In January, the Consumer Financial Protection Bureau released its qualified mortgage, or ability-to-repay, provisions. The rule drew praise from some for including a safe-harbor provision for lower-risk loans and saving a rebuttable presumption standard for higher-risk mortgages. However, many trade professionals still voiced concern as they dug through the complex guidelines of the rule, which is set to take effect in January 2014.

Below is a collection of what professionals within the industry are saying about the qualified mortgage rule.

Debra Still, chairman of the Mortgage Bankers Association:

MBA agrees that the goal of this regulation, ensuring that borrowers receive loans that they can repay, is in everyone’s best interest. We cannot, and should not, go back to the high- risk lending environment of the early 2000’s.  Our concern has always been that we balance this goal with other housing policy objectives, particularly the objective to ensure the availability of mortgage credit to qualified borrowers.  And right now, credit is tighter than at any point we can remember.

The rule was just issued, and we must examine it carefully. Nevertheless, we applaud the bureau for offering a legal safe harbor to lenders when they originate loans that meet the rigorous ‘qualified mortgage’ standards in the rule. This approach should allow lenders to offer sustainable mortgage credit to a great number of qualified borrowers without having to risk unreasonable and overly punitive litigation and penalties.

Fitch Ratings:

Fitch believes the qualified mortgage definition is positive for the jumbo prime residential mortgage market, as it removes the uncertainty that has paralyzed mortgage lending for the past few years and is an encouraging step in easing credit for traditional prime borrowers. Further, finalizing the rule on QM will help advance the determination of a qualified residential mortgage, an additional constructive step in restarting the jumbo securitization market.

The QM announcement is a positive step toward finalizing risk retention and premium capture rules for securitizers of residential mortgages. Given that the QRM definition for exemption from these rules is linked to that of the QM, the back-end debt-to-income requirement for a QRM is now clear. However, a key component of the QRM guideline not addressed by the CFPB is the downpayment requirement. Fitch believes finalization of the QRM hinges on that definition, which is expected to be determined sometime in 2013, as the agencies were waiting for QM to be defined before finalizing QRM. Ultimately, the restart of private-label securitization market will depend on this definition and clarity on risk retention rules, the application of Basel III and other liquidity rules, and a decision on agency guarantee fees.

Barry Rutenberg, chairman of the National Association of Home Builders:

It is essential that it strikes the proper balance that encourages lenders to provide creditworthy borrowers access to affordable home loans, and also gives assurances to financial institutions that they will be protected from lawsuits if they meet the criteria set forth in the rules.

Our initial review of the QM rule indicates that this balanced approach can be achieved. NAHB is encouraged that regulators heeded concerns from the housing industry to craft a broad standard that includes many of today’s sound mortgage products, including fixed-rate and adjustable-rate mortgages, under the QM standard.

To spur the revival of the home lending market, it is essential that regulators act prudently and thoughtfully in the coming year to implement this rule in a sensible manner to avoid disruptions to the housing finance system and ensure qualified borrowers can obtain affordable credit.

Tim Ryan, CEO of the Securities Industry and Financial Markets Association:

Balanced reform is essential to revitalizing the flow of capital to the private securitization markets and increasing the availability of credit to American consumers. As regulators continue to finalize new rules, including risk retention and its associated qualified residential mortgage definition and the capital rules that apply to mortgage lending and securitization, it is vital that they coordinate to ensure all rules work together seamlessly.

Failure to coordinate these new rules could lead to conflicting and restrictive regulation that would slow the flow of credit to consumers and hamper the housing market recovery and economic growth.

Frank Keating, president and CEO of American Bankers Association:

While QM encompasses many of the loans being underwritten today, it must also interact with a number of other mortgage rules that CFPB will be issuing this month. There is a very real impact to these rules, and they will transform our lending practices and could restrict access to credit.

We commend the bureau for recognizing the need for a safe harbor to prevent a reduction in credit availability and unwarranted lawsuits that ultimately drive up the cost of loans for consumers.

We appreciate the thought, time and work CFPB put in to developing this rule. It is clear that the bureau has implemented tough consumer protections with an eye toward limiting market disruptions. ABA will continue to work with CFPB to achieve a strong housing recovery.

Fred Becker Jr., president of the National Association of Federal Credit Unions:

We very much appreciate the CFPB raising the small issuer exemption to 5,000 transactions from parts of the mortgage servicing rule, yet we remain concerned as to the ultimate regulatory costs, given that credit unions have been and continue to operate using solid, traditional lending practices and are second to none in servicing their members’ mortgages.

Barry Zigas, director of housing policy at Consumer Federation of America:

The QM definition was meant to encourage lenders to offer the safest and soundest mortgages in return for some protection from liability for the ability to repay test.  We are disappointed that the bureau is not providing the highest level of consumer protection to prime loans, instead offering lenders a legal safe harbor from any challenges to loans meeting the standard rather than the “rebuttable presumption” that the statute authorized and we strongly advocated in comments on the proposed rule.

While we would have preferred that the rebuttable presumption apply to all QM loans, we applaud the bureau’s decision to extend this higher level of protection to those consumers who are at the most risk.

While a clear so-called “bright line” test for QM will give lenders and investors certainty about whether a loan is QM or not, the bureau wisely chose to expand this test.  FHA and GSE underwriting examines several different factors and their interactions.  This will help ensure access to safe and sustainable mortgages.  This is especially important for low and moderate-income consumers, whose debt levels may be above the threshold but who have shown the ability to repay loans when these other considerations are accounted for. Good underwriting considers a range of factors, and the bureau’s rule acknowledges this.

Evan Siegert, managing director, senior counsel at American Securitization Forum:

We are pleased that the final rule included safe harbor protection for prime loans, but are concerned that the CFPB’s interest rate threshold will adversely impact the jumbo prime market, as such loans may end up with only rebuttable presumption protection. Tying the interest rate threshold to an agency rate does not make sense for jumbo borrowers who don’t qualify for that agency rate.

The CFPB has enacted a transitional rule that would provide qualified mortgage protection for loans eligible for sale to the GSEs. We question the appropriateness of including conforming loan limits as a condition to that rule. Take two loans, one conforming and one not, with the same 44% DTI, and the nonconforming borrower will actually have more residual income than the conforming loan borrower.  Those loans should receive the same protection under the transitional rule.

We are concerned that the CFPB may have weakened qualified mortgage protection by not prohibiting the use of oral evidence in ability-to-repay actions. Potentially allowing oral evidence in those actions is at odds with the requirement under the rule that information be fully documented and verified under the rule.

Richard Andreano, partner at Ballard Spahr:

Now that the CFPB has adopted most of the mortgage-related rules required by Dodd-Frank (we are still waiting on the integrated disclosure rules and rules to implement various prohibitions on steering and related conduct) there is an important task that lies ahead — assessing the aggregate effect of the rules on the mortgage industry and consumers.  The rules clearly will make it more expensive to originate and service a loan.  

While various improvements to the origination and servicing processes were needed, it is important for the rules to achieve an appropriate balance between consumer protection and loan product availability and cost. There is a concern that increased cost to the industry from the new rules, and significant liability for failing to comply with the rules, will limit the number of mortgage industry participants and products and prolong the current period of tight credit. This may create an environment for consumers in which fewer loan products are available, it is more difficult for consumers to obtain a loan, and those consumers who are fortunate to obtain a loan will pay higher rates. If that is the result, then the rules designed to protect consumers may actually harm consumers.

Isaac Boltansky, policy analyst at Compass Point Research & Trading:

Given that the CFPB is a new regulatory body — and therefore an unknown quantity — there was an understandable amount of concern regarding the QM rule. This rulemaking was the CFPB’s most important regulatory undertaking since its inception. The agency’s only comparable rulemaking were the mortgage servicing rules, but these changes were largely expected or already implemented by efforts such as the AG/Servicer settlement. The CFPB’s finalization of the QM rule, on the other hand, was an unknown for the industry. It was particularly concerning that such an integral rulemaking would be transferred to a new agency for finalization.

Still, the final QM rule is nowhere near as burdensome as was once expected. The industry wanted two things: bright line thresholds and a safe harbor for QMs. They effectively secured both of these demands.

Perhaps the most interesting element of this rulemaking is the CFPB’s decision to allow loans that meet the underwriting criteria for the GSEs and the FHA to qualify as qualified mortgages for a period of time. This decision ensured that the vast majority of the current mortgage market would qualify as a QM while also demonstrating operational awareness that we are likely to operate in an environment without meaningful housing finance reform for quite some time.

This is not to say that the CFPB’s rule is not without ambiguity. We believe the most vague, and therefore worrisome, element of the QM rule pertains to the 3% cap on points and fees. There remain serious questions regarding what will be included in that calculation. Numerous elements of the origination process — from mortgage insurance to appraisals to title insurance — could be impacted. The CFPB has left part of this rule open for comment, which means there is more to come in this story.

Since the dust has settled, one of the most important realizations market participants are making is that there will be a point in time where non-QM loans will be originated. It will not be tomorrow, or in the immediate future, but the risk-reward will be attractive enough to bear the increased legal liability.

Kevin Watters, CEO of mortgage banking at JPMorgan Chase:

I think it was consistent with what the Consumer Financial Protection Bureau had indicated they were looking at. There’s still some clarification that we need. We are working with the CFPB and all our regulators to make sure that not only do we have safe and sound banking practices, but we have banking practices that are clear and transparent and fair for the customer. From that standpoint, I think that QM was a good start.

I think some of the ideas behind QM in terms of debt-to-income and ability to repay and really having a safe harbor for banks will make it easier for those types of loans to get done. I think what we are still working through is the impact on non-QM loans.

I think the other issue that still needs to be flushed out is what’s included as part of the 3% fee cap. I know the CFPB has asked for additional feedback on whether to include mortgage banker compensation or not. We’ve been a strong believer that it should not be included. I think it makes it difficult to try to allocate somebody’s cost to one individual loan, given the way that most mortgage bankers get paid more as they do more volume. Trying to figure out how you allocate those costs across different loans might be tricky.

Lisa Rice, vice president of the National Fair Housing Alliance:

We appreciate that the QM is broadly defined and that there are no downpayment or credit score requirements for QM loans.

But if our nation is to fully recover from our economic crisis, we must put an end to the dual credit market which has relegated borrowers of color to nonprime and subprime markets and into higher cost loans, and was the root of the most devastating housing crisis in our nation’s history.  The QM rule has a tiered system — one where some mortgages have a safe harbor and others have a rebuttable presumption.  The National Fair Housing Alliance strongly encouraged the CFPB to offer a rebuttable presumption for all mortgages.

It is also important to note that the safe harbor provision in the QM rule does not exempt lenders from discrimination or fair lending claims.  Even borrowers who receive a “safe harbor” loan or a Qualified Mortgage in general can be discriminated against.  The fair housing community urges the CFPB to pay particular attention to the quality of QM products serving communities of color and to ensure these borrowers have access to sustainable and affordable mortgages.  

It will be critically important for the CFPB to not sanction any compensation scheme that would encourage or allow lenders to steer borrowers to higher cost mortgages when they qualify for lower cost products, even if those higher cost mortgages fall within the parameters of the QM rule.