Lenders are hoping for a boost from the Consumer Financial Protection Bureau's plan to qualify more loans for "qualified mortgage" status, but consumer groups say the proposal violates the protection of the Dodd-Frank Act.
The CFPB proposed a new category of "Expert QM" loans last month that would protect lenders from legal liability. Loans that are not initially QM can still receive this status if they remain on a lender's balance sheet for at least three years and meet other criteria.
The plan is intended to help lenders such as fintechs who rely on alternative underwriting data whose loans are not eligible for QM when granted. Many also hope this will cushion the blow of the Fannie Mae and Freddie Mac backed loans losing an exception to the CFPB underwriting rules.
"This could have a positive impact on borrowers and the secondary market," said Eamonn Moran, attorney with Morgan Lewis & Bockius law firm and a former attorney with the CFPB Office of Regulations. "Specifically, what the CFPB said in the proposal is that at least some creditors are reliant on non-traditional sources of income to underwriting and creditors who use this information may not be able to take out a QM loan under current regulatory constraints."
The agency said in its proposal that three year "spice" loans have enough payment history to be considered safe and therefore deserve the safe haven of QM.
Using alternative data means lenders will often have to give up QM status, but some in the industry say it affects borrowers' access to credit.
However, Alys Cohen, an attorney with the National Consumer Law Center, said the CFPB's plan undermines consumer protection by allowing homeowners to bring legal action against a lender at any time, not just during the first three years of the loan. She argued that the safe haven expansion was unnecessary as borrowers rarely or never take legal action if they claim a mortgage lender has violated CFPB rules.
"The narrative says that only QM loans can be safely issued because they provide a safe haven that is airtight from liability, but this narrative is not factual," Cohen said.
The August 19 proposal states that a loan could achieve QM status after three years if it is secured as the first lien, has a fixed interest rate with full amortization payments and no balloon payments, does not exceed 30 years and meets the CFPB restrictions for corresponds to points and fees.
The plan is tied to a wider effort by the Trump administration to get government-sponsored companies Fannie Mae and Freddie Mac out of the conservatory. The office also wants to encourage lenders to take out mortgages for which lenders can use alternative data to verify a borrower's repayment ability. Using alternative data means lenders will often have to give up QM status, but some in the industry say it affects borrowers' access to credit.
"The CFPB's reasoning will, in part, help bring consumer access – that's a big part of it," Moran said.
In the meantime, a guideline from 2014 that exempts Fannie and Freddie loans from the CFPB underwriting guidelines – including a debt-income limit of 43% for QM loans – expires next year. The exception is known as a GSE "patch".
The CFPB has already suggested redefining QM, including replacing the DTI limit with a price-based standard. However, some in the mortgage market say this is not enough to ensure compliance on GSE-backed loans after the patch expires.
The office said it had received 20 comments on spices after asking for feedback on changes to the QM definition in June.
It's about how a lender verifies a borrower's ability to repay a home loan. Dodd-Frank changed the Truth in Lending Act to identify factors that lenders must consider in order for a loan to be compliant. A creditor who violates repayment eligibility requirements may be subject to both government enforcement actions and consumer-filed lawsuits to avoid foreclosure.
“The idea behind the ability to repay [rules] is that if it looks like the borrower has been properly drawn [the loan] should be a QM loan and if the borrower is seasoned for three years it is unlikely is that the borrower defaults due to a drawing error, ”said Bose George, executive director at Keefe, Bruyette & Woods.
But Cohen said that if lenders have more options for gaining QM status, it will only be more difficult for homeowners to claim liability for an unaffordable loan.
"Lenders want as many of their loans as possible to be offered as safe havens and qualified mortgages so they cannot be held liable. Before that, however, Dodd-Frank's lenders had no airtight arguments against liability and they were granting loans anyway," said she.
The CFPB's proposal does not include data on legal or compliance costs showing how much lenders paid out to either borrowers or regulators to explain why liability is such a threat, Cohen said.
However, lenders are concerned that without resorting to loans subject to the GSE patch, a significant number of loans cannot be sold to government sponsored companies, which could have a massive impact on the now booming mortgage market.
Proponents of the proposal also argue that the spice period is a good protective layer for loans issued by fintech companies.
"The CFPB leadership recognizes that 36 months is a good time to show whether or not someone can pay back a mortgage, to try and accommodate some of the fintech players and other creditors who are in need of alternative sources of income. " Moran from Morgan Lewis said.
The CFPB's plan would currently only apply to non-QM loans taken after the proposed rule came into effect. Since the loans must be held on the balance sheet for three years, the earliest time frame for the reclassification of loans would be 2024. However, the CFPB has specifically asked for a public comment on whether loans held on the balance sheet before the rule goes into effect do should be selectable.
"That could potentially come into play if the CFPB gets enough comments," said Moran.
The 130-page proposal predicts the annual number of loans that will meet all of the requirements of a senior QM loan based on data from the Home Mortgage Disclosure Act for conventional fixed rate mortgages that have no disqualifying features. The complicated analysis estimates that between 22,000 and 927,000 credits can meet the experienced QM definition, which is based on various requirements.
The office proposed "an alternative route to a safe haven for QM because it is to encourage safe and responsible innovation in the mortgage lending market, including loans that may have been taken out as non-QM loans , but meet certain subscription requirements, product restrictions and performance requirements. "
The lenders have worked hard to ensure that the CFPB develop an alternative to the GSE patch that also gives the loans QM status.
GSE-backed loans "are being reviewed for approval by Fannie and Freddie," said Bryan Filkey, executive vice president of lending and strategic initiatives at PCMA Private Client Lending, a non-bank mortgage lender in Irvine, California.
Filkey said the guidelines of the CFPB had the opposite effect that the agency originally intended in creating the QM rule. Lenders providing non-QM loans that currently represent only a small portion of the market must follow a list of technical requirements to document a mortgage applicant's earnings and liabilities under the CFPB's eligibility rule.
He supports the bureau's proposal and says that most non-QM loans are heavily underwriting.
"The standard for documenting non-QM loans is infinitely higher than for loans sold to Fannie and Freddie, where a lender logs into the system and the loan is sold almost immediately," said Filkey. "Non-QM is a misnomer, as the loans were checked five times more often than government loans. We have internal teams that review the loans. If I want to sell a loan, I have to go through a third party due diligence that rates and rates the loan. "