Proposed Fix for QM Helps, but Falls Short of Needed Clarity

Last week the Consumer Financial Protection Bureau announced that it was considering allowing a cure for mortgages that were closed as qualified mortgages but which after the fact lost their QM status when it was later determined the upfront points and fees exceeded the 3% cap.

The CFPB proposed a 120-day period wherein lenders could cure an "overcharge" exceeding the cap if certain conditions were met.

These conditions include (1) that the loan was originated in good faith with the belief that the loan did not exceed the 3% cap (which can be demonstrated by policies meant to avoid mistakes), (2) consistency in loan pricing amongst similar loans, and (3) that post-closing review procedures identify the mistake before it is brought to the lenders' attention by the consumer or investor.

While the possibility of such a procedure is certainly a positive development, one has to wonder whether the proposal—which is aimed at diminishing lenders' fears in originating loans at the edge of the QM threshold—is the result of a fundamental misunderstanding of the underlying problem.

Indeed, to the extent many lenders are concerned about originating loans at the edge of the QM designation, that is likely more a result of unclear rules and regulations as opposed to fears of mistakes in calculating the points and fees. Rather than more tests and protocols, what might work better would be clarifying guidance on mortgage insurance premium rules, the meaning of bona fide discount points, and the rules for affiliate compensation.