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.