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The Federal Reserve proposed two options for legally shielding lenders. One was the safe harbor, which protects banks that follow guidelines for verifying borrowers’ ability to repay against suits that try to hold them liable for defaults. The second was a “rebuttable presumption” that assumes loans comply with the law but gives consumers the ability to sue based on other facts or evidence.
The CFPB’s decision will not only affect what kind of mortgages are offered but also lenders’ ability to resell the loans to Wall Street. Banks and other institutions that buy mortgage-backed securities might demand higher rates of return to account for unexpected liabilities, according to the Securities Industry and Financial Markets Association, which backs the safe harbor.
Capito, Sherman and the other lawmakers say the rebuttable presumption doesn’t give lenders enough legal certainty.
Congress “recognized the need to ensure that properly underwritten loans are not weighted down by this additional liability” when it wrote the law, the Members wrote in a July 12 letter to CFPB Director Richard Cordray. A presumption of compliance gives lenders little incentive to write qualified mortgages, the lawmakers wrote.
Capito is chairwoman of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, which has been holding a series of hearings on the effects of Dodd-Frank.
The CFPB doesn’t have to follow the lawmakers’ recommendations. Cordray earlier this year told the House Financial Services Committee his agency is aware of the importance of creating bright lines in the rule to avoid litigation.
Stevens, of the MBA, said the Members’ appeal reflects deep-seated concern over who will get access to home ownership. But the Consumer Law Center’s Cohen said regulators will always be several steps behind the market, underscoring the need for a rule that provides a backstop to reckless lending.
“Even if we say loans should be affordable, loans will be made that are unaffordable,” Cohen said. “We don’t know what the next wave of abuse will look like.”