In the past, this blog has written about how the Dodd-Frank financial reform act is affecting the residential lending market. In one recent post, we discussed how many expect lenders to be more cautions with the loans they issue as a result of these regulations.
Now, more evidence has come to light to suggest that this is the case.
In a recent article for the Wall Street Journal, contributor Alan Zibel wrote that small lenders in particular are worried about making loans that do not meet standards defined by the Consumer Financial Protection Bureau (CFPB). Since borrowers could sue if it turned out that their loans were not in compliance, small lenders are already planning on cutting back on some of their offerings.
"We're going to be very conservative just to make sure that we're in compliance and don't get into trouble," said Mark Walker, chief executive of Michigan Mutual Inc., based in Port Huron, Michigan. "There are going to be loans that we did in 2013 that we are not going to be able to do in 2014."
As noted by the news source, the CFPB has set strict guidelines for loans that fall within its "ability-to-repay" mandate. Borrowers must spend no more than 43 percent of their income on debt and pay no more than 3 percent in fees and any other charges.
Clearly, such a guideline has many small lenders scrambling to reconsider which services they will be able to offer. Given the tenuous nature of the market, many will benefit from using credit risk assessments to determine which borrowers they should focus on.