Mortgage groups push for simpler lending rules

The newly created U.S. Consumer Financial Protection Bureau is considering how best to implement yet another aspect of the Dodd-Frank Wall Street Reform and Consumer Protection Act, this time in regards to borrowers’ ability to pay.

The debate involves two different alternatives to an ability-to-pay requirement, the standards of which defining a “qualified mortgage.”
Both options are meant to ensure the borrower’s ability to repay their mortgage, but one, known as the “safe harbor QM,” has been specified as the best option by the Colorado Mortgage Lenders Association.

The safe harbor option requires periodic payments that do not result in negative amortization and allowing borrowers to make interest-only payments, as well as excluding loan terms exceeding 30 years, according to Terry Jones, chairman of the legislative and regulatory affairs committee for the CMLA.

This option provides both lenders and borrowers with very clear standards for compliance with the ability-to-pay requirement, said Jones.

The second alternative, which provides a “rebuttable presumption” of compliance, would require that a QM must meet all of the requirements outlined in the safe harbor option, but also that the lender take into account the borrower’s employment status, simultaneous loans and current debt obligations.

The additional requirements contained in the second option are unpredictable, according to Jones, because they can be influenced by circumstances that neither the lender nor the borrower can foresee. That includes divorce or drastic change in employment.

Of the two alternatives, the CMLA believes that the first alternative is the best option for both lenders and borrowers, but proposed clarifications and modifications in a letter to the Federal Reserve in July.

These alterations include issues relating to loan officer compensation, small loan definition, fees paid to affiliates for loan services and products and the sale of the loan in the secondary market.

Julie Piepho, executive vice president of Cornerstone Mortgage, said she supports the CMLA’s position on the QM rule because it brings back “old-fashioned underwriting” that protected both borrowers and lenders before the invention of unconventional loans that brought on the financial crisis of 2008.

Consumer protection is necessary, Piepho said, but regulators need to find a happy medium between lender and borrower responsibility.

“We can’t regulate consumer accountability,” Piepho said. “If a client who makes $4,000 a month comes to me and wants me to help them get a loan that requires a $3,000 a month payment, where is the consumer responsibility?”

Creating QMs with a safe harbor provision would help keep borrowers from taking out loans they can’t afford and would protect lenders from backlash if a borrower can’t make their payments and is ultimately foreclosed upon.

The safe harbor provision would not protect against all litigation, but “reputable lenders will know that they can rely on ‘the rules of the road’ for protection from frivolous and endless litigation,” according to the CMLA’s letter to the Fed.

Jones expects the CFPB to make a decision on the matter in the early months of 2012, but the still leaderless bureau is moving slowly, due in part to disagreement among lawmakers about whether the CFPB should be subject to Congressional oversight and who should lead the bureau, which was also created by the Dodd-Frank Act and has been in operation only since July.

CFPB works to raise awareness on the risks behind mortgages and credit cards, in hopes of helping consumers avoid biting off more than they can chew.