Cordray Downplays Potential Litigation Risk from Contentious Mortgage Rule

WASHINGTON — Richard Cordray, the director of the Consumer Financial Protection Bureau, suggested Thursday that lenders should not be overly concerned about potential legal liability for making so-called "qualified mortgages."

Testifying before the House Financial Services Committee, Cordray noted that the agency is still deciding between two alternative protections for lenders that make such loans, but said either one should minimize potential lawsuits.

Under one plan, lenders would have a complete safe harbor from lawsuits, while the other would provide a "rebuttable presumption" protection that would allow borrowers to sue lenders for underwriting mistakes if a loan ultimately goes into foreclosure.

"What I have said as I have discussed the issue . . . is explaining that some of the differences in safe harbor and rebuttable presumption are in some ways overstated," Cordray said, "and that we are going to try to minimize litigation risk and draw some bright lines."

Cordray's remarks were in response to questions from Rep. Michael Grimm, R-N.Y., about whether Cordray had previously said publicly that the bureau has ruled out the safe harbor protection.

Cordray said the rule, which must be finalized by Jan. 21, is still "in process" and "is not yet resolved."

"I have not taken a position because the bureau has not taken a position on that," he said.

The industry has warned that anything short of a safe harbor for lenders could cause some of them to tighten lending standards or exit the mortgage market altogether amid litigation fears, which would limit credit availability.

Cordray said he agreed with Grimm that "murky criteria will foster litigation and will in fact constrain access to credit."

"I think we're trying to write a rule that confers the protections intended under the ability-to-pay provisions, and we're trying not to have the unfortunate side effect of drying up credit in the mortgage market," Cordray added.

Other lawmakers sought to pin Cordray down on a range of subjects.

Rep. Jeb Hensarling of Texas, a leading candidate for chairman of the House Financial Services Committee next year if Republicans keep control of the chamber, renewed his efforts to pin down Cordray on the bureau's definition of abusive. Under the Dodd-Frank Act, the CFPB was given the power to crack down on "abusive" acts and practices, in addition to "unfair and deceptive" ones.

Cordray said the agency has no plans to write a rule elaborating on the word "abusive," saying the definition was already part of the financial reform law.

"As we go along, if we determine that there are abusive acts and practices, we will rely upon Congress' definition of the term," he said. "There's no reason for us to go make up some different definition."

Hensarling said that the agency has "the power to prescribe rules that define it."

Cordray acknowledged that was right, but said he had no plans to move forward.

"We could, but I don't get a sense that the industry is dying for that either, Congressman," Cordray said.

He said the agency does plan to issue a proposal in the coming weeks to revise a regulation that critics say could limit access to credit for stay-at-home spouses and military families.

Reps. Shelley Moore Capito, R-W.Va., and Carolyn Maloney, D-N.Y., have led the call for the bureau to revisit a rule they say could prevent credit card issuers from considering household income when making decisions to grant or deny access to credit.

"I think we have determined that it is a significant problem," Cordray said. "There are tens and perhaps hundreds of thousands of individuals who perhaps have been denied access to credit as a result of the way the law was interpreted."

Capito also raised concerns about the overlapping authority among regulators for enforcing consumer protection rules.

She said she has heard from several institutions that the prudential regulators continue to exert influence over — and in some cases are still responsible for enforcing — certain consumer financial rules, creating uncertainty for regulated institutions.

"I think that institutions can follow a roadmap if they can see the roadmap," Capito said. "But if nobody is going to make a decision, or if there is going to be a political struggle between regulators, that puts them into a Twilight Zone of decision-making, and they don't make a decision."

"I agree," Cordray said, adding that the CFPB has been collaborating with fellow banking regulators on issues where their authority does overlap.

For example, the agency worked with the Office of the Comptroller of the Currency this summer on its first enforcement action against Capital One. It also collaborated with the OCC, the Fed and the Federal Deposit Insurance Corp. on supervisory guidance related to the mortgage loans of military service members who receive orders to permanently relocate.

"I have been really pleased at the progress we have all made at building those relationships and working together," Cordray said.