Our guest bloggers are John Griffith, a policy analyst with the economic policy team at the Center for American Progress Action Fund, and Julia Gordon, Director of Housing Finance and Policy at CAPAF.
Housing barely came up in last night’s presidential debate. When it did, Mitt Romney didn’t discuss his much-maligned housing “plan,” nor his vow to let the foreclosure process “run its course and hit the bottom.” Instead the Republican candidate focused on a little-known consumer protection from the president’s financial regulation law:
Dodd-Frank correctly says we need to have Qualified Mortgages and if you give a mortgage that’s not qualified, there are big penalties. Except they didn’t ever go on and define what a Qualified Mortgage was. It’s been two years. We don’t know what a Qualified Mortgage is yet. So banks are reluctant to make loans…It’s not that Dodd-Frank always was wrong with too much regulation. Sometimes they didn’t come out with a clear regulation.
Romney is alluding to the Dodd-Frank financial reform law’s “ability-to-repay” rule, which requires lenders to consider whether a borrower can afford a mortgage before giving it to them. Lenders get special protections from liability if they make loans that are presumed to be safe and sustainable based on certain features, known as “Qualified Mortgages.”
We’re thrilled to hear Romney give such a full-throated defense of the ability-to-repay rule. It’s a welcomed about-face from his recent calls to repeal Dodd-Frank and dismantle the Consumer Financial Protection Bureau, the federal agency that’s responsible for enforcing the rule. That said, Romney has a few key facts wrong.
As Romney points out, the ability-to-repay rule has not yet taken effect as regulators are still defining the “Qualified Mortgage” exemption. But the Republican candidate neglected to mention that the final rule isn’t due until January 2013 — a deadline regulators appear to be on pace to meet. The Consumer Financial Protection Bureau submitted its proposed rule back in April and is currently hashing through public comments.
Romney seems to imply some sort of negligence or malfeasance from the Obama administration that is preventing the rule from being completed. Alas, no scandal here. The Dodd-Frank law is actually quite clear about what type of loan should be considered a “Qualified Mortgage.” The loan must be well-underwritten with verified income, employment, and debt information. Loan payments can’t exceed a certain percentage of the borrower’s net monthly income. The loan can’t contain risky feature like negative amortization, interest-only payments, or balloon payments. The list goes on.
But those guidelines are just the beginning. Complex laws like Dodd-Frank often leave the nitty-gritty details to regulators, who in turn seek public comments on their rulemaking. One thorny issue confronting regulators today is the legal implication of stamping a loan as a “Qualified Mortgage.” Mortgage lenders are pushing for full exemption from liability — or “safe harbor” — for these loans, meaning borrowers can’t take the lender to court if it turns out the loan was improperly underwritten. Consumers are understandably leery of that sort of “get out of jail free” card, and want to preserve some rights in the event of blatant fraud or other misconduct.
It was particularly odd for Romney to blame the ability-to-repay rule for today’s tight mortgage market. The rule pales in comparison to other uncertainties in the mortgage marketplace: millions of foreclosures in the pipeline, no clear plan for winding down Fannie Mae and Freddie Mac, and new capital requirements on mortgage loans as part of the Basel III accords, to name a few.
The ability-to-repay rule is a critical consumer protection and a linchpin of President Obama’s financial reform law. While it’s refreshing to see the Republican presidential candidate get behind the idea, the fine print matters. There’s no reason for the rule to be rushed out the door.