Steve Ornstein is a partner in Alston & Bird’s Financial Services & Products Group. His practice concentrates on federal and state mortgage banking, consumer credit and ancillary services regulatory issues.
Qualified Mortgage/Ability-to-Repay/Consumer Finance Protection Bureau rules go into effect in January 2014 . . . what’s the big deal?
The “ability-to-repay/qualified mortgage” rule imposes the most sweeping changes to affect the residential mortgage industry in decades. This new rule requires creditors to make a reasonable, good faith determination at or before consummation of a consumer credit transaction secured by a dwelling that a consumer will have a reasonable ability to repay the loan according to its terms using a number of different criteria. Failure to comply with this standard exposes the creditor and its assignee to civil damages and an absolute defense to foreclosure that can be asserted by the consumer for the life of the loan. The rule creates incentives for creditors to originate “qualified mortgages” and provides a “safe harbor” for compliance with the ability-to-repay standards to creditors and their assignees of “prime” loans that satisfy the definition of a “qualified mortgage.”
What was the driving force behind these rule changes?
The meltdown of the subprime mortgage market and the attendant financial crisis created the impetus for the stringent rule. In retrospect, too many subprime mortgages were not adequately underwritten, often under the optimistic assumption that home prices would continue to appreciate and the consumer could just refinance his or her way out of trouble. Loan products that were originally intended for niche markets, such as self-employed borrowers, were expanded to broader segments of the population—with calamitous results. Too few people in the mortgage industry and in government anticipated a crisis of this magnitude.
What impact are the rules likely to have on liquidity in the securitization market?
Unquestionably, the intent of the Dodd-Frank Act is to contract the availability of credit, especially in light of policymakers’ belief that too many consumers had access to easy credit prior to the collapse of the residential housing market. A potential problem with the rule is that in light of the incentives for creditors to make only “qualified mortgages,” too many consumers will be unable to obtain residential loans and will be shut out of the credit markets. This is especially true for consumers with blemished credit histories.
It seems that every time you pick up a newspaper, you are hearing about a new settlement involving the major banks arising from events occurring during the lead-up to the financial crisis. For example, there’s the AG’s settlement, the OCC-Federal Reserve Board Foreclosure remediation settlement, not to mention the pending FHFA suits against a number of major banks. When does this stop? Was the “robo-signing” controversy much ado about nothing in retrospect? servicers?
The perception among the public is that the government bailed out the big banks that allegedly caused the financial crisis—and did comparatively little for the rest of America. The perception is unfair, but as long as the banks continue to thrive and make profits—and many American families continue to struggle with a sluggish recovery—the banks will be perceived as punching bags who can cough up ever-greater sums of money.
A year from now, what will be the major development in the residential mortgage industry?
The Dodd-Frank mandated “ability-to-repay” rule was a reaction to the financial crisis in 2008 and could ultimately preclude too many Americans from obtaining residential mortgage credit. Congress might respond to this pronounced contraction of credit by pressuring the CFPB to liberalize the “qualified mortgage” rules, so that more American will have access to credit. A failure of Congress to act and the CFPB to be responsive to such a liberalization of the rule could jeopardize the housing recovery and derail the economic recovery that is underway.