The Consumer Financial Protection Bureau (CFPB) issued new guidelines on Qualified Mortgages that provide a standard definition for home mortgage lending. The regulation also provides a benchmark for how Qualified Residential Mortgage, the risk retention standard for securitization of mortgage loans, will be defined. 

Under the Dodd-Frank Act, lenders are required to ensure borrowers have the ability to repay their loans. If lenders issue loans meeting the QM definition under the CFPB’s new rules, they will be deemed to have complied with the Ability-to-Repay rule and offered special protection under the rules.

The CFPB definition of QMs grants safe harbor status to loans provided to prime borrowers but higher-priced loans, typically for consumers with insufficient or weak credit history will be made with a rebuttable presumption. 

A QM with a safe harbor would be protected by the QM, under a rebuttable presumption, the borrower would be able to bypass the QM finding entirely. Analysts at Bank of America Merrill Lynch explained in a report today that  a “presumption is an assumption of fact accepted by the court until disproven based on the evidence.” For non-prime QMs not protected by a safe harbor provision, the burden of proof would lie with the borrower who would have to prove that the bank’s loan did not meet the ability-to-repay standards.

Tom Deutsch executive director of the American Securitization Forum said today that this rebuttable presumption could deter lenders from lending to this group.

 “The CFPB’s decision to grant only a rebuttable presumption to non-prime borrowers that meet specified criteria, but are outside the 43%, may dry up credit for this group, he said. “Lenders and investors could easily decide the potential legal liability isn’t worth the risk, putting mortgages and home ownership out of the reach of less than perfect borrowers.”

QMs will be provided to people who have debt-to-income ratios less than or equal to 43 percent.   

However, there are two kinds of QMs that have different protective features for a consumer and different legal consequences for the lender. The first, Qualified Mortgages with a rebuttable presumption, are higher-priced loans. These loans are generally given to consumers with insufficient or weak credit history. Consumers can challenge that decision by proving that they did not, in fact, have sufficient income to pay the mortgage and their other living expenses.

The second, QMs that have a safe harbor status, are generally lower-priced loans. They are generally prime loans that are given to consumers who are considered to be less risky. They will also offer lenders the greatest legal certainty that they are complying with the new Ability-to-Repay rule. Consumers can legally challenge their lender if they believe the loan does not meet the definition of a Qualified Mortgage.

Suzanne Mistretta a senior director at Fitch Ratings explained in a press release this week that QM serves as a good measure for how restrictive QRM will be, because it cannot be any broader than the terms set under the CFPB's QM rule. Securitization of QRMs exempts issuers from risk retention and premium capture requirements.

The ASF said it expects the definition for QRM to come much later in 2013. 

“Resolving these definitions will be a critical breakthrough for restarting the private-label RMBS market,” she said. “Finalization will, at a minimum, provide clarity to the market and allow institutions, particularly banks, to assess the costs of re-entering the market.”


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