Members of a
House Financial Services subcommittee issued a press release Tuesday afternoon
which essentially dismissed testimony heard earlier in the day from two
officials of the Consumer Financial Protection Bureau (CFPB) regarding the
impact efficacy of the new Qualified Mortgage Rule.
Peter Carroll, CFPB's Assistant Director for Mortgage Markets, and Kelly Thompson Cochran, its Assistant Director for Regulations presented information to the Financial Institutions and Consumer Credit Subcommittee about the process the Bureau followed in developing the new Ability-to-Repay requirements of the Qualified Mortgage Rule required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule, the two said, was only finalized after a process in which CFPB considered nearly 2,000 comments from stakeholders and a second comment period made with a special effort to understand potential impacts on small creditors.
Because access to credit remains so constrained, CFPB designed the rule "not just to ensure more responsible lending by curtailing certain problematic practices, but also to encourage creditors to provide responsible loans to consumers in all segments of the covered market." The two said the rule "strikes a careful balance between providing bright lines to give certainty and clarity to creditors while also allowing flexibility for the mortgage market to evolve and innovate in ways that encourage the provision of responsible credit."
While the final rule describes certain
minimum requirements for creditors making good faith determinations of
consumers' ability to repay their mortgages, it does not dictate that they
follow particular underwriting models.
"The Bureau believes that-subject to certain floors
created by the Act-it is entirely appropriate for creditors
to employ a variety of standards
to evaluate their
a minimum, the rule requires
creditors to assess the borrower's
income, savings, other
assets, and debts using
reasonably reliable third-party records for verification. It provides that monthly payments
must generally be calculated
by assuming substantially equal payments
over the loan's life and that the higher of the
indexed rate or an
be used to calculate adjustable rate mortgage payments.
"By rooting out
reckless and unsustainable lending without dictating specific underwriting models, we believe the rule protects consumers
and strengthens the
housing market while
preserving flexibility for creditors," Cochran and Carroll said.
The final rule
also implements provisions creating so-called
These mortgages are entitled to a presumption
that the lender satisfied the ability-to-repay requirements because of additional
such as prohibiting loans with negative
amortization, interest-only payments,
"no doc" loans or terms exceeding
30 years and
sets levels for upfront costs in points and fees. The rule also
general underwriting criteria
qualified mortgages, requiring use of the highest monthly payment
that will apply in the first five years
of the loan and provides that the debt-to-income
(DTI) ratio cannot exceed 43 percent.
The rule also creates a safe harbor for lenders when loans meet the
definition of qualified mortgage and are not "higher priced." "The line the Bureau is drawing is
that has long been
a rule of thumb to separate prime loans from
subprime loans," they said.
Bureau did not intend to stigmatize loans that fall outside those
boundaries or to signal
that responsible lending can
only take place within the qualified mortgage space.
To the contrary, it expects to see markets
non-qualified mortgages and the final rule provides for a second, temporary category of
qualified mortgages that have more flexible underwriting requirements
so long as they satisfy the general requirements
for a qualified
mortgage and also are eligible for sale to the GSEs or certain
temporary provision will phase out over time
and the Bureau will continue to observe the health of the mortgage market going forward
to ensure the availability of responsible credit
outside the qualified mortgage space.
The two said their
that few community banks and credit
unions engaged in the
type of risky lending that
led to the mortgage crisis and that these institutions may be more likely to retreat from
the mortgage market if the regulations are too burdensome. For this reason, the Bureau tailored the final
rule to encourage small creditors
to continue providing certain credit products,
while carefully balancing
consumer protections. Exceptions were made for example to
the prohibition on balloon payments for creditors operating in rural areas and by
proposed amendments to the rule to accommodate
by smaller institution
even where loans exceed
the 43 percent debt-to-income ratio.
The latter provision would cover
institutions with less than
$2 billion in assets that make fewer
than 500 first lien mortgages
Approximately 9,200 small institutions, such as community banks and credit unions,
are likely to be affected
the proposed definition which the Bureau
expects to finalize shortly.
CFPB has also made a commitment to
provide implementation support; publishing a plain-English version of the Rule
on the agency website, a compliance guide designed for smaller institutions and
is publishing clarifications to the rule as it responds to questions and
concerns from stakeholders. The Bureau
is also coordinating with other agencies to develop examinations procedures and
the considerations the Bureau made in formulating the new rules was an attempt
to balance the desire for short-term
certainty with the need for long-term flexibility
to benefit both consumers and lenders. "We sought to structure the
rule in a way that
allows room for a range of reasonable
underwriting models used by different
in today's market.
We were concerned that as
the mortgage market
strengthens, the rule should function
to provide appropriate
safeguards without becoming a straightjacket.
We balanced these considerations in many places, both in leaving flexibility for reasonable underwriting practices
standard and in crafting different
qualified mortgages that use different sets of safeguards to ensure that affordability is being appropriately considered," the two officials concluded.
Following the hearing the subcommittee
issued the following press release.
Members of the
Financial Institutions and Consumer Credit Subcommittee expressed concerns at a
hearing today that the Qualified Mortgage rule mandated by the Dodd-Frank Act
will reduce access to credit that qualified borrowers need to buy homes.
Banks and credit
unions have already pulled back on extending mortgage credit and have tightened
underwriting standards in response to the financial crisis. The Qualified
Mortgage (QM) rule may well exacerbate this reduction in access to credit.
"My main concern
with the QM rule is that the people who do not fit the one-size-fits all
criteria for QM loans will not be able to access mortgage credit," said
Subcommittee Chairman Shelley Moore Capito (R-WV). "Despite the CFPB's
claims that lenders will issue non-QM mortgages, my conversations with lenders
lead me to believe that few, if any, will be willing to issue these types of
mortgages," Capito added.
The CFPB - the
Consumer Financial Protection Bureau - was represented at today's hearing by
two witnesses. The CFPB has responsibility for finalizing the Qualified