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Lending

It's okay to lend outside QM: CFPB Director Richard Cordray

October 28, 2013

It’s likely mortgage bankers attending the Mortgage Bankers Association 100th Annual Convention & Expo in Washington, D.C, eagerly awaited the arrival of Consumer Financial Protection Bureau Director Richard Cordray.

After all, the regulatory landscape stemming from the 2010 Dodd-Frank Act has left the lending industry shell-shocked by not only the CFPB’s new enforcement authority, but by all the lending/servicing rules slated to take effect in January.

If bankers are worried about this new CFPB-era, Cordray told the crowd: Don't be.

In his speech, the CFPB director basically asserted that in many cases, non-qualified mortgages with the right underwriting are perfectly fine even if they fall outside the QM boundaries. This mirrors past statements in which Cordray said he doesn't anticipate an outbreak of QM-related litigation.

Where he stops short — or simply doesn't go — is in explaining how lenders know at the beginning of the origination cycle that what they've done outside QM in terms of underwriting is sufficient enough to protect them later on if someone were to perhaps raise an ability-to-repay claim.

Lawyers up for litigation love gray lines, but those wanting to prevent future ability-to-repay litigation are likely to prefer black and white rules. Cordray shows optimism around the idea that responsible lenders are still safe outside QM, but no specifics were given on how the CFPB would address non-QM lending decisions down the road if a default were to occur. Yet, he seems to be saying don't over worry as long as standards are in place.

And when it comes to the 3% points-and-fee threshold, Cordray has another strong viewpoint, saying "though no data is available to model the precise impact of the three-percent threshold for points and fees mandated by the statute, that threshold is more than three times the average lender origination fees reported by Bankrate.com in its most recent annual survey, and our rule provides an even higher threshold for smaller loans.”

He added that the definition of a qualified mortgage already covers most of the loans made today. And even loans not covered by QM can still be generated as long as lenders use “sound underwriting standards and routinely perform well over time," the director told the MBA crowd. Again, what does 'perform well over time' mean? That part is not as clear.

As an example, Cordray told the audience, he is aware of borrowers who may possess considerable other assets, but who remain stifled by high debt-to-income ratios that force them outside the QM standards. As long as lenders ensure the best underwriting standards, they should be fine, Cordray said.

"Lenders that have long upheld such standards have little to fear from the ability-to-repay rule; the strong performance of their loans over time demonstrates the care they have taken in underwriting to ensure that borrowers have the ability to repay," Cordray added.

"Nothing about their traditional lending model has changed, and they should continue to offer the same kinds of mortgages to borrowers whom they evaluate as posing reasonable credit risk – whether or not they meet the criteria to be classified as qualified mortgages."

Cordray further noted that lenders who refuse to lend outside QM will be at no greater risk, absent other factors, of facing fair lending allegations.

The CFPB director once again cited data from Mark Zandi, chief economist for Moody’s Analytics, noting that 95% of the mortgages made today fall within the qualified mortgage standard.

"Some, such as CoreLogic, have put out much lower figures, but by their own admission, those figures were not intended to take account of the expanded definition of QM that will actually take effect in January but instead were offered as projections of a distant future when the temporary expansion expires," Cordray explained.

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