Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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CFPB to review QM rule

Agency takes issue with "seasoning" provision of revised QM rule

CFPB Director Rohit Chopra

The Consumer Financial Protection Bureau (CFPB) said Friday it would take a “fresh look” at a rule that decides what mortgages are protected from some litigation during foreclosures.

The agency, in a blog post, said it would conduct a review of its Qualified Mortgage (QM) rule. The rule, under the federal Truth In Lending Act, sets standards mortgages must meet in order to have a safe harbor from improper underwriting counterclaims during a foreclosure. The move by the CFPB is part of a larger review of rules the agency says warrant scrutiny because they were inherited from other agencies, published in the first decade of the agency, or have been tested in the market for several years.

The QM rule, which finished a lengthy rulemaking process in 2020 and has yet to be fully implemented, does not fit into those categories, said Bryan Schneider, a partner at Manatt who previously led the CFPB’s ​​supervision, enforcement and fair lending division.

“It’s fair to say we’re going to be reviewing rules inherited from other agencies, or rules where there is in fact a lot of marketplace experience,” said Schneider. “But this particular rule doesn’t fit into that rubric very well, and instead leads to greater confusion.”

The revised rule removed the old rule’s 43% debt to income ratio limit, replacing it with price-based thresholds. The revised standard stated that a mortgage meets the “ability to repay” standard if the annual percentage rate does not greatly exceed the average prime offer rate for a similar loan. It also made higher pricing thresholds for loans with smaller amounts, and established more “flexible options” for lenders to verify the income or assets beyond the value of the property and the customer’s debts. The revised rule also allowed some loans that met certain performance requirements over a three-year seasoning period to gain QM status as seasoned loans.

The conclusion of an arduous rulemaking process, and the mortgage industry’s strong opposition to revisiting it, has not deterred the CFPB.

It’s not clear if the CFPB will solicit feedback from the public during its review, or if it will initiate a new rulemaking, a process that could take a year to 18 months.

A CFPB spokesperson declined to comment. 

In its bulletin, the CFPB said that it is undertaking the review to “explore ways to spur streamlined modification and refinancing in the mortgage market.” But it’s the “seasoning” provisions that the CFPB said it will be paying particular attention to.

The new seasoning provision has yet to kick in for a single mortgage loan, since less than 36 months have passed since the CFPB issued its final rule, in December 2021. But at least one current CFPB official publicly expressed misgivings about the seasoning provision from the start.

Diane Thompson, senior advisor for markets and regulations at the CFPB, has previously raised concerns about the QM rule’s “seasoning” provision. Thompson, in a series of tweets just months before the Biden administration appointed her to the consumer watchdog, railed against the CFPB’s new QM rule.

“@cfpb’s pricing proposal would say loans like theirs were absolutely, unquestionably safe, affordable, responsible loans,” wrote Thompson. “News flash: They’re not.”

For a time, mortgages could achieve qualified mortgage status — even if they exceeded the 43% debt to income threshold — as long as the GSEs’ underwriting platforms accepted them.

But in July 2021, Fannie Mae and Freddie Mac stopped extending QM status to loans that didn’t meet the new QM rule standards. Officially, however, lenders don’t have to comply with the CFPB’s revised rule until October.

Kris Kully, a partner at law firm Mayer Brown who specializes in federal and state regulatory compliance, said that the mortgage industry “might wish for more transparency” from the CFPB.

“We haven’t seen a lot of that,” said Kully. “Instead we’re left to wonder what [CFPB Director Rohit Chopra] is thinking.”

Maria Volkova contributed reporting.

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