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Cordray: CFPB Listened and Adapted QM Accordingly

by devteam September 12th, 2013 | Share

The credit crunch, the financialrncollapse, and the ensuing deep recession will likely stand as the mostrnsignificant financial events of our generation Richard Cordray, Director of thernConsumer Financial Protection Bureau told a group of mortgage professionals onrnWednesday.  And the economy could notrnbegin to return to normal, he said, until the housing market did so asrnwell.   </p

Cordray, speaking to the AmericanrnMortgage Conference in Raleigh, North Carolina, said the crumbling of thernhousing market destroyed jobs across every economic sector and in communitiesrnthroughout the country.  The dimensions of the failure werernastounding and the American dream of homeownership was shaken to itsrnfoundations.  In response Congress passedrnthe Dodd-Frank Wall Street Reform and Consumer Protection Act which createdrnCFPB and gave it a number of tools to assure evenhanded oversight of consumerrnfinancial markets and to prevent bad practices from taking root.  </p

Appropriate market oversight andrnenforcement empowers the American consumer and this was part of what we had inrnmind as we worked to develop the new mortgage rules published last January,rnCordray said.  But in the data-drivenrnprocess CFPB used to develop those rules, the overwhelming message that camernthrough from stakeholders was that the mortgage market in 2012 was vastlyrndifferent from the mortgage market of 2006, and required even more focus onrnaccess to credit than would be true in more normal circumstances.</p

The constrained mortgage lending sornprevalent today was quite critical to our thinking about how to contour ourrnmortgage rules, especially the Ability-to-Repay or Qualified Mortgage (QM) rule,rnhe said.  By paying close attention to this input, and by obtaining andrnanalyzing more up-to-date data, we came to more balanced conclusions about howrnto define a so-called “qualified mortgage” and tailor its legal consequences.  Also, through extensive discussions withrnsmaller creditors CFPB came to recognize that most of their traditional lendingrnpractices should not be put into question by the QM rule, especially where loansrnare made for their own portfolios.  Sornthe rule avoided a one-size-fits-all approach by proposing and then finalizingrnspecific provisions to meet the special circumstances of smaller lenders. </p

While qualified mortgages cover thernvast majority of today’s loans, they are by no means all of the mortgagernmarket, Cordray stressed.  There are<bplenty of good loans that are non-QM but nonetheless are based on soundrnunderwriting standards and perform well over time.  “Lenders that have long upheld such standardsrnhave little to fear from the Ability-to-Repay rule.  The strong performance of their loansrndemonstrates the care they have taken in underwriting to borrowers who have thernability to repay.  Nothing about their traditional lending model hasrnchanged, and they should continue to offer the same kinds of mortgages tornborrowers whom they evaluate as posing reasonable credit risk – whether or notrnthey meet the criteria to be classified as qualified mortgages.”</p

The QM space has been defined quiternbroadly and data indicates that over 95 percent of mortgage loans being made inrnthe current market will be QMs.  CFPB wasrnconscious of the extreme tightness in the current market and shaped thernspecific provisions of the rules to address the concerns from many aboutrnaccess.</p

Another place where CFPB listened tornstakeholders was in developing a legal safe harbor for QM loans.  The key issue for them was to draw brightrnlines to define the contours of a “QM.” rnIf those lines were not drawn as sharply as they are, the Director said,rnthen much would have remained to be fought out in the courts for years andrnyears before the definitions were clarified.  We crafted the rule purposefullyrnto avoid that result, “So you should keep this perspective in mind if you hearrnpeople dreaming up hypothetical factual disputes in an effort to sow anxietyrnabout potential litigation under the rule.”</p

He said he believes that CFPB’srnresponsibility for its rules does not end simply with their promulgation.  ‘We must also care about how well the rulesrnare  understood and implemented, howrnoperational issues can be more easily addressed, and the amount of effortrnrequired.”  The Bureau is taking affirmative steps to help the industryrnunderstand the rules such as publishing plain-language guides and a series ofrnvideos and working with other regulators clarify examination guidelines forrnfinancial institutions ahead of implementation.</p

Also, as the Bureau has become awarernof operational or interpretive issues it has addressed them, issuing one set ofrnamendments over the summer and preparing a second set.  These adjustments were made to ensure the effectivenessrnof the rules by making it easier for industry to comply. </p

Cordray said the Bureau’s regulatoryrnimplementation project should not slow down the implementation process at anyrnlender or servicer.   “It is criticalrnto move forward so that these rules can deliver the new protections intendedrnfor consumers and the certainty that the industry has been seeking.  Thatrnwill encourage consumers to take part in the mortgage market with improvedrnconfidence about how the market will function even as responsible lenders willrnbe enabled to conduct their mortgage businesses profitably.”  </p

The Director told them that, had thernBureau not issued such a substantial set of mortgage rules by last January manyrnkey statutory provisions of Dodd-Frank would have taken effect in their ownrnright.  This would have been much harderrnon industry and much worse for the mortgage market.  We know, he said, that the regulations stillrnpose a challenge for industry but we are all in this together and we appreciaternthe urgency and the resources that the industry is bringing to bear preparingrnfor the rule’s effective dates.  Hernpromised that oversight of the new rules will be sensitive to the progress madernby those lenders and servicers who have been squarely focused efforts to comerninto substantial compliance on time.

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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