Consumer Groups Blast Mortgage Rules' Legal Protection for Lenders

Consumer Groups Blast Mortgage Rules' Legal Protection for LendersNew mortgage rules designed to make sure borrowers are not burdened with loans they can’t afford is under fire from consumer advocates for the legal “safe harbor” protection afforded lenders.
The new rules announced Thursday by the Consumer Financial Protection Bureau features an “ability-to-repay” provision that prohibits lenders from issuing mortgages to people who are unable to prove they can afford the loans.
But consumer advocates say the rules provide a legal protection for banks that may prove to be detrimental to borrowers.
A “qualified mortgage” under the new rules protects banks from lawsuits filed by aggrieved borrowers or buyers of mortgage-backed bonds.
The regulations, which will take effect January 2014, will eliminate some of the riskier loan products in favor of so-called qualified mortgages, lenders say. Qualified mortgages are those for which lenders can prove they adequately screened and vetted the borrower, thus the the lender has limited legal liability if the loan goes bad.
“The Consumer Financial Protection Bureau, in creating a legal safe harbor for certain qualified mortgages, has given the industry a protection that does nothing to help consumers,” said John Taylor, president and CEO of National Community Reinvestment Coalition. “It is an unneeded and undeserved privilege for the lending industry, which caused grave financial harm to millions of Americans during the financial crisis.”
Alys Cohen, the staff attorney for the National Consumer Law Center, says lenders can circumvent the intent of the law by issuing mortgages that are unaffordable but still meet the ability-to-pay guidelines.
Lenders can issue mortgages that are unaffordable in practice but still meet the guidelines meant to demonstrate an ability to repay, she said.
The new rules require that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan, and that the consumer have a total (or “back-end”) debt-to-income ratio that is less than or equal to 43 percent.
Cohen and other advocates say the debt-to-ratio threshold is too high.
Cohen said: “For example, a 43% debt to income ratio in the rule may be a reasonable standard for a homeowner earning $10,000 per month, but for a homeowner earning only $1000 per month, 43% does not leave enough to pay the utility bills and other essentials.”
Lenders counter that the legal “safe harbor” enables them to open up lending in an environment already ruled by tight lending standards. They say the rules’ legal protection provides a more balanced lending landscape where more households can take advantage of historically low interest rates while banks are protected from nuisance lawsuits.
The Independent Community Bankers of America has pushed for the “safe harbor” provision to enable its members to expand residential lending as stricter rules are implemented to prevent risky loans by banks of all sizes.
ICBA President and CEO Camden R. Fine said: “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.”

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