Lenders had warned that any rule opening them to further litigation by delinquent borrowers would stifle the already lethargic market for new home loans. Moreover, they said the much-anticipated rules announced by the Consumer Financial Protection Bureau (CFPB) generally codify the exacting standards mortgage lenders already are imposing on borrowers to prevent a new wave of defaulted loans.
“We are pleased that the rule provides a safe harbor for certain high-quality loans,” said the Financial Services Roundtable's Housing Policy Council in a statement, which also commended the bureau for being open to banking industry concerns when it drafted the rule. “We share the primary goal of the rule to ensure that borrowers have the ability to repay a mortgage loan.”
Analysts stressed the importance of the CFPB move — which lenders have been awaiting since 2010 — because it establishes the basic rules of the game for the mortgage lending and addresses a cloud of uncertainty hanging over the market in the aftermath of the housing crisis that helped fuel the Great Recession.
“The rule will significantly define the mortgage market going forward” and establish the boundary lines between renters and homebuyers, said Brian Gardner, senior vice president at Keefe, Bruyette and Woods.
“While rules like this strike us as efforts in central planning and counterproductive, we expect a positive market reaction” because the new CFPB rule provides the legal safe harbor and regulatory clarity banks have been seeking, and enables other regulators to finish separate rules on the securitization of mortgages, he said.
The bureau’s definition of mortgages that qualify for safe-harbor status is “sufficiently broad enough so the access to mortgage credit is not further restrained from current levels,” he added.
Seeking a balance
Richard Cordray, director of the bureau, the powerful new agency of the Federal Reserve created by the 2010 banking reform law, said the rule tries to strike a balance between the abuses that made mortgages too easy to get during the housing bubble and the overly strict standards today which make it hard for even borrowers with good credit to get loans.
The nation’s smaller community banks welcomed what they said was the flexibility the bureau gave them to provide mortgages with riskier terms such as balloon payments in rural areas to “underserved” borrowers who might not otherwise get loans.
“Excessively rigid rules would threaten to force community banks out of the mortgage market, making it harder for Main Street consumers to get a home loan,” said Independent Community Bankers of America President Camden R. Fine.
Tom Deutsch, executive director of the American Securitization Forum, applauded the safe-harbor provision, but said provisions allowing borrowers who get riskier loans to more easily sue lenders will inhibit lending to people who already have the hardest time getting credit.
“The legal uncertainty created by giving some borrowers a ‘rebuttable presumption,’ which allows them to sue lenders under certain circumstances, could make credit harder to get for less-than-perfect borrowers or make it more expensive,” he said.
And Barry Zigas, housing director at the Consumer Federation of America, criticized with the legal safe harbor the CFPB rule provided on loans that meet strict standards.
“We are disappointed that the bureau is not providing the highest level of consumer protection to prime loans,” he said.