It has been only three years since the passage of the Dodd-Frank Act and five years since the 2008 financial crisis, but memories in Washington can be short.
Even though we are still emerging from a foreclosure crisis that has affected tens of millions of American families, some in Congress are already pushing to weaken new rules designed to protect taxpayers and keep consumers safe from the faulty mortgage products that wrecked the economy.
The latest danger is H.R. 1077 and its companion bill, S. 949. Deceptively entitled the "Consumer Mortgage Choice Act," the bills seek to undermine Dodd-Frank’s ability-to repay provision. This provision, one of the most direct and important responses to the mortgage crisis, requires lenders to determine whether a borrower can afford a mortgage before they extend a loan. The rule was adopted to prohibit loans that were "designed to fail," a practice that was central to the origination model that brought on the financial crisis. Under the new rule, if lenders offer loans that meet the qualified mortgagestandards provided by the Consumer Financial Protection Bureau , they are presumed to have proven the borrower’s ability to repay and are therefore protected from litigation.
One of these standards is a cap on points and fees, the up-front cost of getting a loan, at 3% of the loan amount. H.R. 1077 and S. 949 would create significant exceptions to this, allowing many more high-cost loans to qualify as QM loans.
Specifically, these bills recreate incentives for lenders to steer families into high-risk, high-fee loans they do not understand and cannot afford. In recent investigations, the U.S Department of Justice discovered that, in the lead up to the financial crisis, tens of thousands of borrowers, especially minorities, were sold unsustainable subprime loans even when they qualified for more affordable loans. The mark-up in the cost of those loans led to increased profits for the lenders and also became an indirect form of compensation and dangerous incentive for mortgage brokers. The ability-to-repay rule regulates this indirect compensation by counting it toward the points and fees cap. The new bill, however, would remove indirect compensation from the cap and encourage the same predatory loan companies that dominated the subprime market back into our neighborhoods.
In addition, H.R.1077 and S. 949 would allow additional loans that Fannie Mae and Freddie Mac deem as risky to be counted as QM, and it would remove the cap on fees charged by title companies that are owned by the lender making the loan. The conflict of interest that exists when a title company is owned by the loan issuer can prevent consumers from getting the best prices on title insurance.
It is also very troubling to us that H.R. 1077 and S. 949 undermine the rulemaking authority of the CFPB. The consumer agency has received very positive reviews from industry and consumer groups alike in its work putting in place rules for QM – rules that it has modified several times to address reasonable industry concerns. The CFPB can monitor markets and make changes as conditions warrant, but putting these changes into statute ties the agency’s hands and makes it more difficult to protect consumers. The Senate has finally confirmed Director Richard Cordray, and the CFPB ought to be free to do its work.
Supporters of H.R. 1077 and S.949 claim that these changes will make sure that more safe mortgages pass the QM test and guarantee access to credit for low income Americans. We heard these same arguments in the early 2000s as the industry lobbied against consumer protection, and the result was that needed reforms were not made until after a financial crisis that nearly brought down the economy. The 2008 crisis cost millions of people their jobs, their pensions or their homes, and we should learn from what went wrong and avoid making the same mistakes moving forward.
Rep. Maxine Waters, (D-Calif.), is the ranking member of the House Financial Services Committee and Sen. Elizabeth Warren (D-Mass.) is a member of the Senate Banking Committee.
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