Washington lawmakers are looking to alter the ability-to-pay rule in order to help ensure that smaller community banks can keep making home loans.
At the time that the ability-to-pay rule was set forth, it actually enjoyed much support from consumer advocates as well as mortgage banks. But after some examination, many smaller banks have determined that it would hurt their ability to provide loans. This hasn’t gone over well with them, and their criticism of the measure has reached the ears of those in power.
Officials at the Consumer Financial Protection Bureau were brought before a house hearing this past Tuesday to hear the complaints of house members who argued that the rule will cause lending to contract, especially for smaller banks. The proposed changes enjoyed bipartisan support at the meeting.
Rep Gary Miller (R., Calif.), set the mood for the hearing. He said, “We’re all unhappy. It appears to me that the rule is much more restrictive than the legislation that enabled you to do what you’re doing.”
The CFPB’s mortgage-lending standards were required by law because of the passage of the Dodd-Frank Act. The Dodd-Frank act has typically been criticized by republicans for the strict standards that it put in place, but now even some of the House of Representative’s more moderate members are beginning to criticize certain parts of it.
The legislation passed in both the house and senate and was signed into law by President Obama in 2010. The objective of the law was to lessen the likelihood of another financial crisis and to try and crack down on lending practices that were deemed to be too risky. It stands as one of the most significant changes to finance regulation in the United States since the reform proposals that were put in place following the Great Depression.
The Consumer Finance Protection Bureau characterizes the period leading up to the adoption of the new rule as follows: “During the years preceding the mortgage crisis, too many mortgages were made to consumers without regard to the consumer’s ability to repay the loans. Loose underwriting practices by some creditors—including failure to verify the consumer’s income or debts and qualifying consumers for mortgages based on “teaser” interest rates that would cause monthly payments to jump to unaffordable levels after the first few years—contributed to a mortgage crisis that led to the nation’s most serious recession since the Great Depression.”
One of the contentious issues of the ability-to-repay rule is that it makes lending more difficult for banks that exist in some rural areas. The Independent Community Bankers of America, which has been lobbying hard to see the rule altered, has recommended defining the word “rural” to areas with less than 50,000 residents so that more banks can be covered by the rule’s standards. Unless lawmakers take action to alter the law, it is set to take effect on January 14, 2014.
