The Consumer Financial Protection Bureau is charting the course for new regulation on qualified mortgages, the new QM rule.
Their goal is to dissuade lenders from partaking of mortgage loan programs that involve undo risk taking by imposing more stringent underwriting principals to potential loan applicants, including requiring that borrowers show they have the ability to repay a loan.
Lenders that adhere to the guidelines may gain a higher degree of legal protection, known as “safe harbor,” against potential law suits that result from borrower default.
Though this may seem like common sense to most of us, making sure that the borrower has the ability to repay a loan should always have been a top consideration.
However, like most regulatory changes of late, there are two schools of thought on this issue. There are those that want a guarantee of ultimate protection, that there would be no permissible cause of action with regulation adherence, versus those that would like a more broad definition of “qualified mortgages” in exchange for weaker legal protection.
The cost of defense of any law suit always creates an issue for smaller lenders who would like to see a version that would protect them entirely from being sued. These smaller lenders are also taking the position that loans would be harder to obtain and more costly to consumers if they were allowed to be the victims of what many times could be unsubstantiated law suits.
The new QM rule would of course eliminate the most predatory of lending practices from the menu, including loans that permit interest-only payments and loans that include fees and points totaling more than 3 percent of the loan amount. This still leaves many questionable loan practices on the table that we hope would be vetted out as this regulation takes form.
The final rule on the qualified mortgages standards is expected this summer and will go into effect the first of next year. Lenders that choose to ignore or stretch the bounds of these new regulations will find it very difficult to securitize their portfolios.
We doubt very much that the CFPB would ever impose regulations that would completely eliminate a consumer’s cause of action or legal recourse on a defaulted mortgage.
While there may indeed be certain consumers who will not qualify under these more stringent loan requirements, the requirement of showing that you have the ability to repay a debt is really just a sound business practice.
Diane Gozza, EVP Business Development Integrated Mortgage Solutions - Houston, TX