* Rules would require lenders to consider ability to repay
* Gives lenders legal shield for certain high-quality loans
* Experts see little short-term impact on housing market
By Emily Stephenson and Margaret Chadbourn
WASHINGTON/BALTIMORE, Jan 10 The U.S. consumer
watchdog on Thursday finalized new mortgage rules that are
expected to have little short-term impact on the housing market
but could prevent banks from returning to the pre-crisis
practice of churning out risky subprime mortgages.
The Consumer Financial Protection Bureau, in one of its most
sweeping moves to date, struck a balance with the new rules that
drew guarded praise from both consumer groups and lenders.
The rules will force banks to verify a potential borrower's
income, the amount of debt they have, and their employment.
They also give banks incentives to issue safer, lower-priced
loan products by offering lenders legal shields for such
The CFPB tried to find a middle ground, stopping short of
giving banks the blanket legal protection they had lobbied for,
but also not giving borrowers broad powers to sue lenders if
they feel they were saddled with a burdensome mortgage.
Richard Cordray, the director of the CFPB, said the rules
were tailored to ensure they would not stifle the slow recovery
of the housing market, while giving consumers more protection.
"When consumers sit down at the closing table, they
shouldn't be set up to fail with mortgages they can't afford,"
Cordray said in a statement.
Mortgage lending reform is a top priority for the consumer
bureau, which is also working on appraisal standards and rules
governing how mortgage servicers process loans.
Lenders and consumer groups have anxiously awaited the
"qualified mortgage" rules, which are among the most
controversial the government watchdog is required to issue by
the 2010 Dodd-Frank financial reform law.
Each had feared a narrow definition of a "qualified
mortgage," saying such an approach could limit the types of home
Stakeholders were still digesting the 804-page package of
rules, but said they do not expect they will radically change
the mortgage market. Instead, they will likely prevent a return
to reckless lending in the future.
David Moskowitz, deputy general counsel at Wells Fargo
, said that the new rules are largely in line with the
current, more conservative industry underwriting standards.
"It's entirely consistent with how we think about basic
underwriting," said Moskowitz, who spoke at an event the CFPB
held in Baltimore to unveil the new rules.
Some consumer groups questioned whether the rules shield
lenders too much from lawsuits, but they generally applauded the
guidelines. The Center for Responsible Lending President Mike
Calhoun called them a "reasonable approach to mortgage lending,
for the most part."
"Applying these fair, understandable standards to the
mortgage market will foster a more competitive and robust
housing industry," he said.
SAFE HARBOR FOR LENDERS
Dodd-Frank directed regulators to designate a category of
"qualified mortgages" that would automatically be considered
compliant with the ability-to-repay requirement. The rule was
first set in motion by the Federal Reserve and then handed off
to the consumer bureau in July 2011.
The CFPB said it would define "qualified mortgages" as those
that have no risky loan features and fees that add up to no more
than 3 percent of the loan amount.
These loans would go to borrowers whose debt does not exceed
43 percent of their income.
The loans would carry extra legal protection for lenders
under a two-tiered system that appears to create a compromise
between the housing industry and consumer advocates.
Under the new rules, the highest level of protection would
go to lower-priced, qualified mortgages. Such prime loans
generally will go to less-risky consumers with sound credit
histories, the bureau said.
Higher-priced loans would receive less protection and most
so-called jumbo loans will not meet the new criteria. That puts
the burden on banks to implement tighter lending standards for
loans that surpass the government conforming loan-limit, which
is capped at $417,000 in most areas and goes as high as $729,750
in expensive real-estate markets.
Bank groups had lobbied the bureau for a full "safe harbor"
to all qualified loans, preventing consumers from claiming in
lawsuits that they did not have the ability to repay them.
Some analysts said the fact that banks got a tiered safe
harbor represented a win for the financial industry.
"It is far less onerous than what banks expected," said
Jaret Seiberg, senior policy analyst at Guggenheim Securities.
He said lenders will likely only originate QM loans in the near
CFPB officials said they were sensitive to concerns about
credit tightening, and designed the rules with provisions meant
to keep credit flowing and smooth the transition.
The new rules establish an additional category of loans that
would be temporarily treated as qualified. These mortgages could
be given to those who exceed the 43 percent debt-to-income ratio
as long as they met the underwriting standards required by
Fannie Mae, Freddie Mac or other U.S.
government housing agencies.
"We are in ... for the last several years an unnaturally
tight mortgage market, and we recognize the need for that market
to transition back to normalcy. And it's starting to happen,"
CFPB's Cordray said in an interview.
He said absent congressional reform of the housing finance
giants, Fannie Mae and Freddie Mac, the CFPB rules will
jumpstart the secondary mortgage market by providing certainty
about what mortgage products are going to be made.
Currently, Fannie and Freddie and the Federal Housing
Administration guarantee nine out of every 10 new home loans.
The provision would phase out in seven years, or sooner if
housing agencies issue their own qualified mortgage rules or if
the government ends its support of Fannie Mae and Freddie Mac,
the two housing finance giants it rescued in 2008.
Regulators also proposed creating a qualified mortgage
category that would apply to community banks and credit unions.
Banks will have until January 2014 to comply with the new
rules, the consumer bureau said.