Recently the Consumer Financial Protection Bureau (CFPB) invited comment on its plans to assess its Ability to Repay/Qualified Mortgage (QM) rule. Federal law requires the CFPB to assess important rules every five years, and certainly the QM rule qualifies as important!
The same Dodd-Frank Act (Act) that created the CFPB also defined a statutory “ability to repay” and empowered the CFPB and other federal agencies to develop QM rules to shape market conduct – market “guardrails” – in order to discourage practices that harmed borrowers.
As timely and as well-intentioned any review of the QM rule may be, make no mistake: This assessment is not rule-making and will not result in substantive changes to the QM rule. Essentially, the CFPB intends to analyze the QM rule and determine lessons learned from its implementation and use.
Nevertheless, the CFPB invited stakeholders to respond to the proposed plan and offer data and suggestions regarding the Qualified Mortgage (QM) rule.
The reality is that the Act as implemented by the CFPB impacted private mortgage insurers and, in turn, the industry and homebuyer in 2 unfortunate ways:
1) The Act does not provide for a single regulator to develop a QM standard applicable to the entire residential mortgage market. The Act delegated authority not only to the CFPB, but also to other federal agencies (FHA, VA, RHS) to adopt their own QM rules for each Government insurance/guarantee program. Further, the Act conferred additional flexibility to the Government-sponsored enterprises, Fannie Mae and Freddie Mac, to use their purchase/guarantee guidelines as a QM standard (limited by their conservatorship status and an end date specified by the Act).
2) The Act fails to recognize or apply compensating factors when prudently underwriting loans. Because Congress struggled with how to include all relevant mortgage risk factors within a simple ability to repay standard, it forced the CFPB and the other federal agencies to develop QM rules relying on prescriptive approaches. This provides limited opportunity to recognize or apply compensating factors routinely used by mortgage underwriters, or to respond promptly to emerging loan performance results.
Taken together, those realities have resulted in an unlevel playing field for private capital lending compared to what the government ends up insuring. An example of this unlevel playing field can be witnessed in how the two sectors are required to handle upfront premiums paid by the borrower.
A borrower seeking to use private mortgage insurance with an upfront premium might not qualify under the CFPB’s points/fees limit (because private MI premiums are included within the points/fees definition, subject to certain qualifications). However, the upfront FHA premiums are not included within the points/fees definition; a borrower who may have otherwise been able to use conventional financing instead could end up having to have the government insure their loan – fundamentally putting taxpayers at larger risk.
In the end, it is unclear how multiple, differing standards ensure a consistent standard of consumer protection. It is clear that borrowers have fewer loan options (sometimes at a higher cost) as a result.
That is why the CFPB’s plans to examine and understand how stakeholders have reacted to the multiple QM rules should be applauded. It is unclear whether the other federal agencies are willing to collaborate on this assessment or whether Congress would be interested in seeing a single QM standard adopted.
The CFPB’s assessment should document how the multiple QM standards are being used and whether those uses are consistent with the legislative rationale for QM in the first place. MGIC and other private MIs believe that a revised, more uniform QM approach would result in more protection and choice for borrowers.
Stay tuned for further news regarding QM and feedback offered by market stakeholders.
What’s your take on the topic of CFPB and QM rule? Share in the comments below!Tags: CFPB, Mortgage Industry, Mortgage Insurance, Qualified Mortgage