Don’t blame the CFPB for tight credit

With the confirmation of Richard Cordray, the financial industry has stopped trying to destroy the young agency he runs, the Consumer Financial Protection Bureau. But that doesn't mean it's stopped complaining about what the Bureau is up to.

In particular, banks and their advocates say that new rules requiring stricter lending standards are making it harder for everyone to get a mortgage, not just those who actually can't afford to pay it back. Essentially, they charge, bureaucrats trying to protect consumers have in some ways done the opposite.

"There is absolutely no question that the qualified mortgage rule has tightened credit," says David Stevens, president of the Mortgage Bankers Association of America. "It put a hard debt to income ratio that is much narrower than some underwriters would've allowed for some borrowers." That's true even though the rule doesn't actually go into effect until January 2014, he says, since banks have started using its guidelines in preparation for the day when not doing so will be against the law.

Then, there are worries about what might come down the pike from the CFPB or other regulators next, like the final qualified residential mortgage rule -- QRM as opposed to QM -- which will govern investment in mortgage-backed securities.

"The nature of lending is that until lenders fully understand the risks that they're dealing with, they're going to be extra conservative," Stevens explains. "I think what we're seeing is the banking system has become very risk averse...Their parent companies are literally instructing their mortgage subsidiaries to be very careful so this doesn't happen again."

But wait--what does the data show on this? The Mortgage Bankers' own index of mortgage availability seems to be trending up:

That, however, reflects abundant credit available for buyers of very expensive homes. While mortgage applications for homes under $150,000 shrank as a share of the market over the past year, that for pricier homes soared:


(Source: MBAA's Weekly Applications Survey)

Plus, the Fed's survey of senior loan officers shows fewer banks reporting increased willingness to lend:

And when they do lend, it's for people with higher credit scores:

So it seems pretty clear that it's harder to get a loan if you don't make much money. But is the CFPB to blame?

First of all, credit started tightening even before the new agency was born. Fannie Mae and Freddie Mac increased their lending standards in 2007 and 2008, to the point where some analysts said they'd "overreacted." That, along with the bankers' own caution around lending to risky borrowers, and overall rising mortgage interest rates, is probably a bigger factor than the impending rules.

And it's true, the qualified mortgage rule will prevent banks from issuing loans to people without a healthy income and decent credit score.* But banks who lend to those who do meet the new standards are shielded from liability in the event that the property goes into foreclosure, which should increase their confidence in lending to vetted borrowers. The Bureau even pulled back on a rule that would have required lenders to provide no-fee mortgages, which could have increased costs to the effect of making banks lend less to low income people.

In the end, a mortgage market with safeguards against the kind of products that got us into trouble in the first place is the best way to get credit flowing in the long term.

"The irony of ironies for me is that the greatest friend of the lending industry is Dodd-Frank," says John Taylor, president of the National Community Reinvestment Coalition. "It made toxic loans illegal -- and what that says to investors is that those loans won't be in those portfolios anymore, so it's safe to come back into the water."

* Correction: An earlier version of this article said that the qualified mortgage rule set down payment standards. It does not. 

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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Ezra Klein · August 16, 2013