A Pirate Code? Cordray Offers Mortgage Industry New Outlook on CFPB Rules

By Gretchen Wegrich

A recent meeting between Consumer Financial Protection Bureau director Richard Cordray and mortgage executives at the Credit Union National Association echoed the scene in Disney’s Pirates of the Caribbean, when Elizabeth Swann says, “The code? Hang the code and hang the rules, you’re pirates! They’re more like guidelines, anyways.”

CFPB director Richard Cordray told mortgage executives at the Credit Union National Association that “the current mortgage market is so tight that lenders are leaving good money on the table by not lending to low-risk applicants seeking to take advantage of the current favorable interest rate climate.”

Cordray added, “Plenty of responsible lending remains available outside of the Qualified Mortgage space. The CFPB encourages you to continue to offer mortgages to those borrowers you can evaluate as posing reasonable credit risk.”

Is the CFPB at least partially raising the white flag to the mortgage industry? Cordray’s statement appeared to be a reversal from earlier CFPB policy, which focused on regulating the mortgage market in order to protect consumers and lenders from high-risk scenarios.

It appears the CFPB may already be concerned about the unintended affect its ability-to-repay/qualified mortgage rule is having on the availability of mortgage credit. 

Cordray also encouraged executives to overcome fears about regulatory scrutiny. Although lenders may be inclined to only lend within the Qualified Mortgage space out of concern for violating regulations, Cordray told officials, “Have confidence in your strong underwriting standards, and you should not be holding back.”  

Cordray also described how smaller banks could enjoy increased flexibility under the QM rule, noting the rules extension of qualified mortgage status to certain balloon loans held by smaller banks operating in rural or underserved areas. He also highlighted the exemptions the CFPB has proposed to free the qualified mortgage standard for portfolio loans made by small banks. He also pointed to small bank exemptions in the CFPB’s new mortgage servicing rules.

However, Cordray’s remarks may have only superficially addressed issues raised by the CFPB regulations. Cordray did not address issues small banks may face when considering making residential mortgage loans outside of the qualified mortgage space. Although mortgage industry members are concerned about how regulators will enforce compliance with the ability-to-repay rule, fears have focused on private lawsuits and claims that may be brought against a lender when they attempt to foreclose.

Lenders operating outside of the qualified mortgage space will face significant risk. Industry experts predict that lenders and lending institutions will prefer to avoid the risk of lawsuits altogether by not making loans outside the qualified mortgage boundaries.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.