Image: Rick Reinhard
Image: Rick Reinhard "There will be time for them to work to get it right. They don't have to be perfect the first day," said CFPB Director Richard Cordray.

WASHINGTON — The Consumer Financial Protection Bureau is prepared to modify its "qualified mortgage" rule if efforts to reform the nation's housing finance system remain at a standstill, the agency's chief said Tuesday.

The underwriting rule, which limits legal liability for ultra-safe QM loans, effectively exempts mortgages backed by Fannie Mae or Freddie Mac for another six years, or until Congress creates a new housing finance system in place of the two government-sponsored enterprises. But lawmakers' inability to advance GSE reform has prompted concerns the CFPB will hit the deadline without a fix for the huge amount of GSE-backed loans that could one day lose their QM status.

CFPB Director Richard Cordray told the House Financial Services Committee that a review of the QM rule is scheduled to take place well before the GSE provision expires, giving officials ample time to consider changes in time.

"We will have completed the five-year review of these rules, and as needed we will adjust the rules to take account" of those "issues," Cordray said.

The concerns about the effects of the GSE provision were highlighted at the hearing by Chairman Jeb Hensarling, R-Texas, who pressed Cordray on what could happen to the housing market if so many loans suddenly lost their QM status. Hensarling echoed Republicans' general criticism of the rule, saying further borrowers could be hurt if and when the provision expires. He cited a 2013 Fed study that found that minorities could have trouble accessing credit under the QM rule.

"We could quibble over percentages, but I assume that you think there is some validity to the fact that many of these people will no longer be able to access mortgage credit," Hensarling said.

Cordray noted that the status for GSE-backed loans was considered in the drafting of the rule, saying the temporary exemption was necessary since the bureau wanted to avoid a situation where mortgages faced added uncertainty due to the legislative process. He said the agency has ample time to make "adjustments as needed" if Congress has not resolved what to do with the GSEs in coming years.

"My point is those are legitimate issues, those are legitimate concerns, that's why we didn't adopt the rule in that form in the first place, and that's why we'll review them on the five-year mark to make sure they're calibrated to the market," he said.

Cordray noted the Fed study "is not describing the rules we adopted" because of the GSE provision. Fannie and Freddie currently accept some mortgages with higher debt-to-income ratios than is otherwise allowed under the QM rule, allowing some borrowers, including a disproportionate number of minorities, to get a mortgage.

The question about how to design the QM rule in the future could gain increasing significance given lawmakers' failure to pass GSE reform so far. It is not clear whether lawmakers will take another serious stab at housing finance legislation again this year. Lawmakers in the House and Senate proposed differing plans to unwind the housing giants in the last Congress, but no bill gained enough traction for a vote outside of the banking committees.

Cordray said the agency was deliberate in its initial crafting of the QM rule, because the future of the housing finance market was so uncertain.

"We needed to be careful about writing rules in light of not knowing how Congress was going to handle GSE reform," he said.

Hensarling, meanwhile, did praise several proposed modifications to the QM rule issued by the CFPB in January, calling the move to loosen several provisions for small and rural banks "a step in the right direction."

"I know you don't often hear complimentary words from my house, so I thought I'd throw you a curveball there," he said.

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