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Consumer Financial Protection Bureau Bans Certain Subprime Loans and Introduces Lawsuit Ban

January 11, 2013

Vincent Howard and our Loma Linda foreclosure defense lawyers were very interested to see a new rule introduced by the Consumer Financial Protection Bureau, the agency tasked with protecting mortgage borrowers from overreaching by lenders. According to the Los Angeles Times, the CFPB announced new standards for mortgage lending this week in an effort to stop abusive lending. The new rules create "qualified mortgages," which are loans with total monthly payments of no more than 43 percent of the borrower's gross income. These are expected to be most of the loans made by mortgage lenders in the future. At the same time, the rules reduce lenders' liability for lawsuits alleging that those qualified loans were made without regard to the borrower's ability to pay. The rules were welcomed by the mortgage industry but criticized by housing rights advocates.

The criticism from advocates centers on the "safe harbor" provision, which bars lawsuits over ability to pay when the loan is a "qualified" loan. An attorney with the National Consumer Law Center said the safe harbor provision directly violates the intentions of Congress when it set up the Bureau, by releasing lenders from liability even when they knowingly make loans that are not affordable. Part of the dispute may center around the definition of a qualifying loan. The 43 percent figure is gross income and doesn't account for other debts, which is not how lenders typically look at ability to pay when they underwrite loans. Thus, a family could be spending more than half of its income on paying off credit cards, student loans or other debt, making a loan with a high payment unaffordable--but the same family could still technically get a qualifying loan and then be unable to sue.

At the same time, the rules also ban some of the riskier types of loans that became popular during the housing bubble of the last decade. This includes stated income loans (also known as "liar loans"); any loan with an interest payment so low that debt increases even though the borrower makes payments; and loans that are qualified based on "teaser" rates rather than the rates the loans will eventually carry. Other types of subprime loan will remain available, although lenders will have to meet the 43 percent limit and they will not have safe harbor from lawsuits. The CFPB said the rules were intended to help more borrowers qualify for loans during a time when credit is not easily extended, but critics said banks have been lending for decades without a safe harbor rule. Despite its fervent opposition to the existence of the CFPB, the mortgage industry praised the rules.

This alone would make us suspicious. Vincent Howard and our Garden Grove foreclosure defense attorneys have been working with mortgage borrowers since the beginning of the housing crisis. We remember their strong opposition to the CFPB and its creator, Elizabeth Warren, as well as to mortgage cram-downs and the HAMP program. If they accept a rule without grumbling, it's safe to say they believe that rule won't cost them any money. Limiting consumers' ability to sue is an attractive incentive to the banks, but as the New York Times observed, it's an incentive that no other segment of the lending industry gets--making us wonder whether the CFPB is going to be another lapdog for the financial industry. While the new rules make some progress in the fight against predatory lending, they leave plenty of loopholes open for lenders to exploit borrowers and create a future crisis, which is why Vincent Howard and our Claremont foreclosure defense lawyers would have preferred less deference to the banks.

If you believe you were misled into taking out a loan your lender knew you couldn't afford, don't hesitate to call Howard Law, P.C., to discuss legal action. You can reach us through our website or call 1-800-872-5925.

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