Under(writing) armor

10 January 2013 By Daniel Indiviglio

Five years after the real estate bust, regulators have set out provisions to shield lenders from home-buyer lawsuits. In an industry plagued by litigation, it should help lure investors back. The rules may not stop another bubble, but are an integral step to reshape the market.

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The U.S. Consumer Financial Protection Bureau on Jan. 10 unveiled its definition of a “qualified mortgage” as part of new regulations that provide criteria under which lenders are exempted from most borrower lawsuits.
To be shielded, mortgage originators must take steps to ensure a consumer can pay back the loan. Such underwriting standards include verifying income or assets, examining credit history and calculating that the monthly payment is manageable. The rule also caps monthly consumer debt payments, including the new mortgage, at 43 percent of a borrower’s income. The loans cannot include any toxic features, such as interest-only periods, terms exceeding 30 years and payments so low that principal rises. Limits are also imposed on pre-paid interest and fees.
If a lender satisfies the rule’s criteria on prime loans, a consumer would only have legal standing to sue that lender if it violated other federal consumer protection laws. A lender can still make higher-priced, non-prime loans it believes satisfy these criteria. In such cases, consumers can only win lawsuits by proving the creditor failed to consider that living expenses and other debt payments prevented their ability to repay a mortgage.

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