Government Regulator Evaluates Rules to Protect Mortgage Lenders

by 23 Oct 2012

(TheNicheReport) -- The top federal agency responsible for consumer protection may also shelter mortgage lenders from becoming the target of lawsuits related to home loans guaranteed by government enterprises. 

According to the financial news agency Bloomberg, the Consumer Financial Protection Bureau (CFPB) is reviewing a few measures that may let mortgage originators off the hook with regard to conforming residential loans made to borrowers with debt-to-income (DTI) ratios under 43 percent. This means that up to 80 percent of the loans guaranteed by Fannie Mae and Freddie Mac could be exempt from legal action. 

The CFPB was formed last year as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Many people think of the CFPB as purely a consumer protection agency, but part of its scope is to write and enforce rules that govern financial institutions in the United States.

While the proposed rule may seem lax on the surface, the underlying mechanism of getting this legal protection is intricate and protective in the sense that it will force originators to underwrite impeccable mortgages. Income verification is at the forefront of the rule, whereby mortgage lenders will have to carefully verify income sources and amounts. The same goes for confirmation of assets, but only certain types of mortgages will qualify. Loans with fees and points higher than three percent will not qualify for protection, nor will interest-only mortgages. 

By performing due diligence and proper underwriting that puts an applicant's DTI ratio at 43 percent or lower, mortgage lenders will no longer have to worry about lawsuits or repurchase demands under the above-mentioned proposal. 

Offering legal protection from possible lawsuits by Fannie Mae and Freddie Mac will probably entice mortgage lenders to concentrate their marketing and origination efforts on prime applicants with high incomes and little debt. This means that major banks would probably not go out of their way to consider mortgage applications from working-class applicants whose DTI ratios might be higher. 

A legal spokesperson for the National Consumer Law Center told Bloomberg that the CFPB's proposed rule eats away at the rights of borrowers by giving lenders a wide safe harbor and effectively shielding banks from consumer claims. A spokesman from the National Association of Realtors stated his support for the rule and even proposed expansion into other types of mortgages.

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