January 10, 2013
New York Times Editorial
The Consumer Financial Protection Bureau has issued long-awaited rules on mortgage lending that should help protect home buyers and the global financial system from a repeat of the subprime disaster. But the rules, which were announced on Thursday and go into effect next year, include some features that could hurt lower-income borrowers.
Predatory lending was a leading cause of the housing bubble, the spike in foreclosures and the failure of large financial institutions. It saddled borrowers with too much debt and left investors with big losses. Congress created the consumer bureau in large part to make sure all that never happened again.
The rules the bureau enacted, which will be supplemented by regulations by the Federal Reserve and other agencies, create a new category of loans called “qualified mortgages” that cannot include certain dangerous features like interest-only payments or negative amortization, which means that the amount owed increases over time. The rules also limit fees and penalties. Lenders would also have to thoroughly vet the finances of borrowers and make sure they spend no more than 43 percent of their pretax income on loan payments.
But some rules, including the 43 percent limit, are not sufficiently protective. While a family that earns $100,000 could deal with payments at that level, a family earning $50,000 probably could not. The bureau could have used a percentage range that varied depending on families’ disposable incomes. Another rule gives lenders a “safe harbor,” or immunity, from certain lawsuits for certain qualified mortgages. It would have been more sound to give borrowers a right to sue if they proved that the lender did not properly take into account their ability to repay the loan.
Officials say these new rules should help invigorate the mortgage market by assuring investors that the loans they buy from banks are sound. Right now, most investors are only willing to buy mortgages guaranteed by the government. It is too early to say whether the rules will have that effect. What is clear, however, is that other regulators can build on the progress the bureau has made while adding protections for borrowers.
Source: The New York Times
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