Lenders will for the first time be required by the government to verify borrowers’ ability to repay mortgages by confirming income and assets under a rule issued today by the U.S. Consumer Financial Protection Bureau.
The rule, mandated by Congress in response to lax underwriting standards before the 2008 financial crisis, will also offer some legal protection for lenders who follow guidelines for so-called qualified mortgages, according to an e-mailed statement by the bureau. The measure also insulates issuers of qualified mortgages at prime interest rates from future lawsuits.
David Moskowitz, deputy general counsel at Wells Fargo & Co., the biggest U.S. home lender, said that the rule is “entirely consistent with how we think about underwriting” at the San Francisco-based company.
“The true impact will not be known until the rule is made operational by lenders in the year ahead,” Moskowitz said at a field hearing held by the CFPB on the rule in Baltimore today.
The rule takes effect Jan. 10, 2014, according to the statement.
CFPB Director Richard Cordray said that the rule strikes the right balance between protecting consumers and promoting lending.
“No standard is perfect, but this standard draws a clear line that will provide a real measure of protection to borrowers and increased certainty to the mortgage market,” Cordray said at the hearing.
The qualified mortgage rule will apply to home loans in the underwriting phase, whether made by banks such as Charlotte, North Carolina-based Bank of America Corp. and Wells Fargo, or non-depository originators.
“Our assessment of the broad contours of the rule leads us to believe that the rule is less constrictive on mortgage credit than once thought, which translates to increased ease and certainty in the mortgage origination process,” Isaac Boltansky, a policy analyst with Compass Point Research and Trading LLC in Washington wrote in an e-mailed note yesterday.
The rule on repayment ability is the first in a series to be issued by the CFPB that will shape the mortgage market. The bureau will unveil rules on mortgage servicing at a Jan. 17 hearing in Atlanta. Those rules will apply equally to banks and non-bank servicers such as Ocwen Financial Corp.
Other rules to be issued by the bureau will cover appraisals and loan-officer compensation. The agency has also proposed simplifying the documents borrowers receive when applying for and concluding a mortgage.
Representative John Delaney, a Maryland Democrat, said that the rule is “an important step in the right direction so we can lay a road map for the private sector to get back into the mortgage markets.”
In an interview with Bloomberg Television’s Peter Cook for “Capitol Gains,” which airs Jan. 13, Delaney said the housing-finance market needs revamping because “we cannot sustain the trajectory we are on” in which “the government provides 90 percent of the financing” for mortgages.
For qualified mortgages, borrowers must have a debt-to-income ratio of 43 percent or less. Loans that do not meet that criterion but are eligible for purchase, guarantee or insurance by Fannie Mae or Freddie Mac, or are issued by some government agencies, will be considered qualified mortgages for as long as seven years.
Qualified mortgages must also limit points and fees to 3 percent of the total loan amount, according to the bureau. Features that proved highly risky during the housing bubble, such as negative amortization, interest-only payments and terms exceeding 30 years, are also prohibited for qualified mortgages.
The level of legal protection will depend on the cost of the loan, and will be defined by a regulation approved by the Federal Reserve in 2008 governing the underwriting of higher-priced loans. Prime loans will enjoy a so-called safe harbor from litigation, while loans that fall under the Fed definition can be more easily challenged in court.
The legal protections apply only to this regulation. Borrowers can still sue lenders under existing federal consumer-protection statutes.
The legal protection “does not take away any consumer rights; it adds to them,” Cordray said at the Baltimore hearing. “And for lenders who make qualified mortgages or determine the consumer’s ability to repay over the life of the loan, this rule will foster consumer confidence and improved conditions in the marketplace.”
Debra Still, chairman of the Mortgage Bankers Association, a trade group, applauded the decision to include a safe harbor.
“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, who is the chief executive of Englewood, Colorado-based Pulte Mortgage LLC, said in an e-mailed statement.
The safe harbor provision should make banks less hesitant to lend, said Ron Peltier, chief executive officer of the real-estate brokerage business at Warren Buffett’s Berkshire Hathaway Inc.
“You’ve got some clear pathways to be able to do business, which I think has been lacking,” he said in a phone interview today. “Banks are loaded with capital and they don’t want to lend to anybody” because, before today, they didn’t know the rules, he said.
Alys Cohen, a staff attorney with the National Consumer Law Center, charged that the bureau’s new rule “invites abusive lending” and undermines the goals of the Dodd-Frank law.
“The safe harbor the Bureau has afforded for prime loans provides absolute shelter to lenders who knowingly make unaffordable loans, in direct violation of congressional intent,” Cohen said in an e-mailed statement.
Mike Calhoun, president of the Durham, North Carolina-based Center for Responsible Lending, praised the CFPB’s approach.
“The standard CFPB establishes for a safe, well-underwritten mortgage is appropriately broad enough to include the vast majority of creditworthy home owners, and it is clear enough for lenders and borrowers alike to understand,” Calhoun said in an e-mailed statement.
The CFPB is also requesting comment on additions to the rule that would make exceptions for certain government programs aimed at alleviating the effects of the housing crisis. Another would limit the rule’s impact on small banks and credit unions that make loans and hold them in their portfolio.