On the same day the Consumer Financial Protection Bureau released details of the long-awaited "ability-to-repay" rule, officials from the government agency heard firsthand from critics, supporters and residents at a field hearing in Baltimore.
The mortgage rule, required by the Dodd-Frank financial reform law, attempts to wall off borrowers from irresponsible lending practices by ensuring they have the ability to repay home loans. Participants at the hearing, held in the historic Westminster Church, where author Edgar Allan Poe is buried, held out hope that the rule will help to revive the still-recovering housing and mortgage markets.
Richard Cordray, director of the bureau, told about 150 audience members that the ability-to-repay rule "protects consumers and helps strengthen the housing market by rooting out reckless and unsustainable lending, while enabling safer lending."
Most panelists agreed that the rule is an important first step, but that implementation and further oversight by Congress will be key.
Drawing a contrast with risky lending that is widely blamed for the housing crisis, Cordray said the rule rests on "two basic, common-sense precepts: Lenders have to check on the numbers and make sure the numbers check out." Citing the "NINJA" loans during the housing bubble -- no income, no job, no assets -- Cordray said a balance must be struck between the easy money seen before the crisis and the restrictive lending practices that followed in response to the meltdown.
Cordray said the rule effectively prohibits low- and no-doc loans, and that borrowers will "no longer be sold mortgages that are predestined to fail."
Cordray broadly described criteria for qualified mortgages, which he said should help ensure borrowers are able to make their house payments. He said those loans cannot have "excess points and fees" and cannot place a "particularly large financial burden on the borrower."
Under the rule, total monthly debts, including mortgage payments, cannot add up to more than 43 percent of monthly pretax income. "No standard is perfect," Cordray said, "But this standard draws a clear line that will provide a measure of protection to borrowers and increased certainty to the mortgage market."
During the panel discussion, some participants expressed fears that the 43 percent limit on the debt-to-income ratio could still qualify some individuals for loans they ultimately cannot pay. Alys Cohen, with the National Consumer Law Center, said the 43 percent level is so high that some people would not have enough money left to pay their bills.
Lenders will have some immunity from lawsuits for mortgages that comply with the ability-to-repay rule. After the panel discussion, some members of the Baltimore community suggested that large lenders have an unfair advantage. Marceline White, with the nonprofit Maryland Consumer Rights Coalition, said, "Our concern is that the rule does too much to protect banks at the expense of working families." Most mortgages would fall under the "qualified" designation and would be unfairly shielded from lawsuits, she said.
Another panel member suggested that borrowers will still have legal options, particularly if they are victims of discrimination. Lisa Rice, with the National Fair Housing Alliance, said she remains concerned that residents of urban areas will have trouble getting access to home loans. But she said she was pleased to see that the regulations are not stipulating minimum down payments or credit requirements.