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Good Intentions

In passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress created the Consumer Financial Protection Bureau (CFPB). The purpose of the CFPB was to safeguard consumers against fraud and other predatory practices by financial institutions.

The CFPB recently issued a final rule which will require residential mortgage lenders to begin using new mortgage forms designed to make it easier for borrowers to review important information such as interest rate, monthly payments and costs to close the loan. So far, so good.

Unintended Consequences

Some of the new mortgage rules the CFPB has issued this year will influence qualification requirements and the types of mortgages that borrowers may get. Although the new rules may not affect many people seeking to buy a home or refinance their home loans since lenders have already tightened their lending standards following the financial crisis, analysts say certain groups of borrowers will be adversely affected.

New lending rules would bar people from obtaining a mortgage or refinancing if it puts their household borrowing over 43 percent of their income. Borrowers seeking larger mortgages, self-employed borrowers, first-time homebuyers, especially those who have college loans, and seniors, many with substantial savings, but lower incomes, may all need to jump through additional hoops to get a home loan. Those who lost jobs during the recession or who otherwise have had career disruptions in the past five years may find it difficult to get a real estate loan due to CFPB regulations regarding verification of job history and employment standing. Small business owners and independent contractors whose incomes are volatile, and recently divorced or widowed people could all have a tough time getting mortgages or refinancings. In sum, it has been estimated that anywhere from 10% to 50% of potential borrowers who qualify for real estate loans will be adversely affected under the new regulations.

The rules are aimed at protecting consumers from hurting themselves, but will likely reduce loan availability, loan choices and increase borrowing costs. Additional regulatory compliance costs are likely to put smaller community banks with fewer resources at risk of closing down or offering fewer services to their clients. Is it a good idea to reduce choices and increase regulatory compliance costs in the name of protecting some borrowers from hurting themselves while adversely affecting other borrowers and favoring the “too big to fail” financial institutions? Is a new federal bureaucracy the best way to protect consumers from “predatory lenders” or an example of the “nanny state?” As noted above, lenders have already tightened their lending standards since the financial crisis.

Will the good intentions outweigh the unintended consequences?  Time will tell.