The Biden administration can reverse sure Trump-era mortgage guidelines

Kathy Kraninger, on the appointment of former President Donald Trump as head of the Consumer Financial Protection Bureau.

Andrew Harrer / Bloomberg via Getty Images

“Big thing”

Both of these are a type of qualified mortgage, a category that legally protects lenders from consumer lawsuits. For example, this can be the case when borrowers cannot make monthly payments and lose their homes through foreclosure.

The new rules are to be introduced from March 1st.

“It’s a big deal,” said Patricia McCoy, a professor at Boston College Law School, of the CFPB’s announcement that it may be optimizing Trump-era policies. “The experienced QM rule is a really, really dangerous rule for consumers.”

If this is done, the regulatory process can ultimately change or repeal the rules, the CFPB said.

Given his public statement on Tuesday, the agency is likely to act, said McCoy, who oversaw mortgage policy at the CFPB during the Obama administration.

“If you signal it, don’t say it lightly,” she said.

However, some groups believe that the Trump-era rules should remain in place.

According to Robert Broeksmit, President and CEO of the Mortgage Bankers Association, they will help banks and other lenders innovate and expand more mortgages to underserved groups like Black and Hispanic homebuyers.

“We encourage the office to allow them to go into effect as planned,” said Broeksmit.

Mortgage Rules

Consumer advocates are particularly concerned about the experienced QM rule. It creates a new standard for a mortgage that is classified as “qualified”.

Qualified status is important for both homebuyers and lenders. It is essentially a state seal of approval that a lender reasonably determines that a borrower can afford their loan – the so-called “ability to repay”. Lenders get legal protection in court, and consumers can rest assured they have sustainable credit.

Around 95% of mortgages are qualified according to the Center for Responsible Lending.

Prior to the Trump era rewriting, a loan was generally classified as “qualifying” when a borrower’s debt burden was not too high (more than 43% of monthly income). Government sponsored companies, Fannie Mae and Freddie Mac, make exceptions in some cases based on other financial factors.

We don’t want to encourage high default lending.

Mike Calhoun

President, Center for Responsible Lending

A borrower’s ability to repay helps determine the line between prime (high quality) and subprime loans.

“This is one of the fundamental reform rules that emerged from the great recession,” said Mike Calhoun, president of the Center for Responsible Lending. “It’s exactly what caused the financial crash.”

The Seasoned QM rule also grants a loan qualified status if borrowers make timely monthly payments for their mortgage over a period of three years.

Loans that were not classified as “qualifying” at the time of being granted could eventually receive this label.

Consumer groups fear that doing so will give legal protection to risky mortgages and make it more economical for lenders to issue loans with higher default rates. These risky loans could then be sold on the secondary market, where they are bundled with other mortgages and bought by investors.

“We think it’s too loose and creates some bad incentives to get to the unsustainable ending we saw in the crisis,” said Calhoun. “We don’t want to encourage high default lending.”

But many protections remain in place to keep banks from taking out extremely risky mortgages, Broeksmit said. For example, adjustable rate mortgages and mortgages with a term of more than 30 years cannot acquire qualifying status. At the same time, banks could take a bit more risk and lend more to underserved communities, he said.

Trump-era rules would also repeal the 43% debt-to-income ratio and replace it with another general QM standard. Instead, loans would qualify if their interest rate is below a threshold tied to the Average Prime Offer Rate (APOR).

That change doesn’t seem burdensome, Calhoun said. Community banks have been using the same standard for years and responsibly lending using this test, he said.

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