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Qualified Mortgage Rules Could Present Challenges

Mon, Dec 9, 2013

Washington, District Of Columbia

With the looming January 2014 deadline for compliance with a host of new federal mortgage lending requirements, including the Qualified Mortgage (QM) rule, credit unions are making preparations to comply with new rules of the road.  But what are the changed realities, and what are the potential challenges, that will come with these complex and possibly onerous regulations?

First, the details. On January 10, 2014, the much-debated QM rule goes into effect.  This regulation, drafted and implemented by the Consumer Financial Protection Bureau (CFPB), was mandated by the 2010 Dodd-Frank law in response to the mortgage market meltdown. It sets forth new guidelines to encourage credit unions and other lenders to make loans to borrowers who have a demonstrated ability to repay. The QM standards:

  • Cap the borrower's debt-to-income ratio at 43%;
  • Impose a 3% of loan limit on initial fees and points;
  • Eliminate negative amortization and interest-only loans, as well as loans with terms greater than 30 years.

Taken together, these satisfy the regulation's ability-to-repay requirements. This means that lenders who make these types of QM loans are protected from borrower lawsuits by a legal "safe harbor."  Loans made outside the QM boundaries are still permissible, but the lender is exposed to potential legal action.

QM presents two possible difficulties for credit unions, in the marketplace and in the legal arena.

Credit unions historically have made loans to borrowers of modest means who may not be creditworthy in the eyes of other types of financial institutions.  This lending, while completely consistent with the credit union philosophy and practice, could fall outside the parameters of a QM loan. A credit union with a high proportion of non-QM loans on its books could be considered a safety and soundness risk by NCUA, and could come under additional scrutiny to ensure that these loans are being made prudently. Additionally, a credit union's servicing and documentation practices may also require revision to ensure that the current portfolio falls under QM standards. 

A second and potentially more serious concern involves an expected wave of litigation directed at all lenders by the consumer law community.  "This is going to be a bonanza for lawyers, trying to test and define the boundaries of what exactly constitutes a 'safe harbor,'" said a source at the Center for American Progress, a liberal think tank. Consumers and consumer advocates could view QM as a way to modify allegedly unfair or disadvantageous home loans. While elevated legal activities are an ordinary by-product of any new regulation, it is possible that QM will spawn an even greater volume of litigation than normal because of the complexity of the rules and the sheer size of the home mortgage lending market.

In addition to QM being effective on January 10, other new mortgage lending rules also take effect that day, including:

  • certification requirements for loan originators;
  • restrictions on originator compensation;
  • standards for high-cost mortgage loans;
  • prohibition on closed-end loans being used to finance credit insurance in certain instances.

On January 18 these other new CFPB regulations take effect:

  • a required mortgage applicant notification of a right to receive free copies of appraisals;
  • a required appraisal for high-priced mortgage loans.

Despite being lobbied by credit union and other financial groups for a delay in the QM effective date, CFPB Director Richard Cordray appears to be holding firm to the January timeframe.  In October remarks before the Mortgage Bankers Association annual conference, as well as in a recent press statement, Cordray noted that "there's already been a one-year delay.  Lenders have had ample time to prepare, and consumers have been patiently waiting," for the new rules to become enforceable.