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The Trump Administration's plan to loosen financial regulations could make it easier for many banks to issue mortgages—and for less credit-worthy Americans to get them.
The proposed financial overhaul, unveiled late Monday by the Treasury Department, is aimed at easing many of the regulations imposed by the 2010 Dodd-Frank Act, which was passed in reaction to the 2008 financial crisis and mortgage-market meltdown.
Mortgage bankers say the new proposals could help unplug the mortgage pipeline for many borrowers who have been shut out by Dodd-Frank. But detractors say easing current regulations could put individuals who can't afford to repay their loans—and their lenders—at financial risk, which is what helped spark the financial crisis.
Other proposals in the 149-page Treasury report, which is similar to a financial overhaul bill passed last week by the House, would change how the embattled Consumer Financial Protection Bureau (CFPB) is funded and run.
But while the House bill faces an uncertain future in the Senate, most of the Treasury proposals could be implemented without going through Congress, Treasury Secretary Steven Mnuchin said.
Redefining 'Ability to Pay'
One of the biggest changes involves the so-called ability to repay, or ATR, which requires lenders to document that borrowers can pay back their loans. If the loan meets ATR standards, it's considered a "qualified mortgage."
Issuing a qualified mortgage protects the lender from a lawsuit by a borrower in default who claims he was sold something the bank knew he couldn't repay.
To be eligible for a qualified mortgage with a bank or other private lender, a borrower's total debt must be no more than 43 percent of gross income. In mortgage-speak, that's called a debt-to-income ratio.
One proposed change would allow banks to raise their debt-to-income ratio for qualified mortgages from 43 percent to match the 45 percent now used by Fannie Mae and Freddie Mac, the quasi-public entities that buy most home mortgages in the U.S.
Fannie Mae will raise its debt-to-income ratio to 50 percent for loans originating after July 29, 2017.
"Right now, private lenders are at a disadvantage compared with their competitor, the federal government," says Keith Gumbinger, vice president of HSH Associates, a mortgage information website headquartered in Riverdale, N.J. The change, he adds, could allow more borrowers to get bank loans.
Another proposal would let banks with up to $10 billion in assets take advantage of a rule that lets smaller banks meet fewer requirements for a qualified mortgage. The Treasury also proposes raising some qualified-mortgage caps on fees and points.
'Rules Need Fine-Tuning'
Banking organizations, particularly community banks, have complained since Dodd-Frank was enacted that the current rules are overly restrictive, and have suppressed post-recession lending. They contend that relaxed regulations would allow for more flexibility in lending to borrowers with non-traditional or irregular income, such as the self-employed.
"The changes will allow community banks to do more loans outside of that tight, qualified-mortgage box,” said Paul Merski, executive vice president, congressional relations, Independent Community Bankers of America. "Banks could customize more loans to the needs of the community."
Merski added that a lot of the mortgages that community banks make in rural areas, for instance, aren’t cookie-cuttter, 30-year, fixed loans, but specialized agriculture farm loans. That type of lending has dropped considerably in the past several years, he said.
Supporters of the existing rules maintain that they protect consumers from the type of bad loans that triggered the housing crisis in the first place. And they maintain that community banks and other small lenders aren't hurt by current standards.
"We have not seen evidence that the qualified mortgage rule, as it now, is restricting lending," says Sarah Edelman, director of housing policy at the Center for American Progress, a left-leaning, Washington, D.C., think tank. "Tinkering with the qualified mortgage rule, providing relief to community banks when they already have relief, isn’t going to move the needle."
Karl Frisch, executive director of Allied Progress, a progressive consumer watchdog group based in Washington, D.C., noted that the Treasury's mortgage changes, coupled with more lax rules related to how much capital banks must keep in order to make loans and the defanging of the CFPB, could presage another financial fiasco.
"If there's a problem in people having access for loans for home buying or otherwise, is the solution to offer loans they can’t pay off?" he said. "Make it easier for consumers to have mortgage problems, make it easier for lenders to lend money with horrible terms, remove oversight or ability to hold financial institutions accountable, and what you get is a perfect storm for another crisis."
Changes to qualified mortgage rules do not require legislation and could be implemented directly by the CFPB, which is a division of the Federal Reserve. Recently the CFPB announced it was taking comments on qualified mortgage rules with an eye toward making changes on its own.
Gumbinger, the mortgage information expert, acknowledges the risks and benefits of loosening regulations for borrowers and lenders.
"Any time you expand a definition of what's qualified, there could be some enhanced risk," he notes. "But with Fannie Mae's changes, the market is adopting a higher level of debt already.
"These individualized tweaks that allow lenders to go after certain reasonable niche audiences is not a bad thing," he continues. "What we have to avoid is the layering of risk like we had before: a subprime borrower with no down payment and alternative income stream."
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