The CFPB continues to focus upon defining the term Qualified Mortgage (QM), while the consumer and industry groups attempt to influence the outcome. As discussed in earlier issues of the CFPB Alert, the QM rule will set forth criteria to determine whether a potential borrower can afford a mortgage.
The hotly debated issue at the moment is whether the QM rule will impose a “bright-line” test. The banking industry strongly advocates for a bright-line rule because it will minimize confusion as to what is and what is not a QM. The Clearing House Association (the CHA) stated that without a bright-line test, banks will face significant loan repurchase requests from Fannie Mae and Freddie Mac as well as rescissions in coverage by mortgage insurers. The repurchase requests will not be limited to loans that are found to violate ability to repay requirements, but will also encompass loans that are delinquent, even if those loans have not been challenged for violating the ability to repay requirements. The CHA cautioned that given these risks, the banking industry will impose even stricter standards for lending and, thus, make it difficult for otherwise qualified borrowers to obtain mortgages.
Another issue of debate surrounding the QM rule is whether the rule will include a safe harbor or rebuttable presumption provision. A significant class of the banking industry is adamant that a safe harbor provision, as opposed to a rebuttable presumption, is an absolute must. That subset of the banking industry avers that a rebuttable presumption will leave lenders vulnerable to costly litigation and settlements despite the fact that they satisfied QM underwriting standards.
The CHA, which represents 18 of the nation’s largest banks, however, does not believe that a safe harbor provision is critical. Rather, the CHA has proposed a 43 percent debt-to-income ratio (DTI) test for the QM rule. The 43 percent DTI would include a “waterfall” of compensating factors (such as liquid reserves, payment history and residual income) to cover borrowers with higher DTIs. The American Bankers Association (ABA) strongly disagrees with the CHA’s DTI proposal. First, the ABA stands firm that the lack of a safe harbor is fatal. Second, the ABA takes the position that for its members “a 43% DTI is a bad test.” The ABA explained that a 43 percent DTI is too low because it cuts off 15 percent of the loans currently being originated. In fact, ABA director Bob Davis noted that an ABA survey revealed that 10 percent of banks showed that a 43 percent DTI would cut off 30 percent of their loans.
The House of Representatives agrees with the ABA. On July 12, 2012, 106 members of the House of Representatives wrote to the CFPB urging it to adopt a safe harbor provision. The House members stated that Congress did not intend to impose additional legal liability on lenders that comply with underwriting requirements. The July 12, 2012 letter advised that a rebuttable presumption would “weigh down” properly originated loans and provide “little certainty for the creditor, and thus little incentive to make a qualified mortgage, which limits loan fees and features.”
The CFPB is required to craft the final rule defining a QM by January 21, 2013. The National Association of Mortgage Brokers requested that Congress extend the deadlines for finalizing the QM rule. The House of Representative’s Financial Services chairman, Shelley Capito, (R-W.Va.), however, has urged the CFPB to meet the deadline. Ms. Capito reasoned that “[w]hile we want to make sure CFPB produces a workable rule, we also want to see that they do so in a timely fashion[.]”