WASHINGTON/BALTIMORE 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 "qualified mortgages."
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 loans offered.
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 term.
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.