House Rejects CFPB Testimony on Qualified Mortgage Rule

Members of a House Financial Services subcommittee issued a press release Tuesday afternoon which essentially dismissed testimony heard earlier in the day from two officials of the Consumer Financial Protection Bureau (CFPB) regarding the impact efficacy of the new Qualified Mortgage Rule.

Peter Carroll, CFPB's Assistant Director for Mortgage Markets, and Kelly Thompson Cochran, its Assistant Director for Regulations presented information to the Financial Institutions and Consumer Credit Subcommittee about the process the Bureau followed in developing the new Ability-to-Repay requirements of the Qualified Mortgage Rule required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rule, the two said, was only finalized after a process in which CFPB considered nearly 2,000 comments from stakeholders and a second comment period made with a special effort to understand potential impacts on small creditors.
 
Because access to credit remains so constrained, CFPB designed the rule "not just to ensure more responsible lending by curtailing certain problematic practices, but also to encourage creditors to provide responsible loans to consumers in all segments of the covered market."  The two said the rule "strikes a careful balance between providing bright lines to give certainty and clarity to creditors while also allowing flexibility for the mortgage market to evolve and innovate in ways that encourage the provision of responsible credit."

While the final rule describes certain minimum requirements for creditors making good faith determinations of consumers' ability to repay their mortgages, it does not dictate that they follow particular underwriting models.  "The Bureau believes that-subject to certain floors created by the Act-it is entirely appropriate for creditors to employ a variety of standards to evaluate their customers' repayment ability."

At a minimum, the rule requires creditors to assess the borrower's income, savings, other assets, and debts using reasonably reliable third-party records for verification.  It provides that monthly payments must generally be calculated by assuming substantially equal payments over the loan's life and that the higher of the fully indexed rate or an introductory rate be used to calculate adjustable rate mortgage payments. 

"By rooting out reckless and unsustainable lending without dictating specific underwriting models, we believe the rule protects consumers and strengthens the housing market while preserving flexibility for creditors," Cochran and Carroll said.

The final rule also implements provisions creating so-called "qualified mortgages." These mortgages are entitled to a presumption that the lender satisfied the ability-to-repay requirements because of additional safeguards such as prohibiting loans with negative amortization, interest-only payments, balloon payments, "no doc" loans or terms exceeding 30 years and sets levels for upfront costs in points and fees. The rule also establishes general underwriting criteria for qualified mortgages, requiring use of the highest monthly payment that will apply in the first five years of the loan and provides that the debt-to-income (DTI) ratio cannot exceed 43 percent.  The rule also creates a safe harbor for lenders when loans meet the definition of qualified mortgage and are not "higher priced."  "The line the Bureau is drawing is one that has long been recognized as a rule of thumb to separate prime loans from subprime loans," they said.

In defining qualified mortgages, the Bureau did not intend to stigmatize loans that fall outside those boundaries or to signal that responsible lending can only take place within the qualified mortgage space.  To the contrary, it expects to see markets develop for non-qualified mortgages and the final rule provides for a second, temporary category of qualified mortgages that have more flexible underwriting requirements so long as they satisfy the general requirements for a qualified mortgage and also are eligible for sale to the GSEs or certain federal agencies.  This temporary provision will phase out over time and the Bureau will continue to observe the health of the mortgage market going forward to ensure the availability of responsible credit outside the qualified mortgage space.

The two said their agency recognizes that few community banks and credit unions engaged in the type of risky lending that led to the mortgage crisis and that these institutions may be more likely to retreat from the mortgage market if the regulations are too burdensome.  For this reason, the Bureau tailored the final rule to encourage small creditors to continue providing certain credit products, while carefully balancing consumer protections. Exceptions were made for example to the prohibition on balloon payments for creditors operating in rural areas and by proposed amendments to the rule to accommodate mortgage lending by smaller institution even where loans exceed the 43 percent debt-to-income ratio.  The latter provision would cover institutions with less than $2 billion in assets that make fewer than 500 first lien mortgages per year.   Approximately 9,200 small institutions, such as community banks and credit unions, are likely to be affected by the proposed definition which the Bureau expects to finalize shortly.

CFPB has also made a commitment to provide implementation support; publishing a plain-English version of the Rule on the agency website, a compliance guide designed for smaller institutions and is publishing clarifications to the rule as it responds to questions and concerns from stakeholders.  The Bureau is also coordinating with other agencies to develop examinations procedures and educational tools. 

Among the considerations the Bureau made in formulating the new rules was an attempt to balance the desire for short-term certainty with the need for long-term flexibility to benefit both consumers and lenders.   "We sought to structure the rule in a way that allows room for a range of reasonable underwriting models used by different types of creditors in today's market.  We were concerned that as the mortgage market strengthens, the rule should function to provide appropriate safeguards without becoming a straightjacket.  We balanced these considerations in many places, both in leaving flexibility for reasonable underwriting practices under the ability-to-repay standard and in crafting different types of qualified mortgages that use different sets of safeguards to ensure that affordability is being appropriately considered," the two officials concluded.

Following the hearing the subcommittee issued the following press release.

Members of the Financial Institutions and Consumer Credit Subcommittee expressed concerns at a hearing today that the Qualified Mortgage rule mandated by the Dodd-Frank Act will reduce access to credit that qualified borrowers need to buy homes.

Banks and credit unions have already pulled back on extending mortgage credit and have tightened underwriting standards in response to the financial crisis. The Qualified Mortgage (QM) rule may well exacerbate this reduction in access to credit.

"My main concern with the QM rule is that the people who do not fit the one-size-fits all criteria for QM loans will not be able to access mortgage credit," said Subcommittee Chairman Shelley Moore Capito (R-WV).  "Despite the CFPB's claims that lenders will issue non-QM mortgages, my conversations with lenders lead me to believe that few, if any, will be willing to issue these types of mortgages," Capito added.

The CFPB - the Consumer Financial Protection Bureau - was represented at today's hearing by two witnesses.  The CFPB has responsibility for finalizing the Qualified Mortgage rule.