he said the director acknowledged that credit unions were blameless for the housing crash and there is an understanding that the already heavily regulated group would struggle under the burden of more rules, which are viewed as punishment despite their good behavior.

"What we've seen thus far is encouraging," Becker told The Hill. "But the focus should be on those entities that operated outside the system so there's not a lot of collateral damage on credit unions."

Rep. Elijah Cummings (D-Md.), the ranking member of the House Oversight and Government Reform Committee, who held the Baltimore field hearing, assured Cordray, "I got your back.

"I’m going to do everything in my power to protect this agency because the work you do is so very, very, very important," he said.

That ran counter to House Financial Services Committee Chairman Jeb Hensarling's (R-Texas) statement that expressed concerns over the CFPB's unfettered rule-writing ability.

"The CFPB has been given vast, unprecedented and unchecked power, all delegated to a single director whose alleged recess appointment by the president is legally questionable," he said. 

"Rather than bringing greater certainty to the marketplace, every decision made by the CFPB will therefore be under a cloud."

He said his panel will examine how rules made by the CFPB affect banks' "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 along, with whether the rules affect borrowers' ability to access credit, particularly for consumers in small and rural markets.”

With the rules, the government is for the first time setting out qualified mortgage criteria, which, if adhered to, would give banks “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 monthly payments total more than 43 percent of their income would not be eligible for qualified mortgages under the new rules. But for the next seven years, borrowers who can get approved for loans backed by Fannie Mae or Freddie Mac will be able to skirt that provision.

Despite the generally positive reception, the rule left few completely satisfied.

Mortgage bankers said the rule is "very complex" and "we remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers," including a 3 percent cap on points and fees along with the interest rate threshold for the safe harbor, which is set at 150 basis points above the benchmark rate.

"These pricing-related restrictions need to be carefully examined to ensure that they do not unnecessarily restrict consumer access to 'qualified mortgages,' including smaller balance loans, as well as jumbo loans," said Debra Still, chairwoman of the Mortgage Bankers Association (MBA).

“Ultimately, the final verdict on this rule will be made by the market. We believe the rule will effectively block the return of risky product features and inadequate documentation," she said.

"However, if the result is a tightening of credit as lenders pull back from offering loans that would create greater risk of litigation, the CFPB may need to quickly revisit the rule to avoid harming the housing recovery,” she said.

In a letter sent to Cordray on Tuesday, California Sens. Barbara Boxer (D) and Dianne Feinstein (D) asked the agency to ensure that jumbo loans with higher debt-to-income ratios would have the same flexibility and opportunity to qualify as non-jumbos.

If not, the policy "would have a disproportionate impact on California and other high-cost states, potentially limiting access to affordable credit even more, and making housing — already very expensive in those areas — even less affordable."

Boxer's staff was still looking at the rule to determine whether their concerns were still warranted.