Lawmakers blasted senior officials at the Consumer Financial Protection Bureau last week, arguing they were too rigid with recently finalized mortgage rules that could choke off access to credit.
At a hearing of a House financial institutions subcommittee, several lawmakers focused on the agency's qualified mortgage rule, arguing it was too strict and needed to be reworked.
"While the intent is to protect consumers from fraudulent mortgages, the practical implications of this rule could result in a constriction of mortgage credit for consumers," said Rep. Shelley Moore Capito, R-W.Va., the chairman of the subcommittee. "I fear that this approach of 'Washington knows best' will harm the very people that the rule seeks to help: borrowers who are on the fringe of lacking access to mainstream financial services."
At issue was a final rule issued in January that defined an ultra-safe class of loans which are exempt from a requirement that lenders ensure borrowers have the ability-to-replay a loan before extending credit. Qualified mortgages must fit certain underwriting criteria, including a cap on a borrower's debt-to-income ratio.
But lawmakers said the "one-size-fits-all" approach in the rule could hurt community banks that underwrite more specialized loans for certain higher risk, low-income borrowers.
"Lenders of Pennsylvania are very concerned, and understandably so because they serve the community by making loans and their ability to provide that service depends on their ability to assess credit worthiness," said Rep. Michael Fitzpatrick, R-Pa. "And there's concern that by constructing a box in which they operate that it's inappropriate that qualified borrowers won't have access to credit."
Rep. Lynn Westmoreland, R-Ga., went further by calling for lawmakers to "swiftly" repeal the mortgage rules before local banks stop lending and another housing bubble ensues.
"This country needs sensible housing regulation that allows the market to set the price and the qualifications for eligible borrowers," he said. "Policies like the qualified mortgage are the most dangerous to economic freedom in this country."
But CFPB officials repeatedly argued that they already addressed many industry concerns by broadening the initial definition of QM and carving out exceptions for smaller lenders.
"We worked to structure the rule in a way that allows room for multiple underwriting practices and models used by different types of creditor today," said Kelly Cochran, the CFPB's assistant director for regulations. "We also considered as the mortgage market strengthens, the rule should provide appropriate safeguards without becoming straitjackets."
CFPB officials noted exceptions for small lenders that serve rural and underserved communities.
Peter Carroll, the CFPB's assistant director for mortgage markets, said the agency has expanded the definition of rural lenders from the original version of the rule suggested by the Federal Reserve Board.
But that only led to greater concerns for lawmakers who argued the exemptions were still not broad enough for most small banks.
Rep. Sean Duffy, R-Wis., pulled out a map of what he considered rural Wisconsin and noted discrepancies in how the CFPB's definition affected different areas of the state. He argued that some counties that were similar were treated differently.
“There is no difference [among counties]. It's farms as far as the eye can see for 30 miles on either side of county lines,” Duffy said. "And it creates some real problems and disadvantages in my community the way the rules are written."
Lawmakers also doubted the CFPB's contention that a private market would open up for riskier loans outside of QM.
"Despite the CFPB's claims that lenders will issue non-QM mortgages, my conversations with lenders lead me to believe that few, if any, will be willing to issue these types of mortgages," Capito said.
But Carroll said that given time, lenders will adjust to the new rules.
"Based on our analysis, we do think it is possible to quantify the risks associated with nonqualified mortgage lending."
CFPB officials also said that they have given lenders more flexibility because any loan purchased by the government-sponsored enterprises is considered a QM loan for the next seven years. But Rep. Gary Miller, R-Calif., questioned why the CFPB would give this window if they thought QM was a "good rule" in the first place and fit most current loans.
"Every lender I'm talking to said 'we're not going to do anything. We're not going to make any loans outside of the QM rules.' That is a recipe for immediate disaster this coming January," Miller said. "And I would strongly encourage you to not force us to legislatively change the rule to be more flexible."
House Democrats, however, were more supportive of the CFPB's efforts.
Other lawmakers have said "if the rules regarding QM were put in place, it could result in fewer loans…I must say, I hope so," said Keith Ellison, D-Minn. "The fact is, is that there were a lot of loans that should not have been issued in the last several years."