So the first of many decisions and rulings scheduled for this year by the Consumer Financial Protection Bureau is out, and it could have been worse. With the fortune of hindsight we are all able to look back at the true performance of loans to decide what the “non-negotiable” characteristics of a loan should be. The loudest voices heard in this discussion come from those with the most financial reward at stake ; the voices of those who quality control, service and work-out those loans once close are able to see daily the reality of the decisions that have been made.
They see that down payment isn’t as important as ability and desire to save, and they see that credit scores aren’t as important as defining a history and behavior of discipline to meet obligations. So much of the key benchmarks of credit analysis come down to proving the ability to repay. Bottom-line: Can the borrower afford it? From the sales view we see borrowers who want a certain house and all who need a place to live. Too many begged us for the house with many touching and passionate stories and we, like soft fathers, caved and gave in; or we fought for our child with blind love that only a parent can have, never confirming whether our child was in the right or not.
These laws will force our industry to get a backbone and ask the tough questions, and not assume our kids can do no wrong. As good parents we want to give our kids everything; but hindsight tells us that it is not the best approach and it is a slippery slope. In the end they will blame us for being too accommodating and for “ruining their lives” even though we gave them what they wanted. We need to be able to hold the mirror up to the customer and see if they see their fiscal reality for what it is. It’s rarely a popular stance but they thank you for it later.
The grey area will come in the computation of income. Certain common sense flexibilities have been taken away in recent years that take away the buying power. Credit leadership has made the decision to be conservative in calculating income as that was a hot button for the investor/government-sponsored enterprises and allow for bigger back end ratios. That approach will be a sticking point that will be likely reviewed at all levels of a company given this new ruling. The cash rich/income poor will be hurt which means big impact on the 55-plus demographics and the retirement communities. They will not have the luxury of buying a home for retirement before selling their primary full of equity and carry both homes on their lower consulting incomes and 0.5% producing over $1 million in the bank. The ability to pay off the loan with reserves has to play a bigger factor going forward i.e.: reserves of 2 times outstanding debt equals safe harbor.
There are thousands more pages of contradictory legislation yet to come. Amazingly with all these tomes of rules the regs are no clearer and the weasel lenders will push the envelope and say “come and get me.” CFPB, please clarify these regs and then enforce them swiftly and fairly so those who do it right can find a wide enough safe harbor to start confidently lending. If we all continue to be afraid of our shadow due to constant doubt and redetermination of what “it” is, we will shut down credit for those who need it most and shut down many good companies who find no safe harbor, leaving us with those too big to fail who don’t like the business anyway.