The Consumer Financial Protection Bureau is expected to soon release an “ability to repay” proposed rule, which is likely to prominently detail the attributes of a “qualified mortgage” (QM).
The rule, which amends Regulation Z/Truth-in-Lending Act and is required by the Dodd-Frank Act, aims to prevent lenders from making the riskiest mortgages and grants them legal protection against borrower defaults.
CFPB Director Richard Cordray has said that this is “one of our most important rulemakings.” To review:
- The financial services industry doesn’t agree on the level of protection against lawsuits. The Federal Reserve, which issued a first draft of the rule in 2011 – before the CFPB opened on July 21 – that included two alternatives. The first, known as “safe harbor,” offers total liability protection. The second option includes a “presumption” that loans adhere to certain standards and could still be challenged in court.
- Some of the nation’s biggest mortgage lenders, represented by the Clearing House Association, originally supported the safe harbor idea. However, three months later they had changed course in favor of the presumption model, as long as they will be permitted to make a broad range of types of mortgages under the new rule. This compromise included support from a couple of the larger consumer groups.
- Groups such as the Mortgage Bankers Association, the American Bankers Association and the Independent Community Bankers of America support the safe harbor option. Otherwise, lenders will have to pass along the costs of potential litigation, driving up borrowers’ costs and the availability of credit, they said.
- Other consumer groups say that there would be so many legal hurdles for a borrower to challenge a lender in court that there really is no alternative to the “safe harbor” option.
- Several associations, including the American Bankers Association, the Consumer Bankers Association, the National Association of Realtors and consumer groups, wrote an April 2012 letter to the CFPB that urged a “broad QM, which includes sound underwriting requirements, excludes risky loan features, and gives lenders and investors reasonable protection against undue litigation risk.”
- A draft letter from the offices of Reps. Shelley Moore Capito (R-W. Va.) and Brad Sherman (D-Calif.) advocated a final rule that “must structure the QM as a strong legal safe harbor, not a rebuttable presumption.”
What comes next? After the proposed QM rule, the next debatable regulation will be the “qualified residential mortgage” regulation, which will require lenders to maintain a stake in some securitized mortgages.