In early July, Congress continued to scrutinize the ongoing struggle to reform lending practices in the wake of the 2010 Dodd-Frank Act.

That legislation created the United States Consumer Financial Protection Bureau (CFPB), which was founded as an independent regulatory agency marginally affiliated with the US Treasury.  The CFPB is in place to create and implement bank rules, and indeed, the implementation of new rules is required by Dodd-Frank.  The CFPB was placed in the difficult position of trying to both protect lenders and to ensure that conditions under which borrowers may receive a mortgage are not excessively restrictive.

As of this May, it looked as though the interpretation of the new rules might be tending toward the restrictive.  The “Ability to Repay” rule makes sense on its face; all sides agree that banks should have the expectation that their loans will be repaid.  Consumer Advocates argue that a too-narrow definition of these “qualified mortgages” will make it unnecessarily difficult for many borrowers to get loans.  The Banks are pushing for tight standards in order to reduce their risk.  In May, the CFPB was close to interpreting the rules restrictively, seeming to favor the banks’ position.  Under these rules, banks would be required to meet certain underwriting standards–and if those standards are met, the banks would be virtually immune from lawsuits.

Exactly how the rules will play out has yet to solidify and they may never go into effect in their current form, because the debate continues in Congress.  On July 11, 2012, a House of Representatives committee held a hearing to investigate this issue, with input from consumer advocates and from the banking industry.  The banks continued to lobby for sweeping rules that would protect them from potentially costly litigation, while the consumer representatives emphasized the possibility that such broad “safe harbor” rules for banks could move genuinely tortious lending practices beyond the reach of the courts.

The conflict between the banks and consumer representatives–as well as the somewhat partisan conflict over the CFPB in Congress–assures a lengthy process as the banks wait for the government to provide guidance.  Until it becomes clear what is required of both banks and borrowers, the housing market, which is greatly influenced by the market for mortgage lending, is likely remain uncertain.