The recent uproar over regulators' "qualified residential mortgage" (QRM) proposal has obscured the importance of another underwriting standard in the Dodd-Frank Act, the similarly titled "qualified mortgage" (QM).
While the QRM rule will determine which loans are exempt from risk retention if MBS are issued, the QM rule determines which mortgages lenders can originate without facing potential legal liability of up to $100,000 per loan. Regulators can fine a lender $5,000 per day for “unintentional” violations.
The QM standard is designed to ensure that lenders employ basic underwriting to determine the borrower’s “ability to repay” the loan. The QM proposal drafted by the Federal Reserve also imposes limits on points and fees and prohibits products with negative amortization and interest-only payment features.
The ability-to-repay rules will “categorically prohibit transactions that fall outside” the QM standard, and “any violation will bring extensive liability to lenders and assignees,” the American Bankers Association (ABA) said in its comment letter on the reg.
“The stakes are extremely high. These rules will determine the scope of all future mortgage lending,” according to the letter signed by ABA executive vice president Bob Davis.
Industry groups met to develop a uniform approach to the QM proposal, and chose one option offered by the Fed, a legal safe harbor to protect lenders from liability.
“Creditors, investors and consumers are best served by a clear safe harbor for QM loans. Without one, the availability of consumer mortgage credit will be very limited,” said the Consumer Mortgage Coalition in a comment letter.
As proposed, the QM underwriting standard requires verification of a borrower’s income, assets, employment and total debts, including second liens.
On adjustable-rate loans, the lender must consider the borrower’s ability to repay the maximum interest rate that would apply during the first five years of the loan.
Such standards don’t seem very hard to comply with. But to get a “stronger” safe harbor, the Mortgage Bankers Association (MBA) and other industry groups say they will accept stricter ability to repay standards.
“While MBA supports the original proposal, it would accept more requirements as long as they are part of a clear, unambiguous safe harbor,” the trade group said in its comment letter.
One commenter expressed concerns that simply filing for foreclosure will be used as proof that a borrower didn’t have the ability to repay the loan.
At the same time, industry groups don’t want the QRM rule to be substantially stricter than the QM rule. That would leave QM loans that don’t meet the downpayment and debt-to-income requirements of the QRM subject to risk retention.
The Fed drafted the QM proposal but it will be the new Consumer Financial Protection Bureau (CFPB) that finalizes the rule.
The Consumer Mortgage Coalition is urging the CFPB to add debt-to-income ratio requirements to the QM rule. “If the CFPB wants to influence how creditors nationwide manage DTI, it will need to do so by including DTI requirements in the safe harbor,” CMC executive director Anne Canfield says in a comment letter. “We recommend that 50% would be a reasonable back-end DTI ratio,” she added.
(The QRM proposal limits the back-end DTI ratio to 36%, which many consider too restrictive.)
Some industry groups are opposed to including hard numbers or ratios in the QM rule. They want the courts to consider all the factors that go into the underwriting of a loan. The comment period on the QRM proposal ends in early August.
Six regulatory agencies are charged with finalizing the QRM proposal, which ran into a buzz saw of opposition due to a 20% downpayment requirement and tight DTI ratios.
Commenters are expected to urge the regulators to lower the downpayment requirement to 5% and loosen up on the DTI ratios so more working and middle-class borrowers can qualify for affordable mortgage financing.