CFPB Advisory Provokes New Qualified Mortgage Concerns

WASHINGTON — A consumer advisory issued by the Consumer Financial Protection Bureau on Wednesday is stoking fears that the agency may be inadvertently encouraging borrowers to challenge their lenders in court after new mortgage rules go into effect next month.

Under those rules, lenders that make "qualified mortgages," which must conform to certain underwriting criteria, have greater legal protections than those that don't. But in a fact-sheet distributed by the CFPB to consumers, the agency emphasized that borrowers still have recourse against lenders — and that the CFPB would support them.

"We will stand with borrowers and homeowners to ensure financial institutions treat them properly," the CFPB factsheet said. "Borrowers who fall behind now have more options to take control."

Such language is not altogether surprising considering the CFPB was specifically created to protect consumers , yet some observers said the message could be misunderstood to encourage borrowers to sue.

"We've come to expect" this from the CFPB "but it does have an effect on the industry in that they say 'wow, you are poisoning the water with my relationship with the consumer so they come in applying for a loan thinking that they need you to protect them,'" said Richard Andreano, the practice leader of Ballard Spahr's mortgage banking group. "And the [legal] cost to prove I did my job correctly is so significant I've got to reconsider making a loan in the first place."

Bankers are hypervigilant to any proclamations from the CFPB concerning the new mortgage rules that go into effect Jan. 10, and many are nervous about making non-QM loans. Up until now, the CFPB has been trying to reassure lenders that the new rules will not spark a credit crunch or open up new legal liability.

CFPB Director Richard Cordray has repeatedly knocked down such theories, arguing that there is little legal risk so long as lenders follow the rules.

"The key point here is that we left little room for legal challenges to whether a given mortgage is a QM," said Cordray at the Mortgage Bankers Association's annual conference in Washington in October. "We crafted the rule to avoid that result, which is why critics are now forced to dream up hypothetical factual disputes about whether debts and income were correctly calculated in their efforts to criticize the rules or sow anxiety about them."

Still, the CFPB's No. 1 tip to homebuyers in its recent guide tells consumers that they ultimately determine how much of a mortgage they can afford.

"The new mortgage rules will make the market safer and easier to understand. For example, lenders now have to make a good faith effort to determine if you have the ability to repay your loan," the tipsheet stated. "But in the end, only you can decide how much you are comfortable paying for a mortgage."

Among a handful of consumer materials on the mortgage rules, the agency also included a 100-page guide for housing counselors outlining how to offer loss mitigation options to struggling borrowers. Under the mortgage servicing rule, struggling borrowers — whether delinquent or not — are given certain timeframes to apply for loss mitigation options before the home is foreclosed upon. The guide also highlighted how consumers can resolve servicing errors and request for more information.

"Taking on a mortgage may be the largest financial obligation of a consumer's lifetime," said Cordray in the release. "We want to make sure that potential homebuyers have the information they need to make responsible decisions and that current borrowers know about their new protections."