After coming to grips with the dimensions of two critically important and related mortgage rules, federal regulators have decided that one should be finalized before the other: the qualified mortgage (QM) test.As result, the Consumer Financial Protection Bureau (CFPB) will go first and finalize the QM rule, ultimately determining which loans are safe enough for consumers while shielding lenders from litigation provided they adhere to predetermined underwriting standards.
Next, a group of six regulators will tackle the qualified residential mortgage (QRM) rule. The QRM will determine which securitized mortgages should be exempt from a 5% risk retention requirement.
U.S. Department of Housing and Urban Development (HUD) secretary Shaun Donovan told a recent meeting of the Mortgage Bankers Association that work on the QRM rule will wait until there is a final decision on the QM rule.
Both the QM and QRM rules are mandated by the Dodd-Frank Act — and by statute must be finalized by Jan. 13 of next year.
The CFPB is expected to issue a final QM rule this summer, most likely in the third quarter.
Once the outlines of the QM rule are established, HUD and five other regulatory agencies will “really try to wrestle [the QRM rule] to ground,” Donovan said.
The HUD secretary indicated he favors a single underwriting standard that would “apply across QM and QRM as much as possible.” He noted there can’t be “100% overlap” but this approach has “gained some traction.”
It is widely assumed that lenders will only be able to sell and securitize QM loans. Non-QM loans would carry too much litigation risk.
Meanwhile, lenders and settlement services providers are urging the CFPB to go slow in redesigning good-faith estimate disclosures. In particular the industry wants the agency to wait for the QM and QRM rules to be finalized.
“We urge the CFPB to take the time to get the disclosures right,” according to a letter signed by nine industry groups.
The CFPB has issued numerous prototypes of the “initial loan estimate” for public comment that will eventually replace the GFE. Industry groups have followed this process closely. They generally support the bureau’s approach in redesigning the disclosure that lenders must provide borrowers within three days of signing a mortgage application.
Investors and lenders intend to use the new disclosures to determine whether a mortgage is a QM loan or a QRM loan, according to the April 16 letter. “Thus it is important that the disclosures accommodate the QM and QRM rules.”
The joint letter notes that the points and fees charged on a QM or QRM loan cannot exceed 3%. And the disclosure form should “clearly delineate which charges are included in the points and fees.”
If the points and fees exceed 3%, the lenders would likely reprice the loan. “Few if any lenders will be willing to make non-QM loans because of the liability,” the joint letter says.
The American Bankers Association, American Escrow Association, Financial Services Association, American Land Title Association, Consumer Mortgage Banking Project, Consumer Mortgage Coalition, Mortgage Bankers Association, National Association of Realtors and Real Estate Services Providers Council signed the joint letter.
The CFPB is expected to issue a proposed rule in July for implementing the new initial loan estimate disclosure form.