In sweeping new rules aimed at fixing the home lending market, the Consumer Financial Protection Bureau on Thursday will define a "qualified mortgage" — one a borrower can actually be expected to pay back — while in effect banning a slew of dicey loans at the center of the financial crisis.
The regulations, among the most important handed down yet by the 18-month-old agency, also aim to loosen the choking loan standards that have prevailed since the housing crash. They do so by limiting bankers' liability for prime loans that can be sold to government-backed mortgage giants such as Fannie Mae.
The rules, to be phased in over the coming year, aim to improve access for creditworthy borrowers to today's historically low-interest loans and to create a stable and predictable housing finance system for banks and their customers alike.
Complying with the rules would provide a "safe harbor" shielding lenders from being sued for one of the most frequent and bitter complaints of the subprime era: sticking borrowers with unaffordable loans, then selling off the loans — and the risk.
One leading consumer advocate said the bureau had gone too far out of its way to accommodate bankers, whose loose lending had triggered the foreclosure crisis and the worst economic collapse since the 1930s.
The bureau's action "invites abusive lending and erodes the progress made by Dodd-Frank," the landmark regulatory reform bill passed after the financial crisis, said Alys Cohen, an attorney with the National Consumer Law Center.
"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," said Cohen, who was to appear at a home lending forum Thursday in Baltimore with bureau officials.
The safe harbor provision shields lenders only from lawsuits over borrowers' ability to pay. Consumers would still be able to pursue claims that lenders violated other laws, such as those governing deceptive advertising or wrongful foreclosures.
The rules met with relief from mortgage bankers, who had feared Draconian restrictions from the bureau, created by consumer advocate Elizabeth Warren. The former Harvard law professor, newly sworn in as a U.S. senator, was so at odds with the industry and congressional Republicans that President Obama backed away from appointing her to head the agency after tapping her to set it up.
"The goal of this regulation, ensuring that borrowers receive loans that they can repay, is in everyone's best interest. We cannot, and should not, go back to the high-risk lending environment of the early 2000s," Debra W. Still, chairwoman of the Mortgage Bankers Assn., said in a statement.
Consumer bureau Director Richard Cordray, who was scheduled to formally unveil the rules Thursday, said the aim was to achieve "the true essence of 'responsible lending.'"
"The American dream of homeownership was shaken to its foundations," Cordray said in prepared remarks. "But, in the wake of the financial crash, we have been experiencing a housing market that is tough on people in just the opposite way — credit is achingly tight."
The qualified mortgage rules rest on the principle of ability to pay, the goal Congress told the bureau to implement in the regulatory reform law passed after the financial crisis. Senior officials at the consumer agency briefed reporters on it Wednesday.
The rules notably limit a potential borrower's total payments, including those for property taxes, fire insurance and non-housing debt such as credit cards, to 43% of gross income.
During the housing boom, aggressive lenders had set the bar at 50% or higher for mortgage payments alone — disregarding other debt — and then allowed borrowers to qualify by merely stating their incomes, with no documentation.
The rules simultaneously aim to ban mainstream use of the riskiest practices of the housing bubble, such as loans made without checking tax returns and pay stubs; loans with payments so low that the loan balance rises instead of falls; and qualifying borrowers based on low "teaser" rates instead of fully adjusted payments.
Certain subprime loans to borrowers with credit problems could be qualified mortgages, but not the loosely underwritten loans that helped fuel the housing boom and bust.
Lenders would still have to determine that borrowers could afford to repay such loans, which would carry significantly higher interest rates than prime mortgages. They also could be challenged more easily in court — for instance, by borrowers claiming a lender gave them a loan that left them too little money to live on, even though their debt payments were only 43% of their incomes.
Lenders are expected to continue lending outside the guidelines in some cases. For example, jumbo mortgages — those too big for purchase by Fannie and Freddie — are often written to affluent borrowers who for a variety of reasons choose to pay interest only for a period of time. There's no reason that practice should stop, senior consumer bureau officials said.
Lenders will be given a year to phase in compliance with the new rules. Some question certain limits imposed by the regulations, such as limits of 3% on points and fees that borrowers could be charged upfront, and the 43% cap on total debt payments.
The 3% fee limit would be hard to meet in some cases, said the mortgage trade group's Still.
Laguna Beach mortgage broker Richard Cirelli said that the debt ratio could pose problems, especially in expensive real estate markets.
"Capping the debt limit at 43% is going to create some problems," Cirelli said. "Especially for first-time buyers in California. It's still pretty expensive here."
scott.reckard@latimes.com
