Killing the American Dream

Killing the American Dream


How Mortgage Rules Are Limiting Home Buying

Since 1986, the nonprofit Hill Community Development Corporation has revitalized a two square mile area of downtown Pittsburgh, called the Hill District, historically an African-American neighborhood adjacent to downtown.

This coming year, the organization is poised to kick off an ambitious project: help 100 families buy their own homes in the Hill District in an attempt to further improve the neighborhood by giving people a real stake in the community.

Now, however, new mortgage lending restrictions set to take effect on Jan. 10 may have adverse impacts on the program, said Marimba Milliones, the organization’s president and CEO. She fears the new regulations will prevent the banks from helping those that need access to credit most.

“I do have concerns that most of the families that we were engaging for home ownership may struggle trying to meet the new minimum requirements,’’ Milliones said. “We’re not suggesting there should be no review of someone’s ability to repay, but we’re concerned that this is taking the [lender’s] flexibility away. There needs to be more of a review of the regulation to make sure this isn’t overly hindering home ownership.’’

Milliones is not alone in voicing concerns over regulations intended to prevent the mortgage lending abuses that led to the housing meltdown and the Great Recession. Bankers who work with low-income borrowers say that while the regulations were designed to remedy abuses of the big banks and mortgage servicers, they will instead end up hurting smaller banks who acted more responsibly.

Called the Ability-to-Repay and Qualified Mortgage (QM) Rule, these regulations were created by the new Consumer Financial Protection Bureau (CFPB), formed as part of The Dodd–Frank Wall Street Reform and Consumer Protection Act. Among the sections causing concern is language specifying the requirements that must be met for a loan to be a Qualified Mortgage (QM). It essentially caps the amount a person or family can pay for mortgage and related expenses at 43 percent of total income. There are limits on fees and balloon payments as well.

The regulations also define methods banks must employ to verify income – a move intended to end the egregious “no doc’’ loans in which mortgages were given to people who didn’t verify their income, job, or assets (hence the name Ninja loan), and in some cases were encouraged to lie.

Under the regulations, banks making non-Qualified Mortgages could be sued by the borrower in case of default, if the borrower makes a claim that the bank did not properly evaluate his/her ability to repay. Banks could also face fines and penalties from regulators, such as the FDIC an OCC.

A bank that makes a loan meeting all of QM requirements has a “safe harbor’’ protection, meaning it cannot be sued by the borrower and likely will not be penalized by a regulator should a default occur.

Fair housing advocates fear that banks will stick to QM mortgages, putting home ownership out of reach for lower income individuals. Bankers are concerned about turning away too many low-income customers as well.

Under the Community Reinvestment Act (CRA), banks are required to offer a certain amount of services to those of modest means. Bankers are also concerned that by writing only QM mortgages they could run afoul of what is known as the disparate impact doctrine. Lawsuits using this doctrine usually rely on statistical analysis to show a seemingly neutral policy may result in a disproportionate impact on a particular group.

Disparate impact claims can be made to determine violations of the Equal Credit Opportunity Act and the Fair Housing Act.

Some fear QM regulations set up a no-win situation: banks either run the risk of not meeting CRA requirements or leave themselves liable for approving a mortgage that doesn’t meet the QM requirements.

“Let’s just say for example that you are a community bank that likes to underwrite based on local knowledge,’’ said Dennis D. Cirucci, chairman of the Pennsylvania Association of Community Bankers and president and CEO of Alliance Bank.

“You prefer to use the ‘know your customer rule’,’’ Cirucci said. “But at the moment those calculations go outside the safe harbor rules, you run the risk of incurring the wrath of the CFPB and the regulators.’’

Read the full article in January’s issue of Transactions. Aren’t a subscriber? Visit the Transactions page on this website or call PACB at 717-231-7447 to start receiving the magazine.