A consensus is forming among consumer and housing groups that the ‘Qualified Mortgage’ (QM) rule should encompass a large chunk of conventional mortgages that are being underwritten today.
“A lot of large and responsible lenders only intend to lend in the QM space,” according to Michael Calhoun, president of the Center for Responsible Lending (CRL). “So the QM rule will define which loans are available in the market,” he said at a recent housing finance forum.
K&L Gates partner Larry Platt noted that the QM rule applies to all conventional mortgages – including Fannie Mae and Freddie Mac loans. “A narrow QM rule would restrict credit,” he said.
The Consumer Financial Protection Bureau (CFPB) is drafting a final QM mandated under the Dodd-Frank Act, requiring lenders to evaluate each borrower’s ability to repay a loan. This means the lender has to verify the borrower’s income, assets and debts. The QM rule also requires lenders to make sustainable mortgages, prohibiting certain loan products and features. (Meanwhile, other agencies are working on the ‘Qualified Residential Mortgage’ which addresses risk retention on securitized mortgages.)
Failure to meet the QM standards in originating a loan will leave lenders vulnerable to litigation. And that’s where the consensus on the QM rule quickly breaks down.
Lenders want the final rule to provide a “safe harbor” from litigation that makes it difficult for consumers to challenge them in court. The borrower would need to present actual evidence that a lender disregarded important information in approving a loan.
Consumer groups want the courts to provide a check on lenders and are pushing for a “rebuttable presumption,” which would make it easier to challenge a lender in court with a hearing before a judge.
Mortgage Bankers Association senior vice president Steven O’Connor said the QM rule will allow lending to be performed on reasonable and responsible terms. However, a rebuttable presumption would create additional legal risks for lenders. “Lenders need legal certainty to make loans,” O’Connor said. “At the end of the day, we think the best way to accomplish that is through a safe harbor.”
A rebuttable presumption will make it easy to forestall foreclosures and claim potential penalties in court, according to Bob Davis of the American Bankers Association. In cases involving violations of the QM rule, the borrower can collect all fees and interest paid on the loan up until default.
“If you make it easy to litigate and you make the penalties excessively high, you will effect lending,” the ABA executive vice president said.
To breech this divide over legal protections, three consumer groups and five large banks have been working on a bright line test to gauge a lender’s compliance with QM rule. The bright line test is designed to provide “assurances to lenders that they are making QM loans that can be sold into the secondary market,” Calhoun said.
In early March, the Center of Responsible Lending, Consumer Federation of America, and the Leadership Conference for Civil and Human Rights and the banks sent a draft of a bright line test to the CFPB.
First, the loan must be in compliance with the documentation and verification requirements of the QM test and free of loan terms or features prohibited by the rule. If the borrower has a total debt-to-income ratio of 43% or less, the loan would meet the QM requirements. If not, there are a series of tests concerning the borrower’s DTI ratio, savings, payment history and employment records that can be used to approve the borrower and still meet the QM requirements.
This is considered a ‘waterfall’ approach giving lenders some flexibility in terms of compensating factors.
“These are relatively generous bright line rules so you have credit widely available,” said CRL president Calhoun. “Then you have the backstop of the rebuttable presumptions that allows borrowers to sue in court,” he added.
CFPB director Richard Cordray will decide whether the QM rule has a safe harbor or rebuttable presumption. The bureau is expected to issue a final rule sometime this summer. By statute, the rule goes into effect Jan. 13.
Consumer Mortgage Coalition executive director Anne Canfield noted that the bright line test is still a work in process – but it’s a key component of the rule.
The bright line test is “needed whether you have a safe harbor or a rebuttable presumption,” Canfield said. Without a bright line test, she is concerned lenders will be more cautious and curtail lending.