The new rules, released Thursday, include an "ability-to-repay" provision that prohibits lenders from issuing mortgages to people who are unable to prove they can afford the loans. But, consumer advocates charge, the rules also provide a legal shield for banks that is detrimental to borrowers.
When a loan meets the new lending criteria outlined by the CFPB, it will become a "qualified mortgage," which will protect banks from lawsuits filed by aggrieved borrowers or buyers of mortgage-backed bonds.
The qualified mortgage standards invite abusive lending and erode the progress made by Dodd-Frank, according to Alys Cohen, the staff attorney for the National Consumer Law Center. Lenders can issue mortgages that are unaffordable in practice but still meet the guidelines meant to demonstrate an ability to repay, she said.
Lenders will still be able to issue loans to people in which mortgage debt can comprise as much as 43% of their pre-tax income, for example. For someone earning $10,000 a month that doesn't create much of an issue. But for someone earning $1,000 a month, putting 43% of their income toward housing costs would leave them almost nothing for other living expenses.
So even though the loan would comply with the ability-to-repay rule, the borrower would still not be able to make their mortgage payments. They could lose their home, destroy their credit rating and still not be able to sue their lender.
John Taylor, president of the community activist group, the National Community Reinvestment Coalition, fought against the safe harbor provision. He thought borrowers should be able to sue lenders if they knowingly put them into unsustainable mortgages.
"I thought it was unnecessary to create the legal protection," he said. "[Now that the lenders have it, though,] the major excuse for not lending is removed and I'm looking forward to seeing if there's a massive amount of loans being made available."
According to lenders, the legal protections will give them more confidence to open up the purse strings.
For Camden Fine, CEO of the Independent Community Bankers of America, the legal protection is a significant win for its members.
Many attorneys threaten to bring nuisance suits against community banks on behalf of borrowers over minor filing errors, he said. The new rules should end that.
Yet, some industry insiders are skeptical that this will propel mortgage lending. It does nothing to ease underwriting standards, which lenders have strictly observed the past few years.