As reported yesterday, The Consumer Financial Protection Bureau (CFPB) released a notice of proposed rule-making that would “delay the mandatory compliance date of the general qualified mortgage rule 15 months to Oct. 1, 2022.” The bureau said: “extending the mandatory compliance date of the general QM final rule would allow lenders more time to offer QM loans based on the homeowners’ debt-to-income ratio, and not solely based on a pricing cut-off.”
This delay, unfortunately, is what often comes with a new administration, but it is a bad one for lenders, Realtors, and consumers.
For the past two years, industry leaders, which includes the Mortgage Bankers Association and other key mortgage and housing trades, have been working with the CFPB and other stakeholders to get to the point that resulted in the QM rule. This two-year process that industry and the CFPB leadership took was to meet the requirements for rule-making.
It began with the ANPR (advanced notice of proposed rule-making) as well NPR (notice of proposed rule-making) process. Industry and the Bureau were careful to follow everything by the book from an APA (administrative procedures act) standpoint.
They incorporated the QM look-back report done by the Director Richard Cordray, and did a “deep dive” on additional data analysis in order to develop a proposal that would allow the QM patch to expire, get rid of appendix Q, preserve the current credit box so as not to shrink access, and actually expand access for self employed and “gig” worker types. The final rule levels the playing field for non agency product like private label securitization.
In short, stakeholders have (or had) a new QM rule that relies on objective standards, versus punting underwriting guidelines to the FHFA and the GSEs, but one that also protects the safe harbor. This process was extensive and required work with the housing and consumer advocates, and so many joined in support of this final rule.
All that is now at risk because the mandatory compliance date is past, the rule now is still “open,” and lenders are uncertain if the new rule will stay or be changed soon.
This means that lenders will be reluctant build compliance processes for the new rule. This also only extends the dependency on government-supported loans. Several in the non-agency/PLS space who were gearing up to develop QM products under the new rule are now on hold. So now, the infamous “patch” lives on, but the GSEs may not buy patch loans after July 1. In fact the preferred stock purchase agreement expressly leaves out the requirement that the GSEs’ buy loans that meet the QM/ATR standards.
So for all in lending, as long as this final rule remains on hold, it needs to be clearly understood that FHFA Director Calabria still owns the credit box.
What’s At Risk?
This act poses serious risk to mortgage finance and brings potential downstream legal risk to the industry. With the mandatory date on hold, it leaves open the opportunity to re-litigate the work that has taken over two years to date. The Bureau will have more options to tinker with the General QM rule — without starting the whole process over again with an ANPR.
We know there are some who have returned to the CFPB under this new administration that never liked the safe harbor — in fact it is understood that these individuals wanted this delay in order to “preserve options” for the new director and create opportunities to reopen the rule and undermine the safe harbor.
We also know some of the civil rights and consumer advocates want to “strengthen” the rule to add ECOA (equal credit opportunity act) elements — to make it so lenders that are found to have violated ECOA could lose QM status on the loans that were covered by the violations.
There are always positive and negative outcomes with any regime change, but to undermine a multi-year, excruciating process that got us to a final QM rule, and bring in a new day where consumers and lenders would no longer be beholden to Fannie Mae and Freddie Mac, or their regulator, to determine what is or is not QM is unacceptable.
I served in a Democratic administration and sat at the helm of the MBA when we got through the first QM rule, which resulted in the patch. And in the years since, I, and many others, have advocated that the QM rule should stand on its own and not be dependent on the patch.
We almost got there, but what this new regime at the CFPB is doing is to thrust uncertainty and disruption into housing finance completely unnecessarily. In addition, they are literally forcing the reliance on the GSEs and, for now, shutting off the opportunity for new players to emerge in a larger way. This is bad form, bad regulatory behavior, and bad news for all in housing and housing finance.
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