As my fellow blogger, Chris Willis, indicated in his prior post, Raj Date, the current acting director of the Consumer Financial Protection Bureau, has been actively previewing the CFPB’s forthcoming rule-making priorities. Indeed, in another speech at the American Banker’s Regulatory Symposium last week, Mr. Date elaborated on the CFPB’s goals with regard to regulating mortgage lending, announcing that the CFPB will soon complete a new rule requiring lenders to gauge whether homeowners are capable of repaying their mortgages. Dubbed the “ability-to-repay” rule, Date stated that the rule, which is required by Dodd-Frank, will be unveiled “early next year in order to provide clarity to the market as quickly as we can, without sacrificing the quality of our analysis.” The CFPB took over responsibility for finalizing this rule from the Federal Reserve in July.
Date stated that the forthcoming ability-to-repay rule will establish various underwriting standards aimed at preventing the types of lending practices that lawmakers and regulators assert led to record foreclosures in the wake of the 2008 credit crisis. The law also will establish minimum underwriting standards for most mortgages. A key issue is what types of legal protections lenders will receive if they offer a qualified mortgage, as the term ultimately is defined in the final rule. Banks and other lending institutions are pushing for full legal protection for making qualified mortgages, essentially establishing a “safe harbor” from any subsequent liability. In contrast, consumer advocates want borrowers to have some type of legal recourse if they believe a lender did not meet the standards laid out in the rule, even with regard to qualified mortgage loans.
Date indicated that the CFPB is still in the process of considering the comments it has received on the ability-to-repay rule. Nevertheless, in light of Date’s comments last week, we are likely nearing the point of “speak now or forever hold your peace” with regard to this issue. How the CFPB handles the final implementation of the ability-to-pay rule will be an early test of its responsiveness to the concerns of the banking industry and its capacity to balance the needs of that industry with consumer protection concerns. The ability-to-pay provisions of Dodd-Frank are yet another example of the philosophy that substantive regulation of loan terms is necessary to protect consumers. A qualified mortgage standard that restricts the loan terms a lender can offer while leaving a lender who meets that standard exposed to liability ignores the reality that a sustainable system of regulation must require responsible decision-making by both parties – lenders and borrowers.