July 17, 2012

Legal Immunity for Mortgage Lenders Would Undermine Efforts to Combat Abusive Practices

Statement by Christine Hines, Consumer and Civil Justice Counsel, Public Citizen

An effort by some congressional lawmakers to let mortgage lenders off the hook for violating rules and offering shoddy mortgages to consumers is an irresponsible appeal that could upend much-needed mortgage reforms before they even take effect.

Led by U.S. Rep. Shelley Capito, (R-W.Va.), 108 lawmakers sent a letter to Consumer Financial Protection Bureau (CFPB) Director Richard Cordray, arguing for legal immunity for mortgage lenders. The lawmakers were commenting on a proposed rule for determining borrowers’ “ability-to-repay” and the definition of a qualified mortgage, required under the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act.

The proposed rule leaves open the question of legal liability for bad practices. The bureau must decide whether to allow mortgage lenders to be completely shielded from lawsuits, i.e. give them a “safe harbor,” or whether to protect them with a standard that presumes their compliance with the rules, but gives vulnerable borrowers the opportunity to provide evidence of the lenders’ wrongdoing.
Talk about short memories.

It was just five years ago that the U.S. economy imploded partly because toxic mortgages were given to mostly unaware borrowers. Mortgage lenders were able to hide their untenable risk-taking from the public and government oversight until it was too late. This irresponsible behavior led to the shutdown of large financial institutions, record home foreclosures and high unemployment. Now, unbelievably, lobbyists have convinced some lawmakers that bankers should be shielded from lawsuits, returning us to that place where perilous actions would remain in the dark and borrowers would be barred from seeking redress in court for their lenders’ wrongdoing.

Adding a “safe harbor” to once again protect lenders from their reckless acts is arbitrary;  if the industry is granted immunity at the outset, there would be no opportunity to address the facts underlying each case. A safe-harbor would undermine the CFPB’s rulemaking on mortgages because consumers would not be able to enforce their rights and assure accountability.

Enabling borrowers to rebut the presumption with evidence of wrongdoing is a step forward, but aggrieved borrowers should be able to seek redress under the Dodd-Frank Act without being forced to use either of these standards.

It is clear that given the recent past, strong underwriting rules are necessary to protect the market from abusive lending practices. It also is evident that lenders need incentives to comply with the rules, and that legal accountability is such an incentive.

The CFPB should not shield mortgage lenders from liability, or else the laws passed to guard against another mortgage meltdown will be in vain.