It's hard enough to regulate Wall Street's activities with the usual band of well-paid lobbyists and lawyers attacking every provision. But imagine what would happen if organizations purporting to represent the poor and disenfranchised swarmed Capitol Hill and demanded deregulation.
Last week saw two such incidents, both focused on the Consumer Financial Protection Bureau's new mortgage rules, based on the simple idea that lenders should only offer mortgages to borrowers who can afford the terms. The rule sets standards for "qualified mortgages," excluding risky products like "interest only" loans (where the monthly payment only covers the accrued interest) or loans with excessive upfront costs. Additionally, lenders must judge that the borrower has the ability to repay, based on income and other monthly bills.
Lenders can still make riskier loans, but they would be on the hook for a lawsuit if the borrower defaulted. Qualified mortgages get a safe harbor, both for the lender and whoever they might sell the loan to on the secondary mortgage market. The basic idea is to prevent a glut of dangerous mortgages in the marketplace, like the ones that collapsed after the housing bubble and led to the financial crisis.
The rules went into effect Jan. 10. The sky has not fallen and people are still getting loans, but mortgage bankers and their allies in Washington have been screaming about how the rules will inhibit lending, despite the fact that over 87 percent of all mortgages originated in 2012 would have met the qualified mortgage standard, and the other mortgages aren't even banned (it's more that the banks don't want nonqualified mortgages on their books, and if the loans are that toxic, maybe they shouldn't be sold in the first place).
Sadly, some unlikely voices joined the Wall Street chorus last week. Representatives from Habitat for Humanity, which builds and repairs houses with volunteer labor for poor families all over the world, testified to the House Financial Services Committee that the new rules unfairly burden them. Habitat doesn't give away homes, but outfits them with no-interest, affordable mortgages. Because they work with borrowers who would be considered subprime, under the new rules their loans trigger additional scrutiny, which Habitat believes creates significant compliance hurdles.
CFPB recognized the Habitat issue early on and exempted nonprofit organizations that write under 200 loans a year from the qualified mortgage rules. But because Habitat adds a second mortgage as a safety measure for their clients, some of their affiliates may go above that 200-loan limit. By one estimate, 99 percent of all Habitat affiliates would find themselves within the exemption. But Habitat wants 100 percent blanket coverage, and doesn't mind loudly suggesting that in congressional hearings that then get amplified by House Republicans with designs on eliminating the qualified mortgage rules altogether. "Lenders are trying to ride on the coattails of these nonprofit organizations and their technical concerns about the scope of the exceptions," said Michael Calhoun of the Center for Responsible Lending, who testified at the same hearing in support of the qualified mortgage rules.
Another group agitating for their own exemption is NACA, the Neighborhood Assistance Corporation of America. You may know them from their "Save the Dream" events all over the country. NACA signs up subprime borrowers as members and uses their leverage to get banks to work with them on refinancing (some would say they intimidate banks, but I'm pro-bank intimidation so that's fine). Their membership costs $50 a month, which is folded into the mortgage payment, and their primary mortgage product includes an "interest rate buy-down." Under this program, if borrowers pay 1 percent of the mortgage amount upfront (known as 1 point), they reduce their interest rate by .25 percent, saving money over the life of the loan.
CFPB's qualified mortgage rule prevents loans with over 3 points from eligibility. This cuts off a substantial portion of NACA loans (and those $50 a month fees, which go directly to the organization). NACA's loans involve so many points that they trigger an additional protection, under the Home Ownership and Equity Protection Act. Under HOEPA, lenders must make additional disclosures to the borrower, and ban things like prepayment penalties or balloon payments.
Last week, NACA members in yellow T-shirts handed out fliers in the halls of Congress, claiming that "the CFPB's rigid regulations" mean that "lenders are refusing to make mortgages where the borrowers can use their own funds to significantly reduce the interest rate." Lenders clearly don't want to comply with the additional rules, so they're telling NACA they cannot write the interest-rate buy-down loans, and NACA is subsequently appealing to Congress, under the guise of helping homeowners, to deregulate the marketplace.
There's good reason for CFPB to be skeptical of loans with high upfront fees; they don't always make sense for the borrower. It typically takes more than five years to pay off 2 points that are added upfront; NACA's loans call for many more points. If the borrower doesn't plan on living in a home long-term, interest rate buy-down just costs them money they may not be able to afford. "High upfront points were a primary abuse of the predatory loans that hammered so many homeowners and communities," said Michael Calhoun of the Center for Responsible Lending.
There's also reason to be skeptical of NACA, which has faced numerous complaints from troubled borrowers who claim the organization lies about its services and often leaves them without help and further down the road toward foreclosure. Local foreclosure prevention groups have warned homeowners away from NACA events due to what they consider onerous terms, and state attorneys general in Ohio and North Carolina have received official complaints. NACA CEO Bruce Marks typically dismisses these complaints, arguing that a trivial number of bad experiences do not cancel out thousands of homeowners helped.
But the real problem here is the unholy alliance between housing groups catering to the poor and Wall Street. NACA members were also carrying around a study attesting to their effectiveness from Promontory, traditionally a consultant for big banks that helps their clients scale "unprecedented regulatory challenges." Using Promontory to seek out a special carve-out is precisely the behavior Wall Street would use, yet here, NACA is doing it. Community groups usually can't afford a big-time Wall Street consultant to help them lobby in Congress.
NACA claiming that "for many qualified homebuyers (CFPB) regulations are a nightmare" that "suffocate a homebuyer's dream of sustainable homeownership," as it does on its flier, plays into the hands of those who merely want to eliminate the rules. "I look at the qualified mortgage rules and say they should be stricter," says Ira Rheingold of the National Association of Consumer Attorneys, also known as NACA but not affiliated with the other group. "What's silly is that there's nothing that says these loans cannot be made," he adds. Lenders are in no way prevented from the loans NACA prefers, and in fact there is an emerging market interested in taking on risk from non-qualified mortgage loans. So this looks more like lenders getting NACA to do their deregulatory dirty work for them, rather than ensuring low-income borrowers an opportunity at homeownership.
While CFPB is reportedly committed to handling some of these issues with additional regulatory guidance, opening up the rules to special exemptions could have a crowbar effect, giving anti-regulation zealots in Congress the opportunity to create more loopholes.
It's hard to get Congress to legislate tougher regulations, and even harder to implement them once the smoke clears. Groups purporting to support safe and affordable lending should not act as puppets for banking interests by loudly demanding regulatory rollbacks and demonizing common-sense rules to protect borrowers just a week into their existence. "This is what we've wanted for years, that loans given to low-income borrowers won't cause people harm," said Ira Rheingold. "If we discover it has unintended consequences we can go back and tweak it. But don't throw out the baby with the bathwater."