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New data prompts CFPB to reopen comment period on QM

Armed with new data, the Consumer Financial Protection Bureau is reopening the comment period for the qualified mortgage proposal.

The proposal addresses the definition of a qualified mortgage, or a consumer’s ability-to-repay requirement for a loan secured by a home.

The proposal’s original comment period closed in July 2011, but the bureau is reopening it until July 9 to seek comments specifically on new data and information obtained during and after the close of the original comment period.

The qualified mortgage rule is one of the most important Dodd-Frank rules governing how mortgages will be written and is likely to arrive by the end of the year. Industry trade groups and influential market players are meeting regularly with administration and regulatory officials to ensure the rule does not limit mortgage availability in the future.

In response to information received from the public, the bureau is seeking comments and data on potential litigation costs and liability risks associated with violation of ability-to-repay requirements.

The commenters’ estimated costs and damages ranged from $70,000 to $110,000 depending on various assumptions, such as the interest rate on a loan or whether the presumption of compliance is a safe harbor or a rebuttable presumption. However, some consumer groups assert the potential incidence of litigation is relatively small, and therefore liability cost and risk are minimal for mortgage creditors.

The new proposal suggests CFPB may be serious about giving borrowers the ability to challenge whether they should have received the loan, said Jaret Seiberg, senior policy analyst at Guggenheim Securities, in a commentary note about the CFPB’s report: “As a result, we believe the risk is rising for an adverse ruling in 2013.”

New data the CFPB received from the Federal Housing Finance Agency consists of all single-family mortgages purchased or guaranteed by Fannie Mae and Freddie Mac, but does not include private-label mortgage-backed securities bought by the government-sponsored entitites.

Among other elements, the data include payment-to-income and debt-to-income ratios at origination; initial loan-to-value ratios; and borrower credit scores.

The CFPB is using the data to perform statistical analyses to assist it in defining a qualified mortgage and examining various measures of delinquency and their relationship to other variables such as a consumer’s total DTI ratio.

“Loan performance, as measured by delinquency rate such as 60 days or more delinquent, is an appropriate metric to evaluate whether consumers had the ability to repay those loans at the time made,” CFPB said in a report. “These specific tabulations include first-lien mortgages for first or second homes, that have fully documented income and that are fully amortizing with a maturity that does not exceed 30 years.”

Delinquency rates for loans meeting strict DTI requirements shrunk dramatically from 1997 to 2009. In 1997, 4.38% of loans with a DTI below 46 were delinquent for more than 60 days; in 2009 that number had fallen to 0.78%.

Click on the image below for the percentage of loans that were 60 days or more past due from 1997 to 2009 within various DTI restrictions, provided by the FHFA to the CFPB.

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