Treasury's Responsible Lending Standards are Good for Mortgage Lenders
The United States Department of the Treasury recently adopted Responsible Lending Standards (RLS) for mortgage lenders. These common-sense practices allow lenders, investors, underwriters, and other stakeholders to verify that a mortgage lender's practices are fair, responsible, and non-predatory. In fact, ensuring compliance with the RLS protects all mortgage originators from consumer liability due to predatory practices, while increasing the risk of consumer liability for those who ignore or violate these practices. This fosters a more equitable lending environment. By eliminating risky loan features, the RLS not only safeguard borrowers but also contribute to the long-term stability of the housing market, reducing the likelihood of another financial crisis triggered by irresponsible lending practices. These include restrictions on:
- Loans where the lender Fails to verify either the income or the assets of the borrower.
- Loans with Negative amortization.
- Loans with Adjustable-rate mortgages (ARMs) underwritten at less than the full amount for the first five years.
- Loans with Interest-only payments.
- Loans with Amortization of greater than 30 years.
- Loans with Balloon payments.
Treasury's RLS are applicable to mortgage loans that are secured by a lien on a single-family, owner-occupant residence, excluding:
- Transactions secured by a subordinate lien;
- A reverse mortgage subject to the CFPB's rules at 12 CFR § 1026.33;
- A temporary or "bridge" loan with a term of 12 months or less, such as a loan to finance the purchase of a new dwelling where the consumer plans to sell a current dwelling within 12 months or a loan to finance the initial construction of a dwelling;
- A construction phase of 12 months or less of a construction-to-permanent loan;
- An extension of credit made pursuant to a program administered by a Housing Finance Agency, as defined under 24 CFR § 266.5;
- An extension of credit made pursuant to a program administered by the U.S. Department of Housing and Urban Development, the U.S. Department of Veterans Affairs, or the U.S. Department of Agriculture (USDA);
- A transaction that does not require payment of interest;
- A transaction made for the purpose of foreclosure avoidance or prevention; or
- For loans with interest-only payments and loans with balloon payments only, a transaction with a payment schedule that is adjusted to the seasonal or irregular income of the consumer.
Mortgage Lenders should all "up their game" and ensure all their loan programs are consistent with Treasury's guidance for CDFI lenders. Who wouldn't want to ensure their lending practices are responsible? Aligning with these standards not only safeguards consumers but also positions lenders as trustworthy and forward-thinking, potentially giving them a competitive edge in the market.
Upon the full implementation of the Treasury's new rules in 2025, we expect investors will seek to understand whether Non-QM loans are compliant with Treasury's Responsible Lending Standards versus those that are not. This could impact the scope of loan diligence and compliance reviews. The distinction between RLS and non-RLS loans could also influence investor decisions, with a preference likely emerging for those adhering to RLS. In the meantime, all stakeholders will know that CDFIs and the loans they originate are compliant with the RLS, further reinforcing their role as reliable and ethical participants in the mortgage market.
The CFPB should review the Treasury's RLS and consider updating its mortgage regulations to include these consumer protections to the extent they are deemed to protect consumers, or to specify a heightened standard of liability for lending that is inconsistent with Treasury's RLS. Over time, the RLS should come into alignment with CFPB predatory lending regulations. Establishing a unified set of standards across federal agencies will not only simplify compliance for lenders but also provide clearer protections for consumers, ensuring that no borrower falls through the cracks. A loan program is either responsible or not, and Treasury and CFPB (as well as state regulators) should ensure that regulations relating to responsible lending practices are consistent and consistently applied. Alignment amongst regulators would also provide clarity to the industry to ensure that predatory lending practices are clearly defined to deter harmful practices.
Importantly, the Treasury Department has committed to evaluating exceptions and variances to the RLS when such practices are well founded and will not subject consumers to harm.
The implementation of the RLS by the Treasury marks a significant step forward in ensuring the long-term health and stability of the mortgage market. By establishing clear boundaries for what constitutes responsible lending, with the ability to seek adjustments and exceptions for circumstances that warrant it, these standards not only protect consumers but also contribute to the overall integrity of the financial system.
As mortgage originators and other stakeholders adapt to these standards, it is crucial that they view compliance not just as a regulatory obligation but as an opportunity to enhance their reputation and build consumer trust. Lenders who proactively align their practices with the RLS are likely to be seen as responsible leaders in the industry, attracting more business and investment from those who prioritize ethical and sustainable lending practices.
Moreover, the Treasury's focus on evaluating exceptions and variances to the RLS suggests a balanced approach that recognizes the diverse needs of borrowers and the need for further innovation in mortgage lending. This flexibility allows for lenders to ensure their innovative loan products to serve unique borrower situations do not compromise consumer safety. This thoughtful regulatory approach is essential in a dynamic housing market where one-size-fits-all regulations may not always serve the best interests of consumers or lenders. By fostering an environment where responsible innovation can thrive, the Treasury is setting the stage for a more resilient and equitable mortgage industry that can better serve the diverse needs of America's homeowners.
