New Mortgage Rules Readied by CFPB as Banks Seek Time to Comply

Banks including PNC Financial Services Group Inc., SunTrust Banks Inc. and BB&T Corp. are pushing the U.S. Consumer Financial Protection Bureau to give them a year to comply with new mortgage underwriting rules that could be released as early as this week.

The consumer bureau’s so-called qualified mortgage regulation, which requires lenders to ensure a borrower’s ability to repay, will be released in connection with a hearing in Baltimore scheduled for Jan. 10, according to two people briefed on the plans.

The qualified mortgage rule, mandated by Congress as part of the 2010 Dodd-Frank Act, is aimed at tightening lax underwriting that fueled the housing bubble. The regulations aim to protect consumers from mortgages they cannot afford by requiring lenders to take steps such as verifying income and assets. In return, lenders gain some protection from lawsuits.

Seven regional banks wrote to CFPB in recent weeks asking that rules be “sequenced” to minimize disruptions to mortgage lending. The banks proposed a final compliance date of Jan. 21, 2014, for the qualified mortgage rule.

A second hearing, in Atlanta on Jan. 17, will feature new rules on mortgage servicing to regulate how consumers interact with the companies, and what protections they can expect, according to the people briefed on the plans. In their letter, the banks sought a compliance date of July 21, 2014, for the servicing rules.

Jen Howard, a spokeswoman for the consumer bureau, declined to comment. The people briefed on the plans asked not to be identified because the plans haven’t been made public.

Dodd-Frank requires completion of the qualified mortgage rules and some of the servicing rules the CFPB is finalizing by Jan. 21, 2013. The law authorizes the agency to give up to 12 months for implementation of the required rules.

The qualified mortgage rule will apply to mortgages in the underwriting phase. Servicing rules will cover major banks including Charlotte, N.C.-based Bank of America Corp. and San Francisco-based Wells Fargo & Co., as well as non- depository companies such as Ocwen Financial Corp., based in West Palm Beach, Fla.

The regulation on qualified mortgages is likely to resemble a version the bureau vetted with other government agencies in October, one person said. That version imposed a range of underwriting requirements and extended a legal safe harbor to loans issued at prime interest rates to borrowers whose total debt-to-income ratio doesn’t exceed 43%.

An early date, or a simultaneous compliance date for too many individual rules, would cause lender and servicers to consider “scaling back or discontinuing mortgage-related activity,” seven regional banks wrote the bureau on Dec. 19. “This would be harmful to both consumers and the industry.”

The letter was signed by PNC, SunTrust and BB&T, Fifth Third Bancorp, Regions Financial Corp., Comerica Inc. and RBS Citizens NA.

The Housing Policy Council, a part of the Financial Services Roundtable, advocated the same timetable in a Dec. 18 letter. The roundtable represents the largest U.S. financial companies.

Consumer groups have continued to press CFPB for rules on mortgage servicing that would restrict so-called dual tracking, the process of seeking mortgage modification during foreclosure. They are also seeking substantive obligations on lenders to modify some mortgages beyond those CFPB has proposed.

Americans for Financial Reform, an umbrella group of consumer advocates, labor unions and civil rights organizations, asked CFPB to scrap its proposed servicing rules in an Oct. 9 letter.

“They have to be bold on this one to get it right,” Lisa Donner, executive director of the umbrella group, said in an interview. “There’s no squaring a circle here.”

Consumer groups have met with Richard Cordray, director of the bureau to argue for more stringent rules on mortgage modification. They also assembled a group of law professors who argued in a meeting that it has the authority to do so, according to two other people briefed on the session.

Under the qualified mortgage rule CFPB discussed with other agencies, loans to borrowers whose debt exceeded 43% of income or had nonprime interest rates would fall under a legal standard giving borrowers or bondholders greater latitude to sue if a lender didn’t adequately gauge ability to repay. This standard would presume that lenders properly underwrote the loan while allowing court challenges of that presumption.

About 80% of loans backed by Fannie Mae, Freddie Mac or government insurers such as the Federal Housing Administration would qualify for a legal safe harbor under the bureau’s plan, according to data from the Federal Housing Finance Agency.