New mortgage standards must be clear, measurable

Published Dec. 28, 2012

The nation is still feeling the effects of risky mortgage lending that helped fuel the 2008 financial crisis. That's why it's important as federal regulators aim to write new mortgage rules by Jan. 21 that banks are held to account for lending decisions without cutting off the flow of credit. Banks say if they follow new rules, they should gain a full legal shield from homeowner lawsuits. But that's too much. A partial legal shield is good enough.

Under the 2010 Dodd-Frank law, mortgages must be affordable for the borrower, meaning lenders are responsible for assessing a person's capacity to carry and repay a loan. This may seem obvious, but during the height of the housing bubble unqualified borrowers were put into subprime loans with high interest rates, adjustable terms and excessive fees they couldn't afford, with disastrous results from which the country is still recovering.

Banks want to be fully shielded from litigation if they comply with these new ability-to-repay rules being written by the Consumer Financial Protection Bureau. Banks say if they follow the underwriting standards for a "qualified mortgage" they should gain a "safe harbor" shield against legal liability. Otherwise, they say, mortgage lending will be limited to only the most creditworthy borrowers.

It's understandable that banks fear an onslaught of claims by borrowers in default who blame the banks for putting them into unaffordable mortgages. But putting the brakes on most litigation will unfairly limit homeowners' access to the courts if they were sold a mortgage that the bank should have known the buyer couldn't carry. This defeats elements of the law's protections from predatory lending.

Dodd-Frank provided regulators with general parameters of what constitutes a "qualified mortgage," a loan that is presumably properly underwritten. The lender would have to verify the borrower's income, employment and debt levels — no "liar loans" where lenders don't independently confirm the borrower's claims. The loan amount would be less than a set percentage of the borrower's net monthly income.

If federal regulators set out clear, measurable standards for what loans may be designated as qualified mortgages, it would be a big step toward alleviating the danger that consumers will be exploited. It could also allay the fears of banks that lawsuits will proliferate. Banks could easily show that they followed federal underwriting standards that ensure the loan was affordable. There would be no need for a "safe harbor" legal shield that prevents homeowners from going to court. A presumption in favor of the bank is legal protection enough.