News & Events

Should the Government Stop Lending Lawsuits to Encourage Extending Credit? A Consumer Protection Agency Says Yes.

The Consumer Financial Protection Bureau is making a seemingly anti-consumer move.  The CFPB, a watchdog agency for consumer financial markets that was formed in 2011 as part of the Dodd-Frank financial regulation overhaul, is considering a rule that would give legal protections to lenders of government-backed mortgage loans.

The proposed rule would provide a safe-harbor for lenders sued for their conduct in the underwriting of highly qualified loans, those made at prime interest rates to borrowers with debt-to-income ratios of less than 43 percent.  The impact?  Big.  Nearly 80% of loans backed by Fannie Mae, Freddie Mac, and government insurers like the FHA and the VA would be considered a “qualified mortgage” under the proposed QM rule.

Admittedly, the rule’s immediate effect is to limit some borrowers’ rights to sue.  But the secondary effect, the intended one, is that lenders, having more confidence that they won’t be sued for underwriting qualified mortgages, will be more willing to extend credit to borrowers who fall outside the rule’s parameters.  This increased willingness to extend credit should help alleviate the blowback tightening of credit that followed the 2008 housing market collapse.

The CFPB is still considering the parameters of the rule, and is reportedly seriously considering input from lobbyists on both sides of the aisle.  Agency officials plan to issue a final rule by the January 21, 2013 statutory deadline.

-John Dollarhide