Today the Consumer Financial Protection Bureau (CFPB) released its final qualified mortgage (QM) rule, a long-awaited implementation of the Dodd-Frank financial regulation law that sets standards for mortgage lending. The simple summary: QM requires lenders to only make loans that they expect borrowers to repay and to verify that ability to repay. Codifying that into laws and rules requires setting standards for mortgages and the legal liability of lenders. The final rule strikes a careful balance between the needs of lenders and consumers.
From NHC’s perspective, important features of QM are:
- Eliminating bad loan products. QM eliminates exploding adjustable rate mortgages, no-documentation loans, too-high fees, and other excesses of the housing bubble. These product standards are the single most important part of the rule for protecting consumers and ensuring responsible mortgage lending.
- Requiring documentation and verification. The rules requires lenders to document and verify borrowers’ ability to pay loans, not just initially but over the life of the loan. Guidelines include a 43% debt-to-income standard but no downpayment requirement.
- Setting legal standards. This was a sticking point for many stakeholders concerned about the rule. CFPB tried to balance lenders’ desire for clear standards and protection from liability with consumers’ desire for protection and means to redress unfair lending. The rule creates a safe harbor for lenders making prime loans that meet QM standards and a rebuttable presumption for higher-priced loans. The longer a borrower has made timely payments, the harder it will be to rebut the QM presumption.
- Proposing to accommodate specialized lending by credit unions, state agencies, and community banks. The final rule has an additional proposed component for a special category of QM loans that include downpayment assistance, first-time homebuyer loans, and loans targeted to low- and moderate-income families.
The most common theme I’ve seen in reactions from the industry is that market reactions will tell. If we see an uptick in lending that reaches beyond just wealthy borrowers with pristine credit to low- and moderate-income borrowers, that will be a powerful signal that the rule struck a good balance. Comments from the Mortgage Bankers Association and the National Community Reinvestment Coalition in Housing Wire are representative reactions, with the necessary caveats on some specific points. CFPB Director Richard Cordray’s speech announcing the new rule is worth a read for an accessible summary of the rule and the thought behind it. You can also see the full text of the rule from CFPB (when it becomes available), and a helpful summary from the Mortgage Bankers Associations.
Issuance of QM sets the stage for the qualified residential mortgage (QRM) rule, which may include minimum downpayment requirements and other restrictions with potentially far-reaching implications for access to safe and affordable mortgages. See NHC’s comment letter on the proposed rule.