The U.S. Consumer Financial Protection Bureau should give the strongest possible legal protection to mortgage lenders who follow key underwriting rules, according to lawmakers preparing a letter to the agency.
Representatives Shelley Moore Capito and Brad Sherman will send a letter to the CFPB on the so-called qualified mortgage rule later this week that calls for a strong standard, Capito said at a congressional hearing today in Washington.
“We must ensure that reforms do not increase the cost of mortgage credit and therefore restrict credit-worthy borrowers from receiving mortgage loans,” Capito, a West Virginia Republican, said during the hearing by a House Financial Services subcommittee. “If there is not sufficient legal certainty for these loans, the cost of credit for borrowers could rise as well as fewer mortgages being issued.”
So far, 90 lawmakers have signed the letter, of whom 13 are Democrats, Ben Fishel, a spokesman for Sherman, a California Democrat.
The regulation, which the bureau must issue by January 21, 2013, aims to discourage lenders from making home loans with risky features and outlining steps they must take to verify borrowers’ finances. Banks that follow the guidelines will gain protection against being held liable for borrower defaults.
The extent of that legal protection has divided both industry and consumer groups. The Federal Reserve, which proposed the initial rule in 2011 and then handed it off to the CFPB, has suggested two options: a “safe harbor” standard which offers complete protection from liability, or a “presumption” that loans issued according to quality standards were non-abusive. A presumptive standard could nonetheless be rebutted by a borrower or bondholder in court.
Some industry groups have argued that, without a safe harbor, lenders will pull back on lending for fear of provoking extensive litigation.
Debra Still, President and Chief Executive Officer of Pulte Mortgage, a lender headquartered in Englewood, Colorado, told lawmakers at the hearing that consumers harmed by a credit pullback could be among the most vulnerable.
“If this rule is not finalized appropriately, the impact will likely be worse for the very borrowers we are trying to protect and hinder the availability of credit for far too many borrowers who are otherwise qualified,” said Still, who is also chairwoman-elect of the Mortgage Bankers Association. “We will undoubtedly end up with a far more restrictive lending environment than we have today, and simultaneously harm the larger economy for years to come.”
Richard Cordray, director of the consumer bureau, said the agency wants to avoid the question “being punted into the courts.” He said it was less important which standard regulators pick than that it be written clearly.
“If you leave the standards vague and mushy, there’s not a lot of difference between the two,” Cordray said at a hearing on March 29.