CFPB Announces its Ability to Repay Rule Baltimore
This posting was written by Leonard A. Bernstein.
Direct from Baltimore: I just walked out of Westminster Hall in Baltimore, Maryland where I attended the Consumer Financial Protection Bureau’s (“CFPB”) field hearing where the CFPB announced the issuance of its “ability to repay rule,” a rule required by the Dodd-Frank Act and designed to ensure that prospective borrowers have the ability to repay their mortgages. To view the summary, click here. In order to navigate and understand this and other regulations that are expected from the CFPB, the Reed Smith Financial Services Regulatory Group (“FSRG”) has invited the industry to a series of teleseminars. To register for the CFPB Teleseminar Series, "Preparing for Impact: Explosion of New Mortgage Regulation," click here.
The field hearing began with complementary statements from Sen. Ben Cardin (D-Md) and Rep. Elijah Cummings (D-Md), who told the CFPB leadership: “We got your back.” CFPB Director Richard Cordray (pictured above) then summarized the new rule and announced the creation of a “safe harbor” for compliance with the new “qualified mortgage” standards for a large portion of the prime lending market. Other mortgage lenders would have a “rebuttal presumption” for compliance with new qualified mortgage standards. Director Cordray also repeatedly emphasized the CFPB’s dual goal of putting an end to what he perceives as “reckless lending” as well as “enable[ing] consumers to access affordable credit.” While the new qualified mortgage rule and associated ability-to-repay provisions aim to establish responsible lending principles as the mortgage market recovers, Director Cordray pointed out that “you cannot have responsible lending unless you have lending in the first place, and the mortgage market as it stands today has tightened so much that many consumers cannot borrow to buy a home even with a strong credit history.”
A panel of consumer and industry observers next took the stage, with most being relatively positive about the new rule. Although all appeared to agree with the rule’s dual goals of establishing adequate consumer protections and ensuring access to affordable credit, debate continued regarding the extent to which lenders should be protected from liability, and some expressed concern that the two-tier qualified mortgage rule could exacerbate historic divides in the market. For example, an attorney from a national consumer advocacy group said that her organization advocates a rebuttable presumption for all loans, and cautions that a lack of uniformity could perpetuate a dual credit market. This sentiment was echoed by the a senior member of a national housing advocacy group, who also stated that a rebuttable presumption should apply across the board because it allows consumers to seek redress under certain circumstances, but this relief would not be available for prime loans.
Other speakers noted that the rules need to be adapted to reflect the needs of smaller creditors, such as community banks and credit unions. During the hearing, a senior officer of a major community bank trade association explained that the lending model for community banks is based on relationships, and that those institutions are responsible common sense lenders whose portfolios frequently include loans for properties that are unusual and may not qualify for the secondary market. She further stated that a safe harbor for these smaller banks is necessary to permit them to continue to serve their communities. The CFPB noted that community banks and credit unions will have the opportunity to comment on a proposed exemption for loans they make.
Despite these criticisms of the rule, other speakers expressed strong support for the CFPB’s efforts. For example, a representative of a large mortgage lender called the rule “an important milestone” and “a balanced rule.” Moreover, an academic from a top business school said that the new rule was a “major step forward” and that “the CFPB is to be congratulated.”
Now my colleagues and I, along with the entire industry, will read many pages of details on the new rule to reach our own conclusions. I, along with Bob Jaworski, Travis Nelson, and the rest of our FSRG team, will work hard this year to assist our financial services clients in achieving compliance with this rule and the others to follow. Talk to you on our teleseminars!
Leonard A. Bernstein is the Global Chair of the firm's Financial Services Regulatory Group. Len concentrates his practice in the representation of banks, thrifts, mortgage bankers and finance companies in providing consumer credit compliance advice on federal, Pennsylvania and New Jersey laws and regulations.