Richard Cordray, the director of the Consumer Financial Protection Bureau (CFPB), suggested late this week that lenders should not be overly concerned about potential legal liability for making so-called "qualified mortgages" (QMs).
Testifying before the House Financial Services Committee, Cordray noted that the agency is still deciding between two alternative protections for lenders that make such loans, but said either one should minimize potential lawsuits.
In securitization, to preserve the functioning of the secondary market, securitization trade group American Securitization Forum (ASF) said in July that the CFPB will need to come up with clear and objective standards for QMs and a safe harbor protection instead of a rebuttable presumption.
This is needed to lessen liability concerns in the mortgage securitization process. Additionally, the ASF said that an inappropriately implemented QM can cause higher borrowing costs.
Under one plan, lenders would have a complete safe harbor from lawsuits, while the other would provide a "rebuttable presumption" protection that would allow borrowers to sue lenders for underwriting mistakes if a loan ultimately goes into foreclosure.
"What I have said as I have discussed the issue...is explaining that some of the differences in safe harbor and rebuttable presumption are in some ways overstated," Cordray said, "and that we are going to try to minimize litigation risk and draw some bright lines."
Cordray's remarks were in response to questions from Rep. Michael Grimm, R-N.Y., about whether Cordray had previously said publicly that the bureau has ruled out the safe harbor protection.
Cordray said the rule, which must be finalized by Jan. 21, is still "in process" and "is not yet resolved."
"I have not taken a position because the bureau has not taken a position on that," he said.
Recently 10 industry groups wrote to the CFPB urgin the agency to issue a qualified mortgage rule that allows them to adhere to current underwriting standards without fear of litigation.
Mortgage bankers have warned that anything short of a safe harbor for lenders could cause some of them to tighten lending standards or exit the mortgage market altogether amid litigation fears, which would limit credit availability.
Cordray said he agreed with Grimm that "murky criteria will foster litigation and will in fact constrain access to credit."
"I think we're trying to write a rule that confers the protections intended under the ability-to-pay provisions, and we're trying not to have the unfortunate side effect of drying up credit in the mortgage market," Cordray added.
Other lawmakers sought to pin Cordray down on a range of subjects.
Rep. Jeb Hensarling of Texas, a leading candidate for chairman of the House Financial Services Committee next year if Republicans keep control of the chamber, renewed his efforts to pin down Cordray on the bureau's definition of abusive. Under the Dodd-Frank Act, the CFPB was given the power to crack down on "abusive" acts and practices, in addition to "unfair and deceptive" ones.
Cordray said the agency has no plans to write a rule elaborating on the word "abusive," saying the definition was already part of the financial reform law.
