In 2013, George Ralph Elliott applied to refinance his Ohio home ahead of a separation from his fourth wife, claiming both his monthly rental income and the spousal support he would soon receive. He didn’t know it at the time, but Elliott’s application would later test a relatively obscure banking law — the CFPB’s Ability To Repay rule — and strike fear into the hearts of mortgage industry executives across the country.
The two-story farmhouse in a rural corner of Milford Center, Ohio, was one of at least two homes that Elliott, who had been a real estate agent for 30 years, owned with his wife, Golan, who was also a Realtor.
First Federal Community Bank of Bucyrus’ loan committee initially rejected the application. But the soon-to-be ex-wife met with bank executives to assure them she would pay the support — which would provide $2,200 a month to Elliott. The in-person meeting worked, and the bank approved the loan. But the couple didn’t separate as planned.
Golan paid the spousal support for just three months before stopping. Elliott decided not to adhere to the separation agreement, instead seeking more alimony from the divorce court.
Then Elliott lost his job, and bills from the divorce proceedings began to pile up. The divorce judgment, which was far less favorable to Elliott than the separation agreement, ordered him to pay Golan a substantial amount. The divorce court also ordered Golan to pay Elliott just $250 per month in spousal support for three years. By early 2017, Elliott defaulted on his mortgage.
Elliott went on the offensive. That same year, he sued his lender for violating the Truth in Lending Act.
He alleged that his lender violated the Ability To Repay rule, which requires lenders to make a “reasonable, good-faith determination” that a borrower can repay the loan. The bank filed a counterclaim to foreclose on the property.
Four years later, the case is still winding its way through the courts. In July, the 6th Circuit found that the bank failed to comply with the ATR rule, and that Elliott’s verbal promises were insufficient for the bank to make a loan.
The case is the only one known to challenge the ATR rule, several attorneys told HousingWire.
But cases like it could become more common. That outcome is what lenders fear may happen if the Consumer Financial Protection Bureau seeks to limit crucial protections against such claims for loans that comply with the Qualified Mortgage rule, as many experts suspect it may.
Not so safe
Uncertainty is now swirling around the so-called final QM rule, which has only recently emerged from a lengthy rule-making process.
For lenders, the appeal of a qualifying mortgage hinges on the certainty that, during a foreclosure, they are not vulnerable to counterclaims of improper underwriting. As a result of that surety, lenders have embraced the QM standard since its introduction in 2014.
But that “safe harbor” from litigation could now be up in the air. New regulators at the CFPB are mulling which mortgages should be eligible for those protections and under what conditions a counterclaim could be brought against a lender.
Last week, the CFPB announced it would delay the compliance date for the final QM rule until October 2022. The new final rule, which the CFPB finalized in December, axed the 43% debt-to-income limit and replaced it with a pricing threshold capped at 150 basis points above the prime rate.
To explain the compliance date delay, Dave Uejio, the agency’s acting director, pointed to the need for “flexibility” in light of the pandemic.
But for many compliance lawyers HousingWire interviewed, that didn’t quite pass the smell test.
First, it contradicted the rationale CFPB gave just weeks before, when it rolled back seven COVID flexibility provisions for lenders.
Mike Robinson, a spokesperson for the CFPB, said the regulatory flexibilities rescinded in March differed in scale and in their implications for the broader marketplace. “The Bureau believed industry should be capable of complying with existing law,” said Robinson. “That does not mean it was ready for a paradigm shift that would affect the full market.”
The compliance date delay also seemed to throw cold water on the final QM rule’s just-completed rule-making process, which included an Advanced Notice of Proposed Rule-making and Notice of Proposed Rule-making, in compliance with the Administrative Procedures Act.
It also set off a tug-of-war with the Federal Housing Finance Agency. The FHFA, led by Mark Calabria, had already announced an agreement with the Treasury that as of July 1, Fannie Mae and Freddie Mac would no longer accept mortgages under the GSE patch.
Robinson said the Bureau “plans to evaluate” the amendments to the General QM definition. The CFPB has also not ruled out another rule-making to reconsider other aspects of the General QM loan definition, he said.
“I’m sure there’s something to [the rationale], but I wouldn’t be surprised if the real reason had more to do with the new CFPB wanting to reopen the whole issue again and look at if the new QM construct is striking all the right notes,” said Kris Kully, a partner at law firm Mayer Brown. “We have a new CFPB and they may want to take a crack at it.”
New CFPB sheriff is a familiar face
The person currently overseeing the rule-making process at the CFPB, according to multiple sources, is a former staff member who publicly expressed “hate” for the agency’s new general QM rule and called another of the agency’s new QM rules “dumb.”
“Diane Thompson is among the most accomplished experts in consumer law in the United States,” said Robinson. “As senior advisor for markets and regulations, her perspective is valuable to the acting director, as are the views of other advisors and staff members at the agency.”
Thompson, a former CFPB deputy assistant director-turned consumer advocate, now has a powerful perch at the Bureau. The Biden administration appointed Thompson early during the transition from the previous administration.
Thompson, who was previously the acting assistant director of the CFPB’s Office of Regulations, applied but was passed over for the permanent role, sources say.
Thompson departed the agency in 2019, employment records show. In 2020, Thompson founded the Consumer Rights Regulatory Engagement and Advocacy Project — where she penned criticisms of the CFPB’s response to the pandemic.
An April 2020 whitepaper, which Thompson co-authored with former CFPB Director Richard Cordray, urged the agency to cease rule-making activities in light of the pandemic. It also accused the CFPB of “proceeding as if it is oblivious of the new and urgent risks facing consumers.”
But Thompson wrote her most pointed criticisms of the Bureau on her social media account, in a series of tweets just months before the Biden administration appointed her to the agency. In one tweet, she explained her upset with the CFPB’s new QM rule with a story of a young couple she represented. Before achieving a favorable ruling, she wrote, the wife committed suicide — at least in part because of the dispute over her home’s insurance, Thompson wrote.
“@cfpb’s pricing proposal would say loans like theirs were absolutely, unquestionably safe, affordable, responsible loans,” wrote Thompson. “News flash: They’re not.”
In interviews with HousingWire, multiple compliance attorneys said that Thompson’s strong feelings about the general QM rule represent a risk for the agency, which is tasked with crafting regulations after considering industry input. An official having a closed mind before the rule-making comment period could call a proposed rule into question, several of the attorneys said.
“It’s fine to articulate strong views,” said Brian Johnson, a partner at Alston and Bird and former deputy director of the CFPB. “But if the person who is developing rules and directing the team has already articulated them publicly, and the final rule closely tracks with those views notwithstanding the evidence, it could potentially create complications for the agency.”
Picking a fight
Come July 1, Fannie Mae and Freddie Mac will no longer accept mortgages under the GSE patch, which gave automatic QM status to loans approved by the GSEs’ underwriting platforms, even if they exceeded the 43% DTI threshold.
That could change, however, if a pending Supreme Court decision finds that the president can remove the head of the FHFA at will.
A similar Supreme Court decision last summer made it easier for the president to fire the CFPB’s director. Observers immediately drew comparisons to the FHFA, which has faced similar challenges in court, and has a similar structure.
The decision is expected before the end of the Supreme Court’s sessions, which typically run until late June or early July. The court often leaves more complex or controversial decisions to the end of that period, although no one can predict the exact timing.
If the decision plays out as last year’s CFPB decision did, it would pave the way for the Biden administration to remove Calabria, a Trump-appointee who is at odds with the priorities of the new administration.
The Biden administration may see the role of Fannie Mae and Freddie Mac as a countercyclical protector, while Calabria’s mission has been to bolster the GSEs’ capital and ensure they are not over-exposed to risk.
Calabria is more of a “dig in your heels type,” said Kully. “His inclination is to stand firmly on decisions he’s made, so it could come down to the Supreme Court case and the decision by the president to replace him with someone else.”
If the Supreme Court were to allow for his removal, and Biden were to appoint a new head of FHFA, that could also lead the agency to amend its agreement with the Treasury in order to match the CFPB’s compliance date timing.
But it is unclear if that will happen. Ultimately, to issue QM loans, lenders will have to comply with any rule the CFPB finalizes. Despite the regulatory headache, there are important reasons lenders are still hesitant to enter the non-QM market, said Mitch Kider, managing partner of Weiner Brodsky Kider.
“Lenders have less appetite for risk now,” said Kider. “That comes out of what occurred 13 years ago during the financial crisis and the aftermath of that crisis. The QM gave lenders certainty.”