Consumer Rights Vs. Lender’s Responsibility…….AKA Rebuttable Presumption Vs. Safe Harbor
How comfortable do you feel with a borrower being able to sue you if they go into foreclosure? Under consideration as part of the Qualified Mortgage rule, that could be a real scenario. The CFPB is trying to balance the seesaw on consumer protection and lender responsibility. Lenders are fighting for safe harbor provisions, if a loan meets the requirements of a qualified mortgage loan. Consumer advocates want consumers to be able to take action against a lender, if the lender’s underwriting mistake led to a foreclosure.
Essentially, the CFPB is trying to build rules around how we underwrite a loan, which can be helpful if we are given clear and concise boundaries. They believe this is necessary, because lenders were irresponsible in their underwriting criteria preceding the crisis, causing many borrowers financial harm. We all know that loans were given to clients who shouldn’t have gotten one and they are attempting to correct this with regulation and penalty.
However, on the lender’s side, it is already tough enough to get a loan sold to an investor. Buybacks are rampant and investors are sending loans back for the most minor of issues. Heaping another risk onto the pile just makes it more restrictive for the consumer to obtain credit. Certainly there has to be some balance drawn, that allows a lender to do their business responsibly, following prudent underwriting considerations and if they do this, then earning protection from litigation. What is unclear is what this look likes.
How do you build qualified mortgage guidelines, apply them fairly, and protect the consumer from lender deception or incompetence, while shielding the lender from consumers who want to work the system?
I see many issues with this and I want to hear your opinions. I have never seen anything published by any government agency that can lay out a complete guideline, which covers all of the bases in underwriting a loan. Although we want to believe underwriting is black and white, we know it is an art and many areas are gray. No two financial situations are alike, and underwriting discretion must be part of the process to allow for proper risk management and fairness to the consumer. Gray areas cause murkiness and murkiness opens lenders to litigation. Litigation costs money and the more lenders spend on litigation the higher the cost to the consumer. Somewhere we need to balance the need for consumer protection, with the lender’s desire to lend to responsible consumers, without fear of repudiation.