Last week, the CFPB issued “one of our most important rules to date, the Ability-to-Repay rule.” While the rule itself is a good step forward for consumers, what I found most interesting is the analysis of a financial market that was “reckless about lending money.” The CFPB has always taken a very practical approach that they work hard to ensure is informed by real-life experiences of actual people. With the CFPB about to announce much more detailed regulations for mortgage servicing companies, it is a good time to refresh ourselves on what the CFPB has already done in the mortgage financing sector.
In introducing us to their new rule, the CFPB talks about “Henry.” Henry was offered a loan of more than half a million dollars on a $50,000 salary. People in the press have pointed to examples like this as people being greedy and trying to live “bigger” than they can afford. But the CFPB points out that Henry “assumed that the lender knew what it was doing when he qualified for such a large loan.” Henry made a classic consumer mistake: he assumed that a company will have its customers’ best interests at heart.
In reality, in their heart-of-hearts, (publically owned) companies can only have one thing: a profit motive. This isn’t to say that it is a bad thing, not at all. Consumers benefit from companies competing for dollars – competition helps lower prices for consumers, helps provide more choices for consumers, and helps to ensure that a company will be working to sell what consumers really want. Problems only arise when consumers lose sight of this truth – and it happens all too quickly when banks and financial institutions advertise themselves as “on your side” or as being “someone you can trust.”
The CFPB’s rule will put a new factor into play in the marketplace: someone to look out for consumers and to draw a line between making an honest profit and exploiting consumers who don’t know better. The CFPB “put[s] it simply: lenders should not set up consumers to fail.” The CFPB clearly sees itself as performing a balancing role, ensuring that consumers and financial institutions are on an equal playing field:
“Consumers should be able to trust the American dream of homeownership without worrying about losing the roofs over their heads and the shirts off their backs. The Ability-to-Repay rule will help ensure that lenders and consumers share the same basic financial
incentives – that both of them win when borrowers can afford their loans. With this confidence, consumers can be active participants in the market and choose which of a wide variety of products they believe is best for them.”
The basic structure of the ability-to-repay standards come from The Dodd-Frank Act:
- Potential borrowers have to supply financial information, and lenders must verify it;
- To qualify for a particular loan, a consumer has to have sufficient assets or income to pay back the loan; and
- Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term − not just during an introductory period when the rate may be lower.
The CFPB added more detail and proposed the following for the ability-to-repay rule:
- First, a proposed exemption for designated non-profit creditors and homeownership stabilization programs, as well as certain Fannie Mae, Freddie Mac, and Federal agency refinancing programs. These programs generally appear to be already subject to their own specialized underwriting criteria, and they are designed to help consumers refinance into a more affordable home loan.
- Second, a proposed a new category for certain loans made and held in portfolio by small creditors, such as small community banks and credit unions, called “Qualified Mortgages.”
Overall the CFPB’s additions are practical and realistic, not surprising since that is the CFPB’s approach to most things.
Have your rights as a consumer been violated? Call Berk Law at (202) 232-7550 to discuss your legal rights.