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.