Should regulators treat traditional banks and credit unions exactly the same as technology-driven lenders when vetting their mortgage underwriting standards?
That is the central question to emerge following recent comments by acting Consumer Financial Protection Bureau Director Mick Mulvaney that the bureau may ease its Qualified Mortgage rule. Pointing to a distinction between credit unions and lenders like Rocket Mortgage, Mulvaney said the agency may steer away from a one-size-fits-all approach for its QM rule.
Some industry experts said it makes sense for the CFPB to take into account different underwriting models.
"The competitive advantage of small banks is in relationship lending, or essentially being able to use 'soft info' to underwrite mortgages," said Todd Zywicki, a law professor at George Mason University. "An online lender such as Rocket Mortgage is going to rely pretty much entirely on the numbers and not on any soft information."
But other mortgage experts pushed back on the idea that a digital mortgage that uses automated verification of a borrower's assets and income is more risky than a home loan originated by a smaller institution that may rely on intangible factors.
"Mulvaney is saying there's a difference between a Rocket Mortgage loan and a loan from a credit union, and I say bunk," said Brent Chandler, founder and CEO of Formfree Holdings, which provides automated verification of a borrower's income and assets, eliminating paper verification to prevent fraud. "There's no difference between a Quicken and a credit union when we level the playing field with technology."
The QM rule established legal protections — known as a safe harbor — for lenders that adhere to basic underwriting standards. A key requirement is that lenders have to document a borrower's ability to repay a loan.
In his remarks to a group from the National Association of Realtors, Mulvaney said traditional lenders have the benefit of institutional knowledge about their borrowers, which sets them apart from a more online-focused lender.
"There's a difference between the mortgage that goes out on Quicken [Loans] or Rocket Mortgage … and the one that my local credit union does for somebody that they've known three generations," Mulvaney said. "Those are not the same thing, and to think that we're going to try and force a square peg in a round hole impairs our ability or impairs the ability of a market to function properly."
With mortgage rates hitting their highest level in seven years — essentially drying up the refinancing market — mortgage lenders are eager for any regulatory relief that could attract more home buyers and would likely view changes to the QM rule as well-timed.
"You're going to see us try to bring some sanity to the larger market, including QM," Mulvaney said in his comments. "If you think you can have a one-size-fits-all rule for every single mortgage, you don't understand the mortgage business. You especially don't understand the mortgage business in smaller towns and communities and so forth with smaller lenders."
The CFPB declined to comment further on Mulvaney's remarks. Quicken Loans, which owns Rocket Mortgage, did not immediately respond to a request for comment.
One area of the QM rule that could be changed is the 3% cap on points and fees, based on the total loan amount.
Small institutions have claimed that the cost of originating a loan, now at roughly $8,000, combined with the 3% cap on points and fees, makes it unprofitable to originate loans of $250,000 or less.
"In some ways QM has made it hard for originators to make money on smaller-dollar loans," said Ed Mills, a managing director and Washington policy analyst at Raymond James & Associates.
A key requirement for a loan to be given the QM stamp of approval is that QM loans can be made only to borrowers that have a debt-to-income ratio of 43% or less. Mills said the rule does not take into account the way people earn money in the so-called gig economy.
"The criticism is that the rule was overly exclusive of income and overly inclusive of debt when you're trying to calculate DTI limits," he said. "There's a lot that has changed in the economy that is not necessarily reflective in the way QM was developed."
Still, mortgage experts continue to debate whether the QM rule has had any impact on the market given that the CFPB carved out a seven-year exemption for loans backed by Fannie Mae and Freddie Mac. For all intents and purposes, the roughly 95% of loans originated today that are backed or insured by the federal government are not affected by the QM rule. Under federal law, that exemption will expire in 2021.
Currently, any loan that is accepted by the government-sponsored enterprises' automated underwriting engines is considered a qualified mortgage even if the back-end DTI ratio is above 43%. (Before 2000, most banks required that borrowers have a front-end DTI of 28% and a back-end DTI, inclusive of the mortgage payment, of 36% or less.)
Some say that the overall result of QM was positive, creating standard underwriting requirements designed to protect both borrowers and lenders.
"Who's yelling about QM? Nobody," said Chandler. "QM is a nonevent, but asset verification and ability-to-repay are good things. Lenders cannot give somebody a loan they cannot afford."
But small lenders have lobbied heavily for relief from the CFPB's regulations given the high costs to comply.
In 2015, the CFPB expanded the definition of a "small creditor" that automatically enjoys QM designation, providing the exemption for lenders with less than $2 billion in assets that make no more than 2,000 off-balance-sheet loans, up from 500 loans. Meanwhile, the pending regulatory relief bill passed by the Senate and now being considered by the House would designate all portfolio loans as QM for lenders with less than $10 billion in assets.
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Corrected May 18, 2018 at 1:40PM: This story has been updated to clarify that before 2000, most banks required a back-end DTI of 36%, which consists of all borrower liabilities, including mortgage payment.