Biden administration may end some Trump-era mortgage rules

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Katie Kroeninger, appointed by former President Donald Trump, is the head of the Bureau of Consumer Financial Protection.

Andrew Harrer / Bloomberg via Getty Images

“Big deal”

Given his public announcement on Tuesday, it is likely that the agency will act, said McCoy, who oversaw mortgage policy at the CFPB during the Obama administration.

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

But some groups believe the Trump-era rules should remain in place.

They will help banks and other lenders innovate and provide more mortgage loans to underserved groups such as black and Hispanic home buyers, according to Robert Braxmith, president and CEO of the Mortgage Bankers Association.

“We are urging the bureau to allow them to come into effect as scheduled,” Braxmith said.

Mortgage rules

Consumer advocates are particularly concerned about the Experienced Quality Management rule. This creates a new standard for mortgages to be considered “qualified”.

Qualified status is important to both home buyers and lenders. Essentially, it is a government seal of approval that the lender has reasonably determined that the borrower can afford the loan — the so-called “ability to repay”. Lenders receive legal protection in court, and consumers are confident that they have reliable credit.

According to the Center for Responsible Lending, about 95% of mortgages are qualified.

Before the rewriting of the Trump era, a loan was usually considered “qualified” as long as the borrower’s debt burden was not too high (more than 43% of their monthly income). Government-funded organizations Fannie Mae and Freddie Mac make exceptions in some cases based on other financial factors.

We do not want to encourage high failure rate lending.

Mike Calhoun

President of the Center for Responsible Lending

The borrower’s ability to repay helps establish a demarcation line between premium (high quality) and subprime loans.

“This is one of the founding rules of reform emerging from the Great Recession,” said Mike Calhoun, president of the Center for Responsible Lending. “It touches the very core of what caused the financial crisis.”

The Experienced Quality Management rule also grants a loan qualified status if borrowers make their monthly mortgage payments on time over a three-year period.

Loans that were not considered “qualified” at the time of issue could eventually get this label.

Consumer groups fear that this could provide legal protection for risky mortgages and make it more cost effective for lenders to lend to reduce higher default rates. These risky loans can then be sold in the secondary market, where they are pooled with other mortgages and bought by investors.

“We think this is too weak and creates some bad incentive to achieve the unsustainable end that we saw in the crisis,” Calhoun said. “We don’t want to encourage high insolvency lending.”

But there are many safeguards left over to prevent banks from issuing super-risky mortgages, Braxsmith said. For example, adjustable rate mortgages and mortgages longer than 30 years cannot qualify. At the same time, he said, banks can take a little more risk and provide more loans to low-income communities.

Trump-era rules would also remove the 43% debt-to-income ratio and replace it with another General QM standard. Instead, loans will qualify if their interest rate is below a threshold pegged to the average principal offer rate, or APOR.

“This change doesn’t seem like a burden,” Calhoun said. Local banks have used the same standard for many years and lend responsibly according to that test, he said.

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