The Dodd-Frank Wall Street Reform Act that grew out of the housing crisis and financial collapse includes new homeowner protections and a rule aimed at ensuring that borrowers can repay their mortgages. The qualified mortgage rule, also known as “ability-to-repay,” requires lenders to consider whether someone can afford to repay the mortgage before it is issued. In exchange, banks and lenders will get special protections from legal liability in the rule that is scheduled to be finalized in January.
Banks are now pushing to make those legal protections as strong as possible, telling policymakers that they could curb mortgage lending without the new protections, the New York Times reports:
As regulators complete new mortgage rules, banks are about to get a significant advantage: protection against homeowner lawsuits.
The rules are meant to help bolster the housing market. By shielding banks from potential litigation, policy makers contend that the industry will have a powerful incentive to make higher quality home loans. […]
The legislation mandated that loans be affordable, but Congress conceded that banks might fear the legal consequences if the mortgages did not comply. So lawmakers created a type of home loan that would have legal protection, called a “qualified mortgage.” In practice, the protection will make it harder for borrowers to sue their lenders in the case of foreclosure.
Both banks and consumer advocates favor a broad definition of the qualified mortgage, but they differ in their stances on legal protections. The Consumer Financial Protection Bureau, in charge of writing the rule, has two options: it could provide strong legal protections for banks under a “safe harbor” rule, which raises the standard for a lawsuit, or it could pursue a path that gives borrowers expanded legal rights in challenging banks. While banks argue that they will cut lending without tough legal protections, consumer advocates are skeptical.
Even as they fight for legal protections, banks are still dealing with the fallout of their legal abuses before, during, and after the housing crisis. Before the recession, banks used discriminatory and predatory lending practices, and after the collapse, they have used fraudulent practices to push foreclosures through en masse.
Meanwhile, both Democratic and Republican lawmakers have raised concerns over the biggest banks’ ability to avoid punishment for illegal activity. Prosecutions for financial fraud hit a 20-year low in 2011, and after a recent settlement between the Department of Justice and mega-bank HSBC, Iowa Sen. Chuck Grassley (R) slammed the “get-out-of-jail-free card” many big banks seem to hold. Oregon Sen. Jeff Merkley (D), meanwhile, said America’s biggest banks have simply become “too big to jail.”