The housing finance sector will have to wait until next year for the final rule on what constitutes a 'qualified residential mortgage' (QRM), the unofficial head of the Consumer Financial Protection Bureau (CFPB) told a regulatory forum in Washington.
The CFPB is "carefully reviewing" comments it received on the proposed rule, but won't make a final determination until "early next year," Raj Date told the meeting, which is sponsored by ASR sister publication National Mortgage News.
"We want to provide clarity to the market as quickly as we can without sacrificing our analysis," Date said.
Date's official title at the CFPB is special advisor to the Secretary of the Treasury. But since Republicans in Congress have vowed not to confirm any nominee as chairman until the bureau is substantially altered, Date, who "grew up in consumer finance," is its top officer.
During a question and answer session following his talk, Date was asked if it wasn't enough that mortgage lenders have "considerably tightened" their underwriting rules. And he said no.
"At this point in the cycle, I'd be surprised if they didn't," he said. "Our job is to make sure there is no rush to the bottom at the other point in the cycle. We can't pretend there are no bad actors. If there is no enforcement, you can't expect people to abide by the rules. It's nonsensical."
QRM: Lenders and Housing Advocates Adversary
Affordable housing advocates and mortgage industry groups are often on opposite sides of the debate over the future of lending, but recent regulations have created a common adversary for the two groups: the QRM.
It's anticipated that the Dodd-Frank legislation's QRM proposal, which could create a 20% downpayment standard for risk retention exemption, will make it more difficult for both lenders and low-income borrowers alike, according to a panel speaking at a National Mortgage News regulatory conference in Washington.
The lending practices of the last decade did little to promote sustainable wealth building through homeownership, explained Janis Bowdler, director of the wealth-building policy project for the National Council of La Raza. While housing counselors advocate a gradual process to prepare low-income and minority families into homeownership, subprime lenders offered a “get-rich quick” alternative that did more harm than good, she said.
David Berenbaum, chief program officer at the National Community Reinvestment Coalition called the lack of oversight that perpetuated that environment a “regulatory failure.” He added that QRM proposals that include a 20% downpayment requirement “will send us back to the 1950s, and frankly, put fuel on the fire and keep us in the skids of the housing crisis,” he said.
Instead, Bowdler and Berenbaum call for more robust underwriting, accompanied by counseling for first-time homebuyers. “We all know that 5%, 10%, even 3.5% down with the right underwriting, works,” Berenbaum said.
Rodrigo Alba, vice president of mortgage finance and senior regulatory counsel for the American Bankers Association said lenders realize that mortgage finance is a pillar of community development and local lenders are a tremendous asset to homebuyers and small businesses alike. However, lenders don't want to get hit with penalties or negative public reactions if they run afoul of regulations, like new policies dictating lenders have reasonable assurance of a borrower's ability to repay.
“We're actually seeing a strange collusion of banks and consumer groups complaining about some of these new standards,” Alba said.
While they agree on some points, the two sides still have their disagreements — in particular, how much consideration lenders should give to credit scores compared to other “nontraditional credit history” for borrowers with what Bowdler called “thin” credit histories.
Nontraditional credit history items include bill payment history, income reporting for jobs paid in cash, and accounting for rental income when an extended family intends to live in a house.
Mortgage lenders have lost their ingenuity when it comes to finding ways to take a holistic look at borrower credit, instead relying solely on metrics like credit score and income that can be verified with a W-2 tax documents. She said there's a balance between mortgages that require no income and asset verification and strict underwriting standards.
“When we think about credit worthiness, I feel very strongly that this is where the baby went out with the bath water,” Bowdler said. “A couple babies went out with the bath water.”