Delay Legal Liability Under New Mortgage Rules

A short, reasonable delay in enforcement and legal liability of new mortgage rules, required under the Dodd-Frank Act, would prove enormously useful to creditors as they work to meet their responsibilities under them. 

Importantly, consumers would not be measurably affected by these delays, particularly if institutions establish benchmarks toward full compliance.

While there are a number of exemptions from the rules – and creditors should make sure they know what those are – lenders that originate or service loans above the exemption levels are feeling the pain of the compliance countdown, particularly in light of concerns about their vendors' readiness.

But the Consumer Financial Protection Bureau has made it clear compliance deadlines will not be moved given its mandate from Congress. So is relief off the table? It doesn't have to be, but it will take quick action from regulators and Congress to make it happen.

At the Credit Union National Association, we conducted a survey of credit unions which found that despite extraordinarily diligent work, they are seriously concerned about full compliance with the new regulations. Sixty percent of respondents report they plan to suspend certain mortgage loan product offerings at least until they are assured they are in compliance, or take more severe action to delay or reduce mortgage activity, pending their ability to comply. As for qualified mortgages, 21% of respondents say they would reduce nonqualified mortgage loans, while 20% said they would only offer QM loans.

In recent weeks, CFPB Director Richard Cordray has indicated that good-faith efforts of financial institutions to comply should be recognized. We agree.

That is why we believe the prudential regulators should issue a public statement very soon indicating that examiners will generally not write creditors up or subject them to sanctions for violations until, say, September 2014. In fact, a letter urging a one-year delay of these new mortgage rules has been circulating on Capitol Hill and has already received support from 118 lawmakers.          

While enforcement relief is critical, the bulk of the new mortgage rules is subject to both administrative enforcement and private rights of legal action from individuals or classes of borrowers. The new rules require many procedural steps that necessitate changes to things like deadlines for printing periodic statements each month. Noncompliance with these procedural steps and other requirements could mean legal liability for the creditor.  

No one knows for sure the extent to which creditors will or will not be sued for noncompliance, but the uncertainty is unnerving, given the possibility that trial lawyers are trolling for cases. Yet, creditors are particularly vulnerable to such suits for issues that occur during the first few months after a rule takes effect. A short delay before these private rights of action may accrue could be very helpful to creditors as they work to meet their responsibilities under these rules.

A related concern is whether examiners and the secondary market, both of which may favor QMs, will cause some creditworthy borrowers with a debt-to-income ratio above the QM's 43% limit to be passed up or pay more for a mortgage. And creditors that provide only QMs under the ability-to-repay rule may risk fair-lending lawsuits. The regulators issued a statement on Oct. 22, but it does not address creditors' concerns. Moreover, the credit risk retention proposal issued jointly by regulators, if adopted, may also make non-QM loans less attractive in the secondary market. More time is needed to sort out these very important issues.

Congress adopted mortgage requirements under the Dodd-Frank Act and can change them or delay compliance – not likely prospects. But Congress and the regulators can work together on another targeted approach to forestall examiner sanctions and legal liability that will ultimately support full compliance – in the best interests of consumers and creditors.

Bill Cheney is president and CEO of the Credit Union National Association.