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Lenders gripe about new rules

By Holden Lewis ·
Wednesday, January 15, 2014
Posted: 7 am ET

Let's say a loan officer sweet-talks you into getting a mortgage that you can't afford.


Let's say that you lie on your loan application, the lender doesn't check your documentation closely and carelessly gives you an unaffordable mortgage.

In the first case, should you be able to sue the lender if you end up in foreclosure? In either case, should investors or regulators be able to sue the lender?

Lenders say no.

Of course, they don't like rules

By forcing lenders to abide by a set of rules that results in what's called the "qualified mortgage" standard, regulators are scaring lenders away from approving loans to deserving borrowers, several lending executives said Tuesday in a hearing of the House Financial Services Committee.

The hearing's title -- "How prospective and current homeowners will be harmed by the CFPB's qualified mortgage rule" -- makes you wonder why the House bothered to have a hearing, since the committee's majority has made up its mind that the rule is harmful. It turns out that the bankers were more nuanced with their answers than the Democratic and Republican representatives were in their questions.

More rules, fewer loans

But still. Lenders really don't like the caps on fees, or the debt-to-income limits that are required for a loan to meet the qualified mortgage standard. I'll explain those in a sec. Here's the bottom line: Lenders say that they'll turn away good, deserving borrowers because of these rules. They wonder how this is supposed to help the housing recovery and the overall health of the economy.

"Unless there are changes along the lines we suggest in this testimony, these rules may impair credit access for many of the very consumers they are designed to protect," said Bill Emerson, vice chairman of the Mortgage Bankers Association. He's also the CEO of Quicken Loans, but primarily he testified on behalf of the MBA.

Emerson told the committee that home sales are improving at the higher end of the market, "while the lower end of the market is actually shrinking. Access to credit is clearly constrained with first-time and low- to moderate-income borrowers unable to qualify for a mortgage." The ability-to-repay rule "could fuel this trend and further tighten credit to worthy borrowers."

Requirements for a qualified mortgage

Last week, the Consumer Financial Protection Bureau's qualified mortgage rule went into effect. To be designated a qualified mortgage, a loan has to fulfill certain requirements, including:

  • A 3 percent cap on points and lender's fees for loan amounts of $100,000 or more.
  • A maximum debt-to-income ratio of 43 percent, meaning that debt payments can't exceed 43 percent of the borrower's before-tax income.

There are exceptions. The percentage cap on fees is higher for smaller loans, and some mortgages backed by Fannie Mae, Freddie Mac and the FHA can have debt-to-income ratios above 43 percent.

They were for it before they were against it

In testimony, some of the bankers complained about that "bright-line" figure of 43 percent as a limit for debt-to-income ratios. They said some borrowers can afford loans at higher ratios, and it would have been better to give lenders some leeway, and not attach a hard-and-fast number like 43 percent. But actually, lenders asked for a firm number for clarity. Now they're complaining about it.

Impact on rural borrowers

Jack Hartings, testifying on behalf of the Independent Community Bankers of America and president of a small bank in Coldwater, Ohio, said the qualified mortgage rule will restrict mortgage lending in rural areas. His bank can't afford the legal risks of expanding its lending efforts, he said. His bank is exempt from some of the rules because it underwrites fewer than 500 mortgages a year. But in 2012, Hartings's bank did 493 mortgages. That leaves little room for growth in mortgage lending.

Credit unions weigh in

David Weickenand, representing the credit union industry, complained that regulations create a costly and unnecessary "compliance burden" on credit unions. "Credit unions didn't cause the financial crisis and shouldn't be caught in the crosshairs of regulations aimed at those entities that did," he said.

To which I say that savings and loans didn't cause a crisis until the S&L crisis hit in the '80s, and the originate-to-sell model didn't cause a crisis until it did in 2007 and 2008.

Whose risk is it, anyway?

It all boils down to this question: Who is going to assume the risk of bad mortgage lending? (And believe me, when the housing market heats up, there will be bad lending.) In the early years of this century, lenders made a lot of money giving people bad loans, and taxpayers and individual homeowners paid the bill. Congress and regulators pushed the risk back onto lenders and investors, who are pushing back.

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Stan Jackson
January 15, 2014 at 6:52 pm

I have to agree w/the above statement regarding the appraisers. Being told how to walk, talk and dress is somewhat demeaning. Wondering when (and if) you will get paid is another major issue. We realize that most parties involved, including the realtors, attorneys, and other support staff have been payed timely at closing, and we still have to wait. I firmly believe that an overhaul is needed in this industry, not only to protect the appraiser's interests but those of the buyers who are still subject to potential predatory lending. Trust me, commission based lenders are still there, and will find a way to work around the system.

January 15, 2014 at 5:28 pm

How about all the real estate appraiser's whom had there life taken away by Cumo (call him what you want) spell it crook! Appraiser's are now told what to do, when to, how to, what there going to be paid & when (minimum of 30 day & up to 45). along with being told they have to sign a independent contract to do bus/with mortgage companies and then they send the appraiser's a list of what they can say/whom they can talk to, how they should dress. The biggest thing to hurt this industry is the private AMC's take what fee the appraiser charges (gets to charge) and takes it time 3. Do not complain to the appraiser complain to your congressmen. arc

emma pierson
January 15, 2014 at 3:10 pm

will home seller reveive any equity from the home?

emma piersom
January 15, 2014 at 3:06 pm

will home seller reveive any equity from the home?