Regulation

Heritage fellow Diane Katz: New mortgage rules to lead to “erosion of economic freedom”

Heritage FoundationDiane Katz, a fellow in regulatory policy at the Heritage Foundation in Washington, said last week that mortgage rules schedule to take effect on Jan. 10 will reduce credit availability and consumer choice.

New mortgage rules include the Ability-to-Repay rule, which requires mortgage lenders to ensure that potential borrowers have the ability to repay a loan before it is made, American Banker reports.

Katz said that while the CFPB has issued criteria to be used in calculating a borrower’s ability to repay, the agency will allow some flexibility in the underwriting process.

“This is both a benefit and bane to creditors,” Katz said, according to American Banker. “On the one hand, lenders will enjoy some independence in designing ability-to-repay procedures. But it also means there is no fixed compliance standard to follow, which invites arbitrary enforcement actions. As it is, the CFPB ranks among the most powerful—and unaccountable—agencies ever created.”

The rule does, however, provide a safe harbor from potential litigation through “qualified mortgages,” which include fee caps and loan limits. Under the QM rule, mortgage payments are prohibited from increasing the borrower’s debt-to-income ratio above 43 percent.

Katz said that the ratio is within industry standards but added that the DTI requirement will reduce credit availability and cause applicants to be rejected for loans they are able to afford, American Banker reports.

She pointed to a survey from the Credit Union National Association that showed that 60 percent of credit union respondents planned to scale back their mortgage practices ahead of impending mortgage rules.

“Young adults will be among the hardest hit,” Katz said, according to American Banker. “As first-time homebuyers, they may have limited income and college debt, pushing their DTI above ‘qualified’ status. But they are the very buyers who prompt churn in the market.”

Katz said that while the safe harbor protects creditors from litigation related to ability-to-repay requirements, consumers will still be able to file suits, but the scope of the litigation will be limited.

“The threat of litigation will understandably breed greater caution among lenders and thus further restrict the availability of credit,” Katz said, American Banker reports. “The impact will be particularly hard on smaller community banks that lack the capacity to increase their compliance staff or to hire consultants.”

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