CFPB Ability-to-Repy Rule Announcement: Nobody is Completely Satisfied with the Rule

by Ashley Hutto-Schultz and Jeffrey E. Jamison

During yesterday's field hearing in Baltimore, the CFPB announced its final Ability-to-Repay (ATR) rule and hosted a panel discussion to discuss the new rule, which had not been released at the time of the hearing. While the hearing's participants were generally supportive of the CFPB efforts, representatives from both consumer rights groups and financial institutions expressed some concerns about the rule. Banking industry representatives and credit union officials each suggested that the new regulations could limit their ability to make more home loans. Consumer groups, on the other hand, argued that rules are not sufficient to protect consumers. Dykema's Ashley Hutto-Schultz attended the hearing and provided this report.

The hearing started with words of praise for the CFPB by some of Maryland's elected officials (Senator Ben Cardin (D-MD), Rep. Elijah Cummings, Rep. Dona Edwards (D-MD) and the Mayor of Baltimore, Stephanie Rawlings-Blake) but they also pleaded with Director Cordray to take meaningful action to monitor the effects of new rules and protect borrowers from practices that threaten the soundness of the mortgage market.

Next, Director Cordray delivered his prepared remarks announcing the new rule and identifying its two key goals; (i) greater protection for consumers; and (ii) improved, reasonable access to credit for borrowers.  In achieving these goals, Director Cordray explained that the ATR Rule features several protections for borrowers, including criteria for a Qualified Mortgage loan [add link to qualified mortgage blog from last night] and prohibitions against risky lending practices such as no-doc and low-doc loans.  As part of the Qualified Mortgage loan section of the rule, Cordray described a provision that permits "borrowers to rebut the presumption of ability to repay for subprime loans."  Director Cordray also announced that the CFPB will propose an adjustment to the ATR Rule that creates a "special category of Qualified Mortgage loans made by smaller lenders such as community banks and credit unions," in order to allow them to continue lending on a more personal level in their communities.

Consumer panelists included Michael Calhoun, President, Center for Responsible Lending; Alys Cohen, Staff Attorney, National Consumer Law Center; Lisa Rice, Vice President, National Fair Housing Alliance.  The consumer panelists agreed that the ATR Rule is a step in the right direction and showed support for the broadness of the Qualified Mortgage loan criteria, which requires no down payments or credit scoring requirements.  However, the panelists voiced concern regarding sections of the ATR Rule that they believe fall short in protecting borrowers.  For example, Ms. Cohen noted that the 43 percent debt-to-income ratio requirement for qualified loans fails to protect borrowers from unaffordable loans if their monthly income is $1,000 or less; instead, she advocated for a residual income analysis requirement for low-income homeowners.  She also warned that although the rebuttable presumption allows an opportunity for homeowners to seek redress for a Qualified Mortgage loan "that the lender should have known was, nevertheless, unaffordable," the same protection will not be available to prime borrowers, which creates a loophole that may allow institutions to take advantage of borrowers.  Ms. Rice also commented that offering such a safe harbor could reinforce a dual mortgage market.

Industry Panelists included David Moskowitz, Deputy General Counsel, Wells Fargo & Company; Karen Thomas, Senior Executive Vice President of Government Relations and Public Policy, Independent Community Bankers of America (ICBA); and Susan Wachter, Professor of Real Estate & Finance, The Wharton School, University of Pennsylvania.  Mr. Moskowitz applauded the CFPB for codifying a "broad and clear Qualified Mortgage definition" because it will "support robust originations in the primary mortgage market" and enhance liquidity in the secondary mortgage market.  Giving voice to local community banks, Ms. Thomas stated that the "plethora of regulatory changes . . . could further stymie the housing market and community banks' ability to provide mortgage loans to their customers."  She urged the CFPB to tailor rules, as mentioned by Director Cordray, which reflect distinctions between the business models of the community banks, who retain a vested interest in the majority of the loans they make, and national banks, who often sell theirs on the secondary market and do not retain such vested interests.

The hearing ended with a question and answer session involving preselected members of the audience. The questioners-both consumer advocates and industry representatives--also expressed concerns about the new rule.

Stay tuned to the CFPB-Lawblog for further analysis and developments regarding this new rule and the CFPB activities.

Read more articles about the Consumer Financial Protection Bureau at Dykema's CFPB Blog

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