Consumer advocates are lashing back against a Republican-backed bill they say would open the door for the brand of reckless lending practices that led to the financial crisis of 2008.
The House is expected to vote Wednesday on the Portfolio Lending & Mortgage Access Act, a bill introduced by Rep. Andy Barr (R-Ky.) that the Center for Responsible Lending (CRL) says would weaken federal rules that took effect last year to ensure a borrower’s ability to repay a loan.
“Not only does it open the door to past, but it opens the door to the past with a legal shield that’s not merited,” Yana Miles, CRL’S policy counsel, said of the bill.
The Consumer Financial Protection Bureau regulations, part of the government’s answer to the crisis, provide exempt small and rural banks from certain mortgage standards the agency created to prevent bad lending practices, while still providing them a “safe harbor” protection from federal penalties and lawsuits brought by borrowers who have defaulted on their loans.
Barr’s bill would extend that safe harbor to all banking institutions and provide flexibility supporters say is needed for rules that are now too restrictive and have caused community bankers to decrease or eliminate their mortgage businesses.
“Borrowers have to jump through hoops to show they have the ability to repay a loan,” said Joseph Pigg, senior vice president and counsel for the American Bankers Association. “If a bank is willing to make loan and hold it on their books, they have the credit risk and interest rate risk. If the bank is willing to make a loan to that customer, that really should be the only hoop they have to jump through.”
For a qualified mortgage status on a loan, under CFPB’s rules, a borrower’s debt-to-income ratio has to be 43 percent or less; the loan’s points and fees have to be less than or equal to 3 percent of the loan amount; the loan must not contain any risky features like negative amortization, interest-only or balloon payments; and the maximum loan term has to be less than or equal to 30 years.
“Our members want to stay in business for the long-term, so they are only going to make loans that can be repaid,” Pigg said. “What we saw during the financial crisis was that lenders — many of which were non-banks — made loans and didn’t care if they were repaid because they would sell the loans right away.”
The Portfolio Lending & Mortgage Access Act, he contends would provide a safety valve to keep that from happening again.
According to Barr’s office, a loan would lose its protection in the safe harbor created by the proposed legislation if it’s securitized or sold into the secondary market.
In a statement to The Hill, Barr said his bill would give banks and credit unions greater discretion over their mortgage lending decisions if they are willing to keep those loans in portfolio and assume 100 percent of the risk.
“The current one-size-fits-all, top-down, Washington-directed mortgage lending rules are limiting loans to creditworthy individuals, and contributing to consolidation and closures among community banks and credit unions,” he said, later adding that his bill would “expand the dream of homeownership and grow our economy while protecting the health of the financial system and taxpayers from future bailouts.”
Though banks would only remain protected if they held onto the loan, the Consumer Federation of America (CFA) said consumers would lose key protections altogether.
Under the ability to repay rule, Barry Zigas, CFA’s director of housing policy, said a lender has an affirmative obligation to meet reasonable expectations that a borrower can comply with the terms of the mortgage presented.
“That may seem commonsensical and something banks would have a natural indication to do, but we know from the financial crisis there were too many financial institutions that bypassed that and presented loans that put borrowers almost in an immediate risk to not be able to repay the loan.”
The House Rules Committee passed a resolution Tuesday night by a 7-1 vote to move the bill to the floor. One amendments offered by Rep. Donald Norcross (D-N.J.) will be considered at that time. The amendment clarifies that the safe harbor protections don’t apply to banking institutions whose failure might trigger a financial crisis.
At its meeting, the committee received a letter from the Executive Office of the President saying Obama’s senior advisors would recommend the president veto the bill if it were to make it to his desk.
The House is expected to vote Wednesday evening.