Tougher mortgage standard unveiled

Verifying ability to repay stressed

— Lenders will for the first time be required by the government to verify borrowers’ ability to repay mortgages by confirming income and assets under a rule issued Thursday by the U.S. Consumer Financial Protection Bureau.

The rule, mandated by Congress in response to lax underwriting standards before the 2008 financial crisis, also will offer some legal protection for lenders who follow guidelines for qualified mortgages, ones that households can reasonably be expected to repay, according to a statement by the bureau.

The measure also insulates issuers of qualified mortgages at prime interest rates from future lawsuits.

David Moskowitz, deputy general counsel at Wells Fargo & Co., the biggest U.S. home lender, said the rule is “entirely consistent with how we think about underwriting” at the San Francisco-based company.

“The true impact will not be known until the rule is made operational by lenders in the year ahead,” Moskowitz said at a field hearing held Thursday by the bureau on the rule in Baltimore.

The rule takes effect Jan. 10, 2014, according to the statement.

Richard Cordray, director of the Consumer Financial Protection Bureau, said the rule strikes the right balance between protecting consumers and promoting lending.

“No standard is perfect, but this standard draws a clear line that will provide a real measure of protection to borrowers and increased certainty to the mortgage market,” Cordray said at the hearing.

The qualified-mortgage rule will apply to home loans in the underwriting phase, whether made by banks such as Charlotte, N.C.-based Bank of America Corp. and Wells Fargo, or other mortgage originators.

“Our assessment of the broad contours of the rule leads us to believe that the rule is less constrictive on mortgage credit than once thought, which translates to increased ease and certainty in the mortgage origination process,” Isaac Boltansky, a policy analyst with Compass Point Research and Trading LLC in Washington, wrote in a note Wednesday.

The rule on repayment ability is the first in a series to be issued by the Consumer Financial Protection Bureau that will shape the mortgage market. The bureau will unveil rules on mortgage servicing at a hearing next Thursday in Atlanta. Those rules will apply equally to banks and nonbank mortgage servicers.

Other rules to be issued by the bureau will cover appraisals and loan-officer compensation. The agency also has proposed simplifying the documents borrowers receive when applying for and concluding a mortgage.

Rep. John Delaney, a Maryland Democrat, said the rule is “an important step in the right direction so we can lay a road map for the private sector to get back into the mortgage markets.”

Delaney said the housing-finance market needs revamping because “we cannot sustain the trajectory we are on” in which “the government provides 90 percent of the financing” for mortgages.

For qualified mortgages, borrowers must have a debtto-income ratio of 43 percent or less. Loans that do not meet that criterion but are eligible for purchase, guarantee or insurance by Fannie Mae, the Federal National Mortgage Association, or Freddie Mac, the Federal Home Loan Mortgage Corp., or are issued by some government agencies, will be considered qualified mortgages for as long as seven years.

Qualified mortgages also must limit points and fees to 3 percent of the total loan amount, according to the bureau.

Features that proved risky during the housing bubble, such as negative amortization, interest-only payments and terms exceeding 30 years, also are prohibited for qualified mortgages.

The level of legal protection will depend on the cost of the loan and will be defined by a regulation approved by the Federal Reserve in 2008 governing the underwriting of higher-priced loans. Prime loans will enjoy a so-called safe harbor from litigation, while loans that fall under the Fed definition can be more easily challenged in court.

The legal protections apply only to this regulation. Borrowers can still sue lenders under existing federal consumer-protection statutes.

The legal protection “does not take away any consumer rights; it adds to them,” Cordray said at the Baltimore hearing. “And for lenders who make qualified mortgages or determine the consumer’s ability to repay over the life of the loan, this rule will foster consumer confidence and improved conditions in the marketplace.”

Debra Still, chairman of the Mortgage Bankers Association, a trade group, applauded the decision to include a safe harbor.

“This approach should allow lenders to offer sustainable mortgage credit to a great number of qualified borrowers without having to risk unreasonable and overly punitive litigation and penalties,” Still, who is the chief executive of Englewood, Colo.-based Pulte Mortgage LLC, said in a statement.

The safe-harbor provision should make banks less hesitant to lend, said Ron Peltier, chief executive officer of the real-estate brokerage business at Warren Buffett’s Berkshire Hathaway Inc.

“You’ve got some clear pathways to be able to do business, which I think has been lacking,” he said. “Banks are loaded with capital and they don’t want to lend to anybody” because, before today, they didn’t know the rules, he said.

Alys Cohen, a staff attorney with the National Consumer Law Center, asserted that the bureau’s new rule “invites abusive lending” and undermines the goals of the Dodd-Frank law.

“The safe harbor the Bureau has afforded for prime loans provides absolute shelter to lenders who knowingly make unaffordable loans, in direct violation of congressional intent,” Cohen said in a statement.

Mike Calhoun, president of the Durham, N.C.-based Center for Responsible Lending, praised the Consumer Financial Protection Bureau’s approach.

“The standard CFPB establishes for a safe, well-underwritten mortgage is appropriately broad enough to include the vast majority of creditworthy home owners, and it is clear enough for lenders and borrowers alike to understand,” Calhoun said in a statement.

The Consumer Financial Protection Bureau also is requesting comment on additions to the rule that would make exceptions for certain government programs aimed at alleviating the effects of the housing crisis. Another would limit the rule’s impact on small banks and credit unions that make loans and hold them in their portfolio.

Information for this article was contributed by Noah Buhayar and Peter Cook of Bloomberg News.

Front Section, Pages 1 on 01/11/2013

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