CFPB May Offend Both Sides in QM Compromise
Although the Consumer Financial Protection Bureau appears close to a compromise over key mortgage underwriting rules, the agency's attempts to appease both mortgage bankers and consumer groups could backfire.
At issue is the bureau's implementation of Dodd-Frank Act requirements that lenders follow "ability-to-repay" standards for mortgage borrowers. Under the provision, the bureau must define certain ultra-safe loans—known as qualified mortgages—that would automatically fit the ability-to-repay criteria.
But lenders and consumer groups have been at odds over the type of protection afforded to QM loans. The industry prefers a clear "safe harbor," while consumer advocates want the CFPB to leave the door open to some QM loans being subject to court challenge.
Stakeholders who have spoken with CFPB officials say the bureau is considering something in between, where some QM loans would get a safe harbor and others would get a less airtight exemption. But while some industry and consumer groups have been open to compromise, observers say such a move is unlikely to win broad support from either side.
"It's indicative of a bureau that has aimed for the ideological center in its rulemaking to date, in which it doesn't want the aggregate impact to be off-kilter toward one side of the spectrum or the other," said Isaac Boltansky, an analyst with Compass Point Trading & Research. "But I don't think either side will be particularly overjoyed by the rulemaking, however the rulemaking will finally be complete, which will allow the market to move forward."
The Wall Street Journal first reported on Tuesday that the bureau is now considering a tiered approach that would provide a safe harbor for the highest quality loans. By contrast, higher-rate subprime loans—while still eligible for the QM label—would instead get a so-called rebuttable presumption. The latter means borrowers would still have means to argue in court a lender failed to meet proper underwriting requirements. The agency, according to sources, is also considering a maximum debt-to-income ratio of 43% for meeting the QM definition, which is a lower threshold than the industry had sought.
But industry representatives said such a compromise, even one that allows for some safe harbor protection, is likely to face stiff headwinds.
David Stevens, the president and CEO of the Mortgage Bankers Association, said anything short of a full safe harbor creates an "extraordinary" risk for lenders.
"If lenders do not get a safe harbor, and you give a 43% DTI and the borrower goes to default, there's nothing stopping a borrower from filing suit in a state saying I should not have qualified and the lender should have known," Stevens said.
"If there are discussions around a tiered approach, it's a recognition that a safe harbor really is needed at least for a large portion of the segment," he added. "So the question is where would you draw the line?"