The Consumer Financial Protection Bureau's new "ability-to-repay" regulations contain a key legal protection for mortgage lenders, leaving their attorneys cautiously optimistic that the process will work.
The bureau released the broad outlines of its new rule on Jan. 10. Attorneys said they need to dig through the full text and supporting documents that will shape how the mortgage industry does business.
"The basic features are there, but this is one of the rules where the devil is really going to be in the details," said Donald Lampe, leader of Dykema Gossett's financial services regulatory and compliance team. "The implementation challenges are by no means going to be simple, and the larger institutions will start working on it right now."
The idea is to ensure that lenders offer mortgages that consumers can actually afford to pay back. The bureau lays much of the blame for the financial crisis on recklessness by lenders that led to dramatically increased mortgage delinquencies and rates of foreclosures.
Banks now will have to verify that borrowers can afford their mortgages, and payments can amount to no more than 43 percent of their income. On the other hand, the rule will create a legal safe harbor for lenders who issue these qualified mortgages.
"The odds of facing any protracted litigation are more limited," said Rich Andreano, Jr., leader of the mortgage-banking practice at Ballard Spahr.
Additionally, he said, the rule appears to clearly define which loans will earn lenders that protectionan important point for making lenders more comfortable about giving out money. "A safe harbor is only good when you know you're in the harbor," Andreano said.
Americans for Financial Reform and other consumer advocate groups had argued that homeowners should be able to seek redress if their loans were demonstrably unaffordable when issued. That standard, a rebuttable presumption, will apply to loans that fall outside the qualified-mortgage category.
The rule, at the very least, will generate legal work as lenders come into compliance, Lampe said. The rule amounts to a compromise, he said, and with compromise comes complexity.
The bureau was charged with implementing the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which imposed ability-to-repay standards. The repay rule will go into effect in 2014; in the meantime, attorneys will look for provisions that may need clarification or that the industry might want to petition Congress or the agency to change, Andreano said.