Published on October 31, 2014
Written by The Servion Group
Recent regulations put in place by the Consumer Financial Protection Bureau are doing more to help protect consumers, but are they putting financial institutions at risk?
Regulation Z under the Truth in Lending Act is intended to protect consumers from taking on high-priced mortgages they may not be able to repay. Implementing sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Regulation Z calls on financial institutions to make good-faith determinations on whether a consumer will realistically be able to repay their mortgage.
But what happens if an institution fails to properly verify a borrower's ability to repay?
Under TILA, lenders face liability risk in two ways. First, consumers have up to three years to bring a suit against a lender who failed to verify its ability to repay. Secondly, consumers can defend against foreclosure in the form of a set-off. If successful, their penalties are offset against the creditor's claim.
The potential for monetary loss can be significant. Under the new CFPB ability-to-repay/qualified mortgage rules, lenders could find themselves liable for actual damages, statutory damages up to $4,000, attorney fees totaling in the tens of thousands of dollars and finance charges including the principal and interest paid by the borrower.
For financial institutions that have a high number of non-qualified mortgages on the books, the potential for damages is staggering.
Putting safeguards in place
New regulations regarding a borrower's ability to repay can be a boon for consumers and lenders alike, offering greater stability and financial satisfaction for both parties. However, there's no doubt the onus is on the part of lenders.
Recent data from Abound Resources shows that addressing regulatory compliance requirements is the most pressing issue for credit union CEOs in 2014. The CFPB's ability-to-repay/qualified mortgage regulation is likely a major driver of this trend.
The National Credit Union Administration previously stated that non-qualified mortgages won't necessarily result in greater scrutiny or criticism on the part of examiners, but that with new regulations in place, it's up to financial institutions themselves to safeguard against greater legal peril.
For lenders, this means asking some tough internal questions, including whether current portfolio composition is putting organizations at risk. While determining whether present lending practices are dangerous is simple enough, changing how borrowers and their loans are verified can be a challenge.
However, in today's marketplace, this is one challenge lenders can't afford not to address.