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KEATING: New government rules set to restrict credit access

Housing sector needs a safe harbor

- - Tuesday, July 31, 2012

Habitat for Humanity, an organization with the utmost concern for a low-income family's ability to purchase and keep a home, recently sent out a Mayday call to the Consumer Financial Protection Bureau, and all eyes are on the bureau to see how it will respond.

Habitat's concern, expressed in a letter to bureau Director Richard Cordray, centers on a forthcoming rule that, if done wrong, will threaten the nonprofit's mission. The rule requires lenders to demonstrate that borrowers have met an "ability to repay" test. It will define which "qualified mortgages" (QM) will be presumed to have met this test.

In short, because few lenders will dare make anything but a government-blessed loan, the rule will dictate how most future mortgages will look.

Coming on the heels of an economic crisis in which nontraditional mortgage loans played an unfortunate role, this rule might appear welcome. But as Habitat points out in its letter, a rule that is too narrowly defined will limit the ability of many worthy borrowers to become homeowners.

A historic coalition of more than 30 lender, Realtor, consumer and civil rights groups, including the American Bankers Association, the National Community Reinvestment Coalition and the Community Associations Institute, agrees. The coalition's members are advocating for a broadly defined QM because they recognize that poorly constructed mortgage rules will dramatically reduce credit availability even to qualified buyers. Department of Housing and Urban Development (HUD) Secretary Shaun L.S. Donovan also has voiced concern that some suggested approaches to QM are too narrow and will restrict credit.

Such consensus is encouraging and, the coalition hopes, persuasive to the bureau. But there is another aspect to the ability-to-repay rule that presents a clear and present a danger to the housing market and, ultimately, the economy. It's the question of what legal standards will accompany loans that abide by the government's QM definition.

The bureau is considering two options for those standards: a safe harbor, which allows courts to resolve illegitimate cases more quickly, and a rebuttable presumption, which forces full litigation of every case, even those without merit.

A legal safe harbor is a must. Only a safe harbor provides the predictable, unambiguous legal standards that lenders must have. A "rebuttable presumption of compliance" is a poor alternative that would create litigation risks too great for most lenders.

Habitat emphasizes the high-stakes nature of this issue in its letter to Mr. Cordray. A single adverse legal judgment could wipe out one of its affiliates, which act as lenders as well as builders, it said. There's simply no way to operate efficiently with that kind of threat hanging over you.

Borrowers also benefit from a safe harbor, which protects their ability to sue in cases of fraud, misrepresentation and wrongdoing. By minimizing litigation, it would keep down the cost of borrowing.

Simply put, a broadly defined QM that includes a safe harbor would ensure that the largest number of creditworthy borrowers can access safe, quality loans for all housing types. In doing so, it would further encourage the housing market's recovery and help stabilize communities.

The alternative -- a narrowly defined QM that puts lenders on shaky legal ground -- would have the opposite effect. As a matter of self-preservation, banks would be forced to make only loans that stay well within the boundaries of the rule in order to limit litigation risk. In that scenario, only the wealthy and those with nearly perfect credit scores need bother to apply. As the universe of eligible borrowers is curtailed, mortgage credit will contract, and the nascent housing recovery will stall out.

That's something the economy cannot afford. Even in its weakened state, the housing sector still accounts for 4 percent to 6 percent of the gross domestic product, according the Yale economist Robert J. Shiller. From home-building, which generates jobs, income and local tax revenue, to homeowner investments in furniture, paint, plants and renovations, the ripple effects of a healthy housing market are extensive. No wonder, then, that HUD and the administration have undertaken so many initiatives to encourage a housing comeback.

Habitat's letter is a true, albeit pre-emptive, distress call. The bureau should heed the warning and issue a final ability-to-repay rule that encourages, rather than stalls, the recovery.

Frank Keating, former Republican governor of Oklahoma, is president and CEO of the American Bankers Association.