As officials at the Consumer Financial Protection Bureau sift through the latest round of comment letters on the qualified mortgage rule, chances are they see another industry fire to contend with. The QM debate is already red hot over the legal protections lenders should be given to shield them from borrower lawsuits. Most lenders are stressing the need for a legal “safe harbor” to protect them from unwarranted and costly lawsuits.
The alternative is a “rebuttal presumption” that would make it easier for consumer attorneys to pursue cases against lenders. Consumer groups are urging the CFPB to adopt this alternative to ensure that borrowers that end up in bad loans have access to the courts.
An American Bankers Association survey of bank attorneys and mortgage loan officers warns that banks will tighten their already conservative underwriting standards if the CFPB issues a final QM rule with a rebuttable presumption. But now another problem is breaking out which involves a “bright line” test for determining which loans are QM-compliant.
Under the QM rule, lenders must meet certain underwriting requirements and make a reasonable effort to determine the borrower’s ability to repay the loan. The bright-line test is supposed to give lenders an easy way to tell (at the time of origination) if the loan complies with the QM rule.
The Clearing House Association has advanced a bright-line proposal it developed with the Center for Responsible Lending, Consumer Federation of America and the Leadership Conference on Civil Rights and Human Rights. The bright line starts with a 43% debt-to-income ratio and features a “waterfall” of compensating factors (liquid reserves, payment history and residual income) that would justify approving borrowers with higher DTIs.
CHA estimates that 84% of all the conventional originations in 2010 and 2011 could have been approved under a 43% DTI cut-off.
The Clearing House represents 18 of the nation’s largest banks. But the proposal is running into serious objections from the ABA and the Mortgage Bankers Association.
“For our members a 43% DTI is a bad test,” ABA executive director Bob Davis told this publication, because it excludes 15% of loans currently being originated in a conservative lending environment. “What benefit do you get from establishing a bright line that excludes up to 15% of the market on average,” Davis said. He noted the ABA survey shows 10% of the banks indicated a 43% DTI would cut off 30% of their loans.
The CHA proposal also is running into opposition because is embraces a rebuttable presumption. It appears large banks are willing to give up a safe harbor to get a bright-line test that will shield them from lawsuits and repurchase requests. Even QM-compliant loans that are subject to legal challenges are expected to face repurchase demands from investors.
“The lack of a safe harbor would be more exclusionary than a 43% DTI,” Davis said.
The MBA also views the 43% DTI as too low and the trade group considers the rebuttable presumption to be a “fatal flaw” in the CHA waterfall. “Any waterfall should be embedded in a safe harbor if this approach is adopted by the CFPB,” MBA chairman-elect Debra Still told a congressional subcommittee last week.
Still told the House Financial Services subcommittee that the MBA is working “on a more acceptable approach” that includes a safe harbor. “We look forward to sharing it with the bureau shortly,” she said.
