Cordray: CFPB Listened and Adapted QM Accordingly

The credit crunch, the financial collapse, and the ensuing deep recession will likely stand as the most significant financial events of our generation Richard Cordray, Director of the Consumer Financial Protection Bureau told a group of mortgage professionals on Wednesday.  And the economy could not begin to return to normal, he said, until the housing market did so as well.   

Cordray, speaking to the American Mortgage Conference in Raleigh, North Carolina, said the crumbling of the housing market destroyed jobs across every economic sector and in communities throughout the country.  The dimensions of the failure were astounding and the American dream of homeownership was shaken to its foundations.  In response Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which created CFPB and gave it a number of tools to assure evenhanded oversight of consumer financial markets and to prevent bad practices from taking root. 

Appropriate market oversight and enforcement empowers the American consumer and this was part of what we had in mind as we worked to develop the new mortgage rules published last January, Cordray said.  But in the data-driven process CFPB used to develop those rules, the overwhelming message that came through from stakeholders was that the mortgage market in 2012 was vastly different from the mortgage market of 2006, and required even more focus on access to credit than would be true in more normal circumstances.

The constrained mortgage lending so prevalent today was quite critical to our thinking about how to contour our mortgage rules, especially the Ability-to-Repay or Qualified Mortgage (QM) rule, he said.  By paying close attention to this input, and by obtaining and analyzing more up-to-date data, we came to more balanced conclusions about how to define a so-called "qualified mortgage" and tailor its legal consequences.  Also, through extensive discussions with smaller creditors CFPB came to recognize that most of their traditional lending practices should not be put into question by the QM rule, especially where loans are made for their own portfolios.  So the rule avoided a one-size-fits-all approach by proposing and then finalizing specific provisions to meet the special circumstances of smaller lenders.

While qualified mortgages cover the vast majority of today's loans, they are by no means all of the mortgage market, Cordray stressed.  There are plenty of good loans that are non-QM but nonetheless are based on sound underwriting standards and perform well over time.  "Lenders that have long upheld such standards have little to fear from the Ability-to-Repay rule.  The strong performance of their loans demonstrates the care they have taken in underwriting to borrowers who have the ability to repay.  Nothing about their traditional lending model has changed, and they should continue to offer the same kinds of mortgages to borrowers whom they evaluate as posing reasonable credit risk - whether or not they meet the criteria to be classified as qualified mortgages."

The QM space has been defined quite broadly and data indicates that over 95 percent of mortgage loans being made in the current market will be QMs.  CFPB was conscious of the extreme tightness in the current market and shaped the specific provisions of the rules to address the concerns from many about access.

Another place where CFPB listened to stakeholders was in developing a legal safe harbor for QM loans.  The key issue for them was to draw bright lines to define the contours of a "QM."  If those lines were not drawn as sharply as they are, the Director said, then much would have remained to be fought out in the courts for years and years before the definitions were clarified.  We crafted the rule purposefully to avoid that result, "So you should keep this perspective in mind if you hear people dreaming up hypothetical factual disputes in an effort to sow anxiety about potential litigation under the rule."

He said he believes that CFPB's responsibility for its rules does not end simply with their promulgation.  'We must also care about how well the rules are  understood and implemented, how operational issues can be more easily addressed, and the amount of effort required."  The Bureau is taking affirmative steps to help the industry understand the rules such as publishing plain-language guides and a series of videos and working with other regulators clarify examination guidelines for financial institutions ahead of implementation.

Also, as the Bureau has become aware of operational or interpretive issues it has addressed them, issuing one set of amendments over the summer and preparing a second set.  These adjustments were made to ensure the effectiveness of the rules by making it easier for industry to comply. 

Cordray said the Bureau's regulatory implementation project should not slow down the implementation process at any lender or servicer.   "It is critical to move forward so that these rules can deliver the new protections intended for consumers and the certainty that the industry has been seeking.  That will encourage consumers to take part in the mortgage market with improved confidence about how the market will function even as responsible lenders will be enabled to conduct their mortgage businesses profitably." 

The Director told them that, had the Bureau not issued such a substantial set of mortgage rules by last January many key statutory provisions of Dodd-Frank would have taken effect in their own right.  This would have been much harder on industry and much worse for the mortgage market.  We know, he said, that the regulations still pose a challenge for industry but we are all in this together and we appreciate the urgency and the resources that the industry is bringing to bear preparing for the rule's effective dates.  He promised that oversight of the new rules will be sensitive to the progress made by those lenders and servicers who have been squarely focused efforts to come into substantial compliance on time.