U.S. lenders may get strong protections from lawsuits over most government-backed mortgages under rules being weighed by the Consumer Financial Protection Bureau, according to two people briefed on the policy.
The so-called qualified mortgage regulations would give banks including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) safeguards against legal action arising from the underwriting process, according to the people who spoke on condition of anonymity because the discussions aren’t public. Protections would cover loans issued at prime interest rates to borrowers whose total debt-to-income ratio doesn’t exceed 43 percent.
The consumer bureau, which is crafting the rules as part of a broader overhaul of housing-finance oversight, revealed its plans in a meeting with other federal regulators yesterday, according to the people. About 80 percent of loans backed by Fannie Mae (FNMA), Freddie Mac or government insurers such as the Federal Housing Administration, would qualify for a legal safe harbor under the bureau’s plan, according to data from the Federal Housing Finance Agency.
“The CFPB is currently in the process of determining the parameters of these loans, with the goal of protecting consumers from risky mortgages that they cannot afford in a way that does not interfere with access to affordable credit,” Jen Howard, the agency’s spokeswoman, said in an e-mailed statement.
Bureau officials have said they will issue a final rule by the statutory deadline of Jan. 21. The process is still fluid, and the proposal may change, according to one of the people with knowledge of the meeting.
In reaction to lax underwriting that fueled the housing bubble, the new regulations would require lenders to confirm a borrower’s ability to repay by steps such as verifying income. Within that context, lenders would gain some insulation from lawsuits if they meet certain criteria.
Loans to borrowers whose debt exceeded 43 percent of income or had non-prime interest rates would fall under a legal standard giving borrowers or bond investors greater latitude to sue if a lender didn’t adequately gauge ability to repay. This standard would presume that lenders properly underwrote the loan while allowing court challenges of that presumption.
To get any legal protection, a lender would have to meet underwriting standards such as verifying a borrower’s income and assets. Qualifying loans also couldn’t have features such as interest-only payments or include fees and points totaling more than 3 percent of the loan amount.
Once the rule goes into effect, lenders are expected to originate most of their loans according to the new standards in order to gain legal protection from the kind of lawsuits and “putbacks” that have cost banks billions in the wake of the housing market collapse. The additional legal protections will help banks compensate for lost revenue from higher fees or exotic loans such as interest-only mortgages.
Joe Ventrone, vice president for regulatory affairs at the National Association of Realtors, said any partial safe harbor would need to go “much further” to avoid harm to the mortgage market.
“We need a QM that reaches a broad base of borrowers and that has strong protections for lenders,” he said in an e-mail. “Without that, we will see even further tightening of credit.”
Alys Cohen, an attorney with the National Consumer Law Center, said consumer groups favor a so-called rebuttable presumption for all mortgages and that the safe harbor was a concession to the industry. Much will depend on how the rebuttable presumption is structured, she said.
“You will face the problem of any rebuttable presumption being a de facto safe harbor because it is so onerous,” Cohen said in an interview. “The devil really is in the details.”
In the years before the 2008 credit crisis, banks increasingly made loans with high fees and adjustable terms that required borrowers to refinance after a few years. Defaults soared after falling home prices cut borrowers’ equity and prevented refinancing.
The qualified mortgage rule will underpin a series of regulations by the consumer bureau, which was created by the Dodd-Frank law of 2010 in response to complaints that banks had abused borrowers before the housing bubble burst. Other rules planned by the agency will touch on mortgage service, loan officer compensation, and points and fees.