The Consumer Financial Protection Bureau proved today it can engage in some fairly strong enforcement. Lawmakers in both parties want CFPB to ensure that individual homeowners cannot do the same thing.
At issue are CFPB rules on mortgages, the first of many that will set new standards in the industry. A group of House Republicans and Democrats, 108 strong, have expressed in a letter that the new rules on “qualified residential mortgages,” among the first on the industry for CFPB, include a “safe harbor” provision that would shield mortgage brokers and originators from borrower lawsuits. If expressed broadly, this would give borrowers no legal recourse on new loans to contest the terms of their mortgages.
The qualified residential mortgage provision, from the Dodd-Frank law, forces banks that issue mortgage-backed securities to retain at least 5% of the value of the portfolio on their own books. Loans issued with large down payments and favorable terms would be exempt from the QRM provision, giving an incentive to banks to issue plain vanilla loans, where they would not have to retain any risk.
CFPB will get a crack at defining what constitutes a qualified residential mortgage. And these bipartisan lawmakers want to graft on this safe harbor provision. Brad Sherman is leading this effort for Democrats:
“We want better loans, not bigger lawsuits,” said California Rep. Brad Sherman , a member of the Financial Services Committee who teamed up with West Virginia Republican Rep. Shelley Moore Capito to marshal support for a letter that was sent to the consumer bureau earlier this week. The letter was signed by 16 Democrats and 92 Republicans [...]
In the letter, lawmakers argue that without strong legal protections, banks will be reluctant to make loans that could help the economy and allow their constituents to buy homes.
The issue has unleashed a fierce lobbying battle between the consumer groups that championed the agency and the banks who argued it will limit lending.
Consumer advocates, who want the agency to provide consumers some leeway to sue, are having none of the argument that loans will be tough to come by without legal shields.
“That’s what they always argue,” Kathleen Day, of the Center for Responsible Lending, said of bankers. “If they don’t get what they want, they say it’s going to raise the cost of credit.”
None of the banks’ arguments are true. They’re asking for full protection from legal recourses in order to issue loans, their normal course of business. We shouldn’t accept that from any entity, to immunize them from accountability before the fact. But 16 Democrats bought it.
This is probably a pander to community banks, who don’t want to get locked into issuing these kinds of loans, and who would love to have the litigation risk removed from them. But this is a pretty terrible scenario, leading to a block of the courthouse door for things like poor underwriting and origination fraud. Even with CFPB, it would be unwise to rely on regulators for enforcement rather than have a private right of action, pressuring the industry to do their job from a variety of avenues.
UPDATE: Barbara Holzer at Public Citizen writes in to say:
It was just five years ago that the U.S. economy imploded partly because toxic mortgages were given to mostly unaware borrowers. Mortgage lenders were able to hide their untenable risk-taking from the public and government oversight until it was too late. This irresponsible behavior led to the shutdown of large financial institutions, record home foreclosures and high unemployment. Now, unbelievably, lobbyists have convinced some lawmakers that bankers should be shielded from lawsuits, returning us to that place where perilous actions would remain in the dark and borrowers would be barred from seeking redress in court for their lenders’ wrongdoing.
Adding a “safe harbor” to once again protect lenders from their reckless acts is arbitrary; if the industry is granted immunity at the outset, there would be no opportunity to address the facts underlying each case. A safe-harbor would undermine the CFPB’s rulemaking on mortgages because consumers would not be able to enforce their rights and assure accountability.