The Consumer Financial Protection Bureau is considering giving mortgage lenders a shield against some lawsuits in an effort to encourage them to expand lending, The Wall Street Journal reported Oct. 15.
The proposal, which would create a basic national standard for qualified mortgage loans, would mandate that courts rule in favor of lenders in circumstances where consumers who hold high-quality loans contest a foreclosure. However, lenders would not be granted such protection in foreclosure cases that involve qualified mortgages with high interest rates because the court could rule that the lender should have been aware a borrower might not be able to meet such loan standards.
Since 2008, seven of the biggest U.S. banks have spent more than $76 billion on mortgage-related costs and litigation so any future protection from lawsuits would be welcomed by the banking industry, the Journal reported. Small and mid-sized banks stand to benefit the most, as they cannot as easily absorb litigation costs as their larger counterparts.
David Stevens, CEO of the Mortgage Bankers Association, told the Journal his organization would like to see even more protections for more types of loans. He noted that without deeper protections, many borrowers could continue to face major hurdles to homeownership.
Consumer groups do not necessarily agree with the proposed protections, feeling stronger safeguards need to be in place to prevent reckless lending. However, Michael Calhoun, president of the Center for Responsible Lending, told the Journal that he thinks the CFPB’s proposal would encourage safer lending and increase scrutiny of subprime loans.
CFPB Director Richard Cordray told the Journal that it’s a balancing act. “It doesn’t do anybody any good for us to develop an elaborate set of protections if nobody’s going to lend money to consumers.” He noted that his agency wants to avoid doing anything that would “freeze up or further constrict credit in the mortgage market.”
The Journal reported that banks aren’t just worried about litigation, they’re worried about having to buy back bad loans, which is why they’ve kept underwriting standards so tight.
How the CFPB will determine whether or not a mortgage rates as “qualified” has yet to be determined. The agency may evaluate the percentage of income that borrowers have to spend to repay all their debts, not just the mortgage. One idea is to exclude loans from qualification if the borrowers spend more than 43 percent of pretax income on debt servicing.
The CFPB must complete the rule by the end of January.