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The new message focuses on a targeted approach to repealing certain provisions — rather than the whole law — and trying to convince everyday Americans they too will suffer the consequences of new rules for the financial industry.
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The Consumer Financial Protection Bureau said Thursday it was seeking additional comments on the ability-to-repay rule, dashing expectations that a final rule would come by the end of June.
May 31
WASHINGTON — In what has become a seemingly daily event, members of the GOP-controlled House on Wednesday once again debated the impact — and potential pitfalls — of a section of the Dodd-Frank Act.
The subject du jour was a pending rule requiring proof of a borrower's loan repayment ability. While underwriting rules are hard enough for banks to stomach, the most-debated part of the rule is how regulators will define "qualified mortgages" — a special class of loans with a quicker road to compliance.
The hearing before the House Financial Services financial institutions subcommittee was part of a broader effort by congressional Republicans to highlight their concerns about Dodd-Frank as the law approaches its two-year anniversary later this month. The hearing was one of six planned by the GOP to look at various effects of the law.
"It's a wonder why any financial institution would choose to make a loan with the potential added costs and liability of these proposed rules," Ed Royce, R-Calif., said at Wednesday's hearing.
But, echoing past statements, Democrats countered that the GOP is playing politics with the hearings, and overlooking the disastrous effects of the financial crisis that made Dodd-Frank necessary.
"Today's the second day of hearings in which the committee highlights, quote, 'unintended consequences of financial reform', while ignoring the problems that brought us here," said Rep. Stephen Lynch, D-Mass.
At the hearing, GOP lawmakers and industry witnesses warned against defining "QM" too narrowly, saying that could raise lending costs and hold back the recovery. (The rule, mandated by Dodd-Frank, is being drafted by the Consumer Financial Protection Bureau.)
"We all want consumers to have safely underwritten mortgages. However, we must ensure that these reforms do not increase the cost of mortgage credit and, therefore, restrict creditworthy borrowers from receiving their mortgages," said Shelley Moore Capito, R-W.Va., who chairs the subcommittee.
Under Dodd-Frank, the ability-to-repay standards include steps to ensure a borrower's credit and employment history. Alternatively, lenders could meet the QM criteria if a loan has certain characteristics of being safe, such as lacking negative amortization.
But the marketplace is focused not only on what defines QM loans, but what benefit QM loans receive. The CFPB has two choices. Such loans could get a safe harbor, meaning borrowers could not argue a lender overlooked repayment ability. Another option, which lenders oppose, is that QM loans would be "presumed" to have met the ability-to-repay standard, yet borrowers can still try to prove noncompliance in court.
"Clear and unambiguous standards and a strong legal safe harbor are essential for a vibrant mortgage market in the future," said Debra Still, chief executive of Pulte Mortgage and chairman-elect of the Mortgage Bankers Association.
But consumer advocates who testified said a safe harbor would not address the risks of lenders who find ways to achieve the QM criteria without really assessing a borrower's ability to repay.
"A safe harbor that deems certain types of mortgages affordable no matter the circumstances will not build in incentives for creditors to ensure affordability," Alys Cohen, staff attorney for the National Consumer Law Center, told the subcommittee. "A rebuttable presumption, while still requiring a stiff uphill climb for homeowners, will provide a backstop to reckless lending."
Yet asked what the impact would be on the securitization market if borrowers still retained that power, Kenneth Bentsen, an executive vice president for the Securities Industry and Financial Markets Association, said higher lending costs could result if market participants feared such liability.
"That is a risk that investors are not inclined to take," Bentsen said.
Industry witnesses were in agreement that a narrowly-defined QM standard could further slow the housing recovery. That argument echoes one made in the debate about a separate Dodd-Frank rule dealing with how regulators define which loans are exempted from risk-retention requirements.
"An unnecessarily narrow definition of the Qualified Mortgage that covers only a modest proportion of loan products and underwriting standards and serves only a small proportion of borrowers would undermine prospects for a housing recovery and threaten the redevelopment of a sound mortgage market," said Scott Louser, a vice president and government affairs liaison for the National Association of Realtors.
