Two New Federal Regulations That Will Harm the Housing Recovery.


Small rustic home in Beckfoot, England, UK

One part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was the creation of the Consumer Financial Protection Bureau (“CFPB”). This bureau was created in an effort to ensure that financial products and services work well for consumers. According to the website the CFPB “..helps consumers by providing educational materials and accepts complaints. They supervise banks, lenders, as well as large non bank entities, such as credit reporting agencies and debt collection companies. The Bureau also works to make credit card, mortgage, and other loan disclosures clearer so consumers can understand their rights and responsibilities.” Next January, the CFPB’s “ability to repay” rule will take effect. This rule raises the risk of lawsuits against banks, when borrowers default on a mortgage, unless the loan falls within a legal “safe harbor” under the CFPB’s qualified mortgage, or QM guidelines. Here’s a relevant link the legal safe harbor would exclude any loans involving negative amortization, interest-only payments, balloon payments, “no-doc” loans and those with points and fees, paid by the consumer, that exceed 3 percent of the total loan amount, the most onerous provision involves the calculation of the borrower’s maximum debt to income ratio. At present, a loan would not be considered to be “qualified,” if the consumer’s total monthly debt payments exceed 43 percent of his monthly income. This calculation must be based upon the highest payment that will apply in the first five years of the loan.


Since lenders will face a heightened risk of litigation when making non-qualified mortgages, it’s likely many will only make qualified loans. Furthermore, Fannie Mae and Freddie Mac have already gone on record as saying they will only buy qualified mortgages. The impact of such a decision will be fewer loans to marginally qualified home buyers. This possible eventuality poses another risk to mortgage lenders, given HUD’s announcement that such lenders could be liable for violations of the 1968 Fair Housing Act (“The Act”) if their lending decisions have a so-called “disparate impact” on minorities. Even without evidence of discriminatory intent or action, a lender may be found to have violated The Act based entirely upon statistical evidence. This is a major change, as historically, violations of The Act required evidence of discriminatory intent or action.


If the current definition of a qualified mortgage remains in place and HUD’s disparate impact tool is not overturned by the Supreme Court in the Mt Holly v. Mt Holly Gardens Citizens in Action case, fewer and fewer banks may be making mortgage loans at all. Hopefully common sense will prevail and the definition of a qualified mortgage will allow enough flexibility to satisfy the needs of more than only the most qualified aspiring home owners.

Photo credit: and Sue Langford’s photo stream


%d bloggers like this: