Mixed Messages from the Government

By now you’ve probably seen the “guidelines and goals” HUD has put out for lending to underprivileged, non-qualified borrowers. The government can’t very well turn its back on voters who are eager to buy into the American Dream, not if they want to get re-elected.

Now, the Federal Reserve Board has issued a proposed rule under Regulation Z that would require creditors to determine a consumer's ability to repay a mortgage before making the loan and would establish minimum mortgage underwriting standards.

Lenders have a number of options for complying with the rule, according to the proposal. They can verify specified underwriting factors and conclude that the borrower can repay; they can make a “qualified mortgage,” which hasn’t been fully defined yet but that would offer the lender protection from liability; the lender can make a loan with a baloon payment; or it can refinance the borrower into a loan with a lower monthly payment.

The rule is out for comment, but since the Fed won’t even be the body that finalizes the rule, it’s not clear who will comment. The Consumer Financial Protection Bureau will take up the work once it comes up to speed.

Hopefully, when that happens and more regulatory power is put into one agency, we’ll get some clarity on what the government wants lenders to do: make loans to people who the industry can prove can repay them, or make loans to borrowers we know cannot.