New mortgage rule aims to protect borrowers
8:05 PM, Jan 10, 2013
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By Julie Schmit
USA TODAY
A new federal rule on home loan lending will give consumers more
protection against risky mortgages, the government says, but it isn't
immediately expected to make mortgages easier to get.
The Consumer
Financial
Protection Bureau today adopted the rule, which it says spells out what
lenders must do to ensure that borrowers can afford their mortgages.
The rule is meant to guard against lending practices that preceded
the housing bust, when many borrowers took on risky loans they didn't
understand and could not afford. A wave of foreclosures followed,
helping to drive down home prices more than 30% since 2006.
"Washington is saying that we're going to protect borrowers and
regulate what mortgages are going to look like," says Brian Gardner,
policy analyst with
financial services firm Keefe Bruyette & Woods.
CFPB Director Richard Cordray called the rule a "common sense" one that "ensures responsible borrowers get responsible loans."
But some consumer groups say it gives lenders too much protection and
doesn't include adequate provisions to protect low-income borrowers.
The rule "invites abusive lending," says Alys Cohen of the National Consumer Law Center.
The rule, as required by the 2010 Dodd-Frank financial overhaul legislation, defines what constitutes a "qualified mortgage."
If lenders meet those standards, borrowers who later default will
have little recourse to fight foreclosure by claiming the lender sold
them a risky loan.
The rule, effective next year, says a qualified mortgage cannot:
• Contain "risky" features, such as terms that exceed 30 years,
interest-only payments or negative-amortization payments where the
principal amount increases.
• Carry fees and points in excess of 3% of the loan.
• Be issued to borrowers who, once getting the mortgage, will spend more than 43% of their income on debt payments.
The 3% and 43% standards are "reasonable," says Doug Lebda, CEO of LendingTree, an online lender exchange.
Only about 8% of loans that LendingTree facilitated in the last quarter had points and fees above 3%, it says.
Fewer than 14% of recent home loans sold to mortgage giants Freddie
Mac and Fannie Mae had debt-to-income ratios above 43%, says mortgage
tracker
Inside Mortgage Finance.
But Cohen says that 43% is too high for some low-income people, who'll get these loans, and then have no recourse.
Lenders can make loans that do not meet the qualified mortgage
standards. If so, they won't have the same protections against consumer
challenges.
To give the market time to adjust, loans that bust the 43% limit will
be considered "qualified" if they meet Freddie and Fannie's standards,
the CFPB says.
The rule's standards largely track with current lending practices -
which many complain are too restrictive - and "doesn't do anything to
loosen credit," says Guy Cecala, CEO of
Inside Mortgage Finance.
The CFPB, however, says the clarity of the rule, which lenders have
sought since 2010, will enable banks to ease standards over time.
The rule will make it harder for some borrowers to get certain loans,
such as interest-only loans more popular with wealthier borrowers,
Cecala says.
It will also continue to make it hard for subprime borrowers with
weak credit to get loans, Lebda says. That's because they'll have more
recourse against lenders, should loans go bad, than prime borrowers
will, he says.
USA Today
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