Borrower Safeguards Led by U.S. Seen Harmful by Banks

As Richard Cordray, director of the Consumer Financial Protection Bureau, creates more safeguards for borrowers, lenders are trying to roll back rules that rein in reckless lending.

Cordray will announce the launch of a website that will help homebuyers shop for the best mortgage rates in a speech today in Washington.

The website debuts a year after the CFPB began enforcing its qualified mortgage rule, Washington’s most sweeping effort to avoid the kind of lending that spurred the 2008 financial crisis. Cordray said that the rule will continue to prevent irresponsible lending when memories of the housing crash have faded. Realtors and mortgage bankers say they’ll lobby Congress and the CFPB to soften the rule’s strict limits on fees and borrower debt limits in an effort to increase lending.

“We’re going to continue what we’ve been doing since the beginning, which is monitoring the market, listening to feedback on the rules, and when necessary, taking steps to help lenders comply,” Cordray said in an e-mail interview in early January.

The CFPB rolled out the mortgage rule in January 2014. Lenders provided about $2 trillion in subprime loans, many to unqualified borrowers, between 2004 and 2007, including so-called liar loans, which didn’t require borrowers to provide pay stubs or tax returns to document earnings. Almost one in four of those mortgages defaulted by 2008 compared with one in five of fully documented subprime loans.

Fee Cap

The 52-page rule mandates that lenders take detailed steps to show that borrowers have the ability to repay their mortgages. The measure also cracks down on risky loan features such as balloon payments and large fees by leaving lenders exposed to legal liability if they issue such mortgages.

The fee cap, set at 3 percent of the loan amount, is meant to protect borrowers from excessive charges that typified the boom era. The Mortgage Bankers Association wants to change how the cap is calculated and applied, arguing that would ultimately lower borrowing costs and expand credit.

Fees charged by firms affiliated with lenders, such as title companies, are counted under the cap. That forces lenders to use unaffiliated companies to avoid exceeding the cap. That’s not to the benefit of borrowers because the unaffiliated companies often charge more, said MBA President David Stevens. Industry groups want to amend the rule so fees from affiliated firms are no longer part of the cap.

Borrower Debt

The National Association of Realtors and MBA also say the consumer bureau should raise the cap above 3 percent for smaller mortgages. Some loan costs are fixed, making it easier for fees to exceed the cap on smaller mortgages. Currently, the bureau allows fees to exceed 3 percent on loans under $100,000. The groups want that raised to $200,000.

The qualified mortgage rule also seeks to prevent defaults by limiting a borrower’s total debt to no more than 43 percent of income. The ratio is restricting credit to worthy borrowers, such as the self-employed, whose wages fluctuate, MBA’s Stevens said. The groups say the ratio should be replaced with a more flexible system in which borrowers’ total assets are taken into account.

“My greatest concern is that the CFPB policy makers not be overly defensive about the rule they created as if it were perfect,” said Stevens, who estimates that the regulations have reduced lending by about 5 percent. “It is not a perfect rule.”

Continual Drumbeat

Consumer groups including the Center for American Progress plan to resist changes to the mortgage rule. Julia Gordon, director of housing finance and policy at the center, said the compliance costs for the rule “pale” in comparison to the financial damage caused by the housing collapse.

“What happens with the lending community is that you give them an inch and they want a mile,” said Gordon, whose group is affiliated with Democrats. “There’s a continual drumbeat of requests for further exemptions.”

Alys Cohen, a lawyer for the National Consumer Law Center, said she’s seen no evidence that the fee cap needs adjustment.

“Lenders have various ways to adjust for risk but loan fees have historically been a place to simply upcharge vulnerable borrowers,” Cohen said.

Long-Term Impact

Gordon dismissed industry concerns that the 43 percent debt-to-income ratio is restricting credit. Borrowers whose loans qualify for purchase by Fannie Mae and Freddie Mac -- about 60 percent of the market -- are exempt from the ratio. The two government-controlled mortgage companies allow borrowers to carry debt payments as large as 50 percent of their incomes if there are mitigating factors, such as large savings.

“If we had a healthy private label market, we would need to be watching rather carefully,” Gordon said. “But we don’t. So the 43 percent level is not a big issue.”

Cordray said the qualified mortgage rule hasn’t had much effect on lending because banks were improving their underwriting prior to its implementation.

“By the time the rule took effect in January, lenders had already retreated from those kinds of practices,” Cordray said. “We expect the impact to be more significant over the long term.”

The industry groups supported a bill introduced in the House last year by Michigan Republican Bill Huizenga and New York Democrat Gregory Meeks that would have relaxed the fee provision. The measure passed the House twice but never made it through the Senate. The two lawmakers say they’ll reintroduce their bill this year.

Consumer Website

“Our current lending environment is seemingly tighter than we’d like to see right now and the impact of QM is part of that equation,” said Joe Ventrone, vice president of regulatory and industry relations at the National Association of Realtors. “Provisions in the QM rule like the 3 percent cap on fees prevents buyers, particularly of modestly priced homes, from having access to mortgage credit.”

Banks have tightened lending in part to prevent having to absorb the costs of soured government-backed loans because of underwriting errors. Mortgages for home purchases probably fell 13 percent to $638 billion in 2014 from 2013, according to a December forecast by the MBA.

The CFPB now wants to make it easier for borrowers to get the lowest available interest rates. The bureau will release a survey today of borrowers that found that they don’t typically shop around for mortgages. Three quarters of all home buyers submit an application with a single lender.

In response to the study, conducted with the Federal Housing Finance Agency, the CFPB is starting a website with resources to help consumers shop more widely for mortgages.

The CFPB’s efforts are aimed at expanding credit responsibly, Cordray said.

“Consumers put great thought into the choice of a home, but the mortgage process continues to be intimidating,” Cordray said. “We want to enable consumers to be more savvy shoppers.”