By Robert Freedman, Senior Editor, REALTOR® Magazine
For the past several months it’s been all QRM all the time, but now there’s QM.
As many real estate professionals are familiar with by now, thanks in part to an NAR Call for Action and lots of communication on the matter, banking regulators’ proposed qualified residential mortgage (QRM) rule has gotten consumer groups, mortgage insurers, real estate professionals, and a good portion of the lending industry up in arms over the rule’s 20-percent down payment requirement and other standards. A majority in Congress in both chambers are up in arms over the proposal, too.
The ball’s in regulators’ court now. They’re looking at thousands of comments and will be signaling at some point their intentions for how they’ll change their proposed rule, if at all. (The regulators are HUD, FDIC, OCC, SEC, Federal Reserve, and the Federal Housing Finance Agency.)
But QRM is just part of what federal regulators have to do as a result of the big Wall Street reform law Congress passed last year. Another part is QM, the qualified mortgage. This is a law about ensuring lenders only make loans to borrowers who have the ability to repay the loan. With this as their charge, regulators released a proposed qualified mortgage rule not long ago and, as part of it, they set standards for what “ability to repay” means in practice. (Note: Regulators in this case just means the Federal Reserve, which wrote the proposal, and the new Consumer Financial Protection Bureau, which has taken over responsibility for the rule.)
For lenders, “ability to repay” would mean looking at loan applicants’ income, their debt-to-income ratio, and about half a dozen other factors. It all seems pretty straight forward, but NAR has some concerns. One of them is a rebuttable presumption option that regulators have included for public comment. Regulators are saying they might set a rebuttable presumption standard for consumers who end up losing the ability to repay the mortgage because of unforeseen circumstances, like an illness or job loss. This standard could lead to a lot of lawsuits, lenders believe, so NAR has a concern that lenders would stiffen their standards to such a degree to prevent lawsuits that few people would be able to get loans.
As an alternative to that standard, regulators are offering a second option: a safe harbor. Lenders can be expected to like this better, because it gives them a clear set of standards to meet to protect them against lawsuits. NAR favors the safe harbor approach, too, but it wants the standards to be strong enough that it prevents lenders from getting back into the risky loan business again.
How regulators ultimately decide this and other issues in the QM rule is important because it’ll set minimum underwriting standard for lenders. If regulators get it wrong and make standards too tight, applicants will face a tough time getting loans; if the standards are too loose, bad loans might get made again.
You can get a good picture of what regulators are proposing in the 7-minute video above with Jeff Lischer, managing director of regulatory policy for NAR.