Among the most anxiously awaited final rules to be issued by the CFPB is the rule implementing the provisions in Title XIV of the Dodd-Frank Act that amended the Truth in Lending Act to create new ability to repay requirements. Under Dodd-Frank Section 1412, a loan that meets the definition of a “qualified mortgage” (QM) is presumed to meet the ability to repay requirements.
In May 2011, the Federal Reserve Board issued proposed amendments to Regulation Z to implement those requirements. Having inherited authority for this rulemaking in July 2011, the CFPB is now working on a final rule which it must issue by January 21, 2013 to avoid section 1412 from becoming self-effectuating on that date. While many observers have predicted that the CFPB will issue a final rule this summer, the final rule’s likely arrival date remains a question mark.
The Fed had proposed two possible standards for a QM. The critical difference between the two standards is that, under one alternative, the origination of a QM would create a safe harbor that the lender has complied with the ability to repay requirements and, under the other alternative, it would create a rebuttable presumption of compliance. (See our earlier post on the alternatives.) Although the American Bankers Association and the Mortgage Bankers Association had each sent comment letters to the Fed in July 2011 urging adoption of the safe harbor alternative, the ABA and the MBA, along with 21 other trade groups and housing industry organizations, reiterated their views in a letter sent to Director Cordray on April 27, 2012. The letter asserts that a rebuttable presumption approach, because of the risks it would create, “can be expected to result in the exit of lenders-large and small-from the market and a reduction in credit from those remaining.”
In an interesting twist to the QM debate, it was recently reported that the Clearing House Association, which advocates for some of the nation’s largest banks, had “changed its stance” on whether the QM definition should create a safe harbor or a rebuttable presumption. According to the report, after initially advocating for a safe harbor approach, the Clearing House Association had joined forces in March 2012 with several consumer organizations, including the Center for Responsible Lending, in making recommendations to the CFPB not only for a broad QM standard but also for a rebuttable presumption approach.
In what’s hopefully a positive sign, based on remarks made by Deputy Director Raj Date on April 20, the CFPB appears to be mindful of the impact its final rule will have on the mortgage industry, particularly for the continued availability of loans that do not qualify as a QM. Mr. Date stated the CFPB wants “to ensure that, as the market stabilizes over time, every segment of prudent loans has the benefit of sufficient investor appetite and a competitive market. We want to avoid any inappropriate disincentive that would prevent lenders from making prudent, profitable loans in seemingly higher-risk or non-traditional segments — like loans to self-employed borrowers.”