CFPB May Offend Both Sides in QM Compromise

WASHINGTON — Although the Consumer Financial Protection Bureau appears close to a compromise over key mortgage underwriting rules, the agency's attempts to appease both banks and consumer groups could backfire.

At issue is the bureau's implementation of Dodd-Frank Act requirements that lenders follow "ability-to-repay" standards for mortgage borrowers. Under the provision, the bureau must define certain ultra-safe loans — known as "Qualified Mortgages" — that would automatically fit the ability-to-repay criteria.

But banks and consumer groups have been at odds over the type of protection afforded to QM loans. The industry prefers a clear "safe harbor," while consumer advocates want the CFPB to leave the door open to some QM loans being subject to court challenge.

Stakeholders who have spoken with CFPB officials say the bureau is considering something in between, where some QM loans would get a safe harbor and others would get a less airtight exemption. But while some industry and consumer groups have been open to compromise, observers say such a move is unlikely to win broad support from either side.

"It's indicative of a bureau that has aimed for the ideological center in its rulemaking to date, in which it doesn't want the aggregate impact to be off-kilter toward one side of the spectrum or the other," said Isaac Boltansky, an analyst with Compass Point Trading & Research. "But I don't think either side will be particularly overjoyed by the rulemaking, however the rulemaking will finally be complete, which will allow the market to move forward."

The Wall Street Journal first reported on Tuesday that the bureau is now considering a tiered approach that would provide a safe harbor for the highest quality loans. By contrast, higher-rate subprime loans — while still eligible for the QM label — would instead get a so-called "rebuttable presumption." The latter means borrowers would still have means to argue in court a lender failed to meet proper underwriting requirements. The agency, according to sources, is also considering a maximum debt-to-income ratio of 43% for meeting the QM definition, which is a lower threshold than the industry had sought.

But industry representatives said such a compromise, even one that allows for some safe harbor protection, is likely to face stiff headwinds.

David Stevens, the president and CEO of the Mortgage Bankers Association, said anything short of a full safe harbor creates an "extraordinary" risk for lenders.

"If lenders do not get a safe harbor, and you give a 43% DTI and the borrower goes to default, there's nothing stopping a borrower from filing suit in a state saying I should not have qualified and the lender should have known," Stevens said.

"If there are discussions around a tiered approach, it's a recognition that a safe harbor really is needed at least for a large portion of the segment," he added. "So the question is where would you draw the line?"

Still, even though the compromise plan may face challenges, observers said the idea of a tiered approach appears to be based somewhat on a proposal submitted to the agency by a coalition of industry and consumer groups earlier this year.

In a meeting with the agency in March, officials from The Clearinghouse Association, Center for Responsible Lending, Consumer Federation of America, and the Leadership Conference on Civil and Human Rights, proposed flexibility in the types of DTI ratios that would make loans eligible for QM, while also allowing some wiggle room for a borrower to challenge a lender's compliance with the rule.

The Clearinghouse plan proposed allowing borrowers to sue lenders if they could demonstrate the lender failed to take into account information provided by borrowers suggesting they could not repay.

But Mike Calhoun, the president of the Center for Responsible Lending, said the group still believes a rebuttable presumption for the whole market is workable.

"The safe harbor is a very blunt tool, and while we want to encourage lending, there is a real risk of providing immunity to a lot of unaffordable loans, and actually taking a step back from what the statute was trying to do," Calhoun said. "Everybody wants to see more lending, but they also don't want to see a return to the predatory lending that got us into this whole mess to start with."

David Berenbaum, the chief program officer at the National Community Reinvestment Coalition, said the group disagrees with offering any safe harbor for lenders.

"We did not join that effort because we felt inherently an appropriately defined responsible mortgage standard reduces liability for originators," Berenbaum said. "So why exclude consumers from litigation?"

News of a potential compromise surprised some observers who thought recent comments from CFPB Director Richard Cordray signaled the agency was leaning toward a rebuttable presumption for the whole market.

In testimony before the House Financial Services Committee last month, Corday said the agency is "making very real efforts" to draw bright lines to define a qualified mortgage and minimize the risk of litigation. He said the protections afforded by a safe harbor, however, have been overstated.

"The safe harbor versus rebuttable presumption comparison is a little bit of a mirage, because even the safe harbor isn't safe," Cordray said. "You can always be sued for whether you meet the criteria or not to get into the safe harbor."