A late-breaking WSJ story tonight covered a potential compromise on a government proposal to legislate loan approval guidelines, and it requires some further comment…
The piece was on the Qualified Mortgage rule proposed by Dodd Frank and subjet to implementation as of January by the Consumer Financial Protection Bureau (CFBP). It says that lenders must prove a borrower’s ability to repay a loan, and if it’s determined that the lender doesn’t do this, they may be subject to fines, civil liability, and class action lawsuits. Protection from this liability comes if a lender makes a so-called Qualified Mortgage loan: a loan made according to strict and as yet undefined approval parameters (they’re being defined now), and also the loan must exclude features like: negative amortization, interest-only, balloon payments, loan terms exceeding 30 years, total points over 3%.
WSJ’s Alan Zibel and Maya Jackson Randall tonight wrote a measured report about possibly imminent compromise that gives “safe harbor,” aka protection from some of this liability, to loans made to well-qualified borrowers.
I’ve watched a lot of fake outrage on Twitter about how this plays to the banks, and the consumers are getting the short end again.
The CFPB’s leader Richard Cordray is a harcore legal eagle and his agency is the last thing from a lender lapdog. They’re the most feared agency in the history of retail lending, and mortgage lenders are complying lock step with anything CFPB requires. Those who don’t, if there are any regulatory deniers left standing at this point, will have their legs taken out if they don’t follow CFPB rules to the letter.
And if this reported compromise providing protection from extreme liability on loans to well-qualified borrowers is is true, it’s the right decision by the CFPB.
Here’s one example of what’s happened behind the scenes in recent months:
The CFPB screened a portfolio recently closed loans made by one name-brand middle tier lender to near-perfect borrowers and property types (and made under the current, strictest of guidelines). The result: almost one-third of these loans weren’t considered Qualified Mortgages under proposed rules.
That’s one-third of near-perfect credit quality consumers that lenders wouldn’t lend to for fear of loose regs that would lead to loose litigation.
Meanwhile, Washington is trying to broaden out the market so that too big to fail giants like Wells Fargo don’t control one-third of the mortgage market (which they do now).
The middle tier players (because let’s face it, the small players simply can’t afford to comply in a Dodd Frank world) are key to bringing competition and consumer choice to the market, and limiting liability when they to make loans to the most qualified borrowers is a reasonable compromise.
That’s what the CFPB is charged with: preventing the pendulum from swinging from overly loose loan approval guidelines to overly tight regulations that choke off a housing recovery.
It’s a near-impossible job. But the possible middle ground Zibel/Randall reported on benefits consumers. And those feigning outrage need to take a closer look.
Granted, the WSJ headline leads some to this fake outrage, so I’ll take the liberty of renaming the link (but will also reiterate that Zibel and Randall’s reporting was quite measured):
Go read Zibel/Randall’s story: - Mortgage regulation proposals getting closer to reality (Zibel/Randall, WSJ)