Will Regulators Make the QRM Mistake All Over Again?

It’s the QM rule’s turn in the spotlight, and so far a federal proposal raises concerns

If you’re applying for a loan, what determines whether or not you can repay that loan?

That’s what a federal regulator is trying to determine right now, and based on a proposed rule they’ve written, they’re thinking about setting standards that NAR and other industry groups—and consumer groups, too—think will make it hard for even creditworthy households to get a home loan.

The regulator is the new Consumer Financial Protection Bureau and the rule it’s writing is called the qualified mortgage (QM) rule. CFPB is trying to define the way banks measure a loan applicant’s ability to repay a loan: what the applicant’s monthly debt-to-income ratio is, what the monthly mortgage payment would be, what the applicant’s credit history is, and so on.

NAR and some 40 partners in a coalition sent CFPB a letter not long ago saying “ability to repay” should be defined in broad terms, otherwise lenders’ ability to make loans to all but the most creditworthy households would be constrained.

It’s like last year’s battle over the proposed QRM rule all over again.

If you remember the QRM rule, it was supposed to set its own underwriting standards, although with applicability limited to loans that are included in securities and sold to investors. If the loan met the QRM standard, lenders can sell 100 percent of the loan to investors. If the loan didn’t meet the standard, lenders can still make the loan but they have to retain 5 percent of the loan amount on their books. That means these non-QRM loans would be expensive for borrowers, adding to the cost of buying a house and blocking some households from buying.

NAR and other groups, inluding consumers groups, built such a strong case against the proposal (in part because it considered requiring a strict downpayment requirement) that regulators have shelved the rule while they weigh all the input they received.

Here we are a year later and CFPB is writing the QM rule, which is a more general ability-to-repay rule that applies to all mortgages, securitized as well as non-securitized loans, and once again regulators are weighing a narrow definition that could include overly prescriptive standards that would make it hard for lenders to make any loans except to the most creditworthy borrowers.

Will CFPB go down the same road as the Federal Reserve and other regulators that drafted the proposed QRM rule? Let’s hope not.

But there’s another concern with the QM rule, and it has to do with the legal standard that lenders will have to meet if a loan goes bad.

CFPB is weighing whether to hold lenders to what’s known as a rebuttable presumption standard of legal culpability or give them a “safe harbor” under which they can protect themselves from lawsuits of questionable merit by borrowers who default on their mortgage.

“Rebuttable presumption” and “safe harbor” are legalistic terms, but underlying them are simple concepts. If CFPB decides to use a rebuttable presumption standard, any borrower who defauts on his loan and believes the lender didn’t technically meet the ability-to-repay standard can bring an action against the lender. Even if the lender were to prevail against the action, it still has to defend itself, which is costly, time-consuming, and resource intensive. Multiply that by the number of actions taken against it and you can see that lenders might just throw up their hands and refrain from making any loans except to the safest, most creditworthy borrowers.

The safe harbor approach, which NAR and its coalition partners support, is far less likely to lead to a retreat from the market by lenders, because it saves them from having to defend against each and every defaulting borrower as long as the loans it makes follow the ability-to-repay standard. Borrowers who default can still sue but the case can be immediately dispensed with if the lender has met the safe harbor. At the same time, you can expect the loans to be relatively safe, because they would have been underwritten using the federal standard.

There’s more to these issues, and any time you try to write about legalistic issues in non-legal terms, you run the risk of over-simplifying, so you can read the proposed rule for yourself.

The bottom line has to do with what makes sense for the market. If we want lenders to make safe loans to more than just the most creditworthy borrowers, then CFPB should write a QM rule that broadly defines the ability to repay and that provides a legal safe harbor for lenders. A rule that narrowly defines the ability to repay and that gives defaulting borrowers too-easy legal standing to sue reopens last year’s QRM debate.

The 2-minute clip above is extracted from a video on the QM rule. It looks at the differences between the safe harbor and rebuttable presumption legal standard that’s of concern.

More on QM, including the full video in which the clip is taken.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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  1. In general, this discussion would seem to relevant only insofar as loans are insured with tax payer dollars. GSEs like Fannie and Freddy are part of the reason we have the mess that we do now.

  2. I am trying to buy a beautiful home myself here in NW Florida. I make well above a normal two family income, have near perfect credit, and only one vehicle financed. One of the top four major banks are scrutinizing this loan to death. Obviously, they are already using the QRM you mentioned.

  3. Teresa Pitre

    Yes, CFPB should produce a QM rule that will assure the lenders whether an individual can repay the loan or not. http://www.toptaxdefenders.com/

  4. Karl

    I am a realtor and it appears to me that NAR and the unknown other people don’t remember what caused the last melt down. Prime and Sub-prime loans that were not monitored by the regulators and were given to any body who could sign their name. The problem starts when the government doesn’t do it job,

  5. Fred from pasadena

    Could you possibly use any more acronyms in this article? I think that it looks like that was done on purpose by the author!
    But nearly every article of the NAR, National Association of Realtors, contains all kinds of acronys.
    Does the general public know what the NAR is, or do they recognize the National Association of Realtors.
    acronym title=””>

  6. Karl – Loans to anyone who could breathe? Did any REALTOR working with a buyer client ever bother to do an amortization using “worst case” interest rate changes? Did any REALTOR show their client that in 3, 5, 7 years their payment might increase dramatically to an unaffordable level; presuming their client’s income was flat or only rose 3% per year? I would bet just about every REALTOR kept their trap shut just to do the deal. If you are handing out the blame to regulators and lenders, be sure to give an ample serving to REALTORS as well. Signed…a REALTOR

  7. Aram From Hollywood Hills

    Steve – As much as I agree with your point, however you’ve opened a can of warms -I would blame the government, specifically Federal Reserve, they were the ones that cut the red tape. Remember? There was a big article and almost like campaign type of promotion.
    Federal Reserve that guarantied loans was the reason sub-prime market was created. Corporate greed just took over and ran with it. Who allowed the Federal Reserve to cut back on regulations and guarantee loans that they had no business in?
    It’s was the stimulus package for real estate market. They started printing money way before the “Stimulus Package”. Either way it went into someones pocket and we ended up with the bill.
    Yes you can blame the Realtors, Mortgage Brokers and why not, the borrowers as well. But, I say if you don’t offer the product there is nothing to sell.
    To get back to the topic, QM or QRM those are just labels with bunch of bureaucracy and smoke screens. You don’t need to go into panic mode just because of the melt down. Get back to basics and what use to work in conventional, non conventional, FHA, VA loans. Keep it simple.
    The banks should follow the regulations of the Fed after all the Fed is the one that created the Reserve. If banks don’t play by the rules then they should pay for it. The bigger the reward, greater the responsibility. After all they are making billions – so it goes with the territory.
    Trying to over regulate the guidelines, and giving safe haven to the banks, “Rebuttable presumption” and “safe harbor”. Common!!!…
    Will they be able to predict what the weather is going to be like a year from now too????
    Keep it simple!
    I say Fed should keep an eye on the market closer and raise and/or lower the down payment requirements and the interest rates to control the market stability and growth. It’s very simple.

    If everything was done by the Federal Reserve guidelines.
    The borrower should not be able to sue the lender if they can not make the payment. Period! Close the loopholes!

    Take care
    A Realtor