The first thing that should be said about today’s “qualified mortgage” rule is that it is just one of many new regulations the Consumer Financial Protection Bureau (CFPB) will issue under Dodd-Frank. Believe it or not, the 2,500 pages of Dodd-Frank contains both a “qualified mortgage” rule and a “qualified residential mortgage” rule, the latter of which has yet to be issued. And the powerful and unaccountable CFPB — subject to a lawsuit by the Competitive Enterprise Institute, the 60 Plus Association, and the State National Bank of Big Spring (Texas), a community bank — still has the incredibly broad power to ban a mortgage or any other financial product it deems “abusive.”
The “qualified mortgage” regulation involves the types of mortgages banks and credit unions can issue with reasonable certainty they won’t be sued. It’s the proverbial cart that pulls the horse. Dodd-Frank massively increased the ability of borrowers to sue lenders not just for fraud and deception — in which cases lenders should be held accountable — but for not assessing correctly borrowers’ own “ability to repay.”
Never mind that in many cases, “predatory borrowers” lied about their own ability — or willingness – to repay; they weren’t called “liar loans” for nothing! Never mind that through the purchases of Fannie Mae and Freddie Mac, through the insuring of l0w or no-down payment loans by the Federal Housing Administration (FHA), and through the mandates of the Community Reinvestment Act, the government encouraged loans to those who didn’t have the ability to repay.
It’s true that the rules issued today — spelling out terms of loans that would give lenders a “safe harbor” or “rebuttable presumption” — are not as inflexible as they could have been. Perhaps that’s in part because the bureau is watching itself more due to the pending lawsuit.
Low-doc and no-doc loans have already almost disappeared due to both banks and government agencies recognizing their folly. But under this rule, lenders and borrowers will face some needless, additional burdens of documenting “ability to repay.” That means a lot of needless new paperwork, as well as asking borrowers intrusive questions about personal matters that could bear on the ability to repay alone, such as the state of their marriages.
And as Edward Pinto of the American Enterprise Institute points out, loans subsidized by Fannie, Freddie, and the FHA still get a pass from these new rules. He writes:
Rather than banning the irresponsible underwriting practices of the FHA … they are grandfathered for up to seven years or until these agencies issue their own rules codifying their irresponsible lending practices. The GSEs and their automated underwriting systems are also grandfathered for up to seven years, notwithstanding that the GSEs and their systems were instrumental in the housing market collapse.
This rule is a continuation of what I have called “Dodd-Frank’s Fannie Trap.” Private sector actors are restrained, yet their governmental competitors are allowed to run almost completely free. Because of this, as Pinto concludes, “this rule does little to limit borrower leverage and lays the foundation for the next bust.”