Lending

House votes to revamp Qualified Mortgage rules

Presidential veto is looming

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The House of Representatives voted Wednesday to change the definition of “Qualified Mortgage,” opening the door to a potentially seismic change in the mortgage lending landscape.

By a vote of 255-174, the House approved the “Portfolio Lending and Mortgage Access Act,” which would broaden the definition of qualified mortgages – those that qualify for the safe harbor – to include all mortgages held on a lender's balance sheet.

The new QM rule would recognize all residential mortgage loans held in portfolio by credit unions and other lenders as qualified mortgages for the purposes of the Consumer Financial Protection Bureau’s mortgage lending rules.

The current QM rules require a lender to make a good faith effort to determine that a borrower has the ability to repay a mortgage, and that the loan does not include excessive upfront points and fees.

The QM also contains special provisions and exemptions that are available only to small lenders or to small lenders that operate predominantly in rural or underserved areas.

But the Portfolio Lending and Mortgage Access Act would change those rules, but despite passing by a comfortable margin in the House, the likelihood of the Portfolio Lending and Mortgage Access Act being enacted as a law is slim, due to the threat of veto from the White House.

In a statement issued Tuesday, the White House said that the Portfolio Lending and Mortgage Access Act “would open the door to risky lending by allowing balloon loans made in any geographic area to qualify for the safe harbor as long as they are held in portfolio.”

Under the bill, depository institutions that hold a loan in portfolio would receive a legal safe harbor even if the loan contains terms and features that are abusive and harmful to consumers. The bill would limit the right of borrowers to file claims against holders of such loans and against mortgage originators who directed them to the loans, the White House said.

“The Administration strongly opposes this bill because it would undermine critical consumer protections by exempting all depository financial institutions, large and small, from QM standards—including very basic standards like verifying a consumer's income—as long as the mortgage loans in question are held in portfolio by the institution,” the White House said in a statement.

“This bill would undermine the essential protections provided under the Qualified Mortgage rule,” the White House continued. “The Congressional Budget Office estimates that the mortgages offered legal protections under the bill would likely default at a greater rate than the qualified mortgages with current legal protections. For these reasons, if the President were presented with H.R. 1210, his senior advisors would recommend that he veto the bill.”

The Portfolio Lending and Mortgage Access Act was introduced earlier this year by Rep. Andy Barr, R-Ky., and passed out of the House Financial Services Committee in July by a 38-18 margin.

One of the bill’s main supporters, House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said that the CFPB’s rules make it harder to lend to “credit-worthy” Americans.

“The Independent Community Bankers Association reports that 73% of community bankers have decreased their mortgage business or completely stopped providing mortgage loans due to the expense of complying with this regulatory burden,” Hensarling said in a statement. 

“One-out-of-five Americans who borrowed to buy a home just five years ago will not meet the underwriting requirements of the CFPB’s mortgage rules. According to the Federal Reserve, that will hit roughly one-third of Hispanic and African-American borrowers,” Hensarling continued.

“In order to ensure that community financial institutions are able to continue providing mortgage credit to consumers, H.R. 1210 provides a common sense, flexible approach that allows residential mortgage loans held in portfolio to qualify for a safe harbor equivalent to that of the CFPB’s Qualified Mortgage rule,” Hensarling said. 

“H.R. 1210 will allow these financial institutions to meet the credit demands of consumers, while incentivizing that banks and credit unions ensure the borrower can meet the monthly obligations of a mortgage,” Hensarling continued.

“It should not be the job of Congress or unelected and unaccountable Washington regulators to decide who gets a mortgage and who does not, or to force community banks and credit unions to function like regulated utilities, issuing only plain-vanilla mortgages rubber-stamped in Washington,” Hensarling said. “This common sense legislation recognizes that the most effective way to ensure that a borrower has the ability to repay is not a one-size-fits-all, top-down regulation from Washington that mandates the terms of loans and underwriting practices.”

The passage of H.R. 1210 was welcomed by the American Bankers Association, who said that the change to the QM rules would allow its members to expand lending operations.

“We applaud members of the House for passing the Portfolio Lending and Mortgage Access Act, legislation introduced by Rep. Andy Barr that would expand access to mortgage credit by treating loans originated by a bank and held in portfolio as Qualified Mortgages,” James Ballentine, ABA’s executive vice president of congressional relations and political affairs, said.

“This important measure, which received bipartisan support, will help many creditworthy borrowers access safe, traditional credit that would otherwise be out of reach,” Ballentine continued.

“It’s clear that new regulatory requirements have restrained mortgage lending, and have made it particularly difficult for some creditworthy borrowers to obtain a home loan,” Ballentine said.

“This legislation is a common-sense approach that will help borrowers gain access to some of the lowest risk mortgage products offered by banks,” Balentine said. “Loans held in portfolio are well underwritten and conservative by their very nature -- banks hold only the safest loans in portfolio. There is no need to create additional barriers for creditworthy borrowers for loans held in a bank’s portfolio.”

Unsurprisingly, across the aisle from Hensarling, Rep. Maxine Waters, D-CA, the Ranking Member of the Committee on Financial Services, said that the entire vote was a “waste of time” due to the threat of the Presidential veto.

“H.R. 1210 would allow lenders to deal in the same kind of risky loans that sank Washington Mutual, Wachovia, Countrywide and eventually the entire economy in 2008,” Waters said in a statement.

“The bill undermines the anti-predatory lending provisions of the Dodd-Frank Act and virtually eliminates one of the most significant consumer protection rules implemented by the CFPB,” Waters continued.

“The bill also revives an industry practice under which mortgage brokers can earn hefty bonuses by steering borrowers into riskier, more expensive loans regardless of whether they qualify for better rates,” Waters said.

“My colleagues seem to forget that we went through a terrible financial crisis. While we did spend hundreds of billions of dollars to rescue the banking system, millions of victims of predatory lending were left to fend from themselves as they were displaced from their homes and saw their life’s savings disappear,” Waters said.

“It’s time for Republicans to realize that Dodd-Frank and the CFPB are not the problem, they are the solution,” Waters said. “The CFPB has recovered $11 billion in consumer relief for 25 million Americans. It is both a fierce consumer advocate and a fair regulator whose leadership has been praised by many in the banking industry. The CFPB is the kind of government success story Republicans can’t bring themselves to believe is possible.”

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