The Dodd-Frank financial reform act of 2010 took aim at the deceptive and unsound lending practices that roped borrowers into risky, high-cost loans they could not understand or afford. But the reform effort will ultimate hinge on whether federal regulators, including the Consumer Financial Protection Bureau, translate its provisions into tough rules, and that, in turn, will require the bureau — which has made a good start — to stand its ground against an industry that clearly wants the lightest possible regulation.
The bureau this month proposed two new disclosure forms that should help borrowers navigate the mortgage process. The first form, known as the loan estimate, would be furnished to the borrower within three days of the loan application. It would clearly outline the terms of the loan, including the shifts in costs that come with adjustable rate mortgages and other exotic instruments.
A companion form would be furnished to the borrower three days before the closing; the borrower would have time to contest unreasonable charges or negotiate a compromise, instead of being ambushed at the closing.
Another proposed rule would change the way the industry handles high-cost loans; it would ban prepayment penalties and, in most cases, “balloon payments” — the large, lump-sum payment due at the end of the loan.
Dodd-Frank also requires lenders to make a good-faith judgment about the borrower’s ability to pay or face the possibility of fines or lawsuits. But the statute also allows the consumer protection bureau to define a category of loans known as “qualified mortgages” that are presumed to meet the ability-to-pay standard, thus reducing the lender’s risk of being sued in the event of foreclosure.
Mortgages included under the “qualified” designation should meet two important criteria. They should be affordable to people of moderate means. And they should be safe, understandable and simply structured mortgages, like 30-year, fixed-rate loans that have no bells and whistles. But consumer advocates worry that the bureau will succumb to industry pressure to bless as “qualified” some predatory mortgages that could result in borrowers losing their homes.
These advocates worry, for instance, that the “qualified” designation could be stretched to include loans on temporary cash reserves from, say, the borrower’s Social Security payment or on guesses about what a person will be able to afford based on payments made in the past. The “qualified” category should be kept simple and understandable and should not become a backdoor entry for abusive, unsound loans.
The New York Times