CFPB May Revisit Small Bank QM Exemptions

WASHINGTON — The Consumer Financial Protection Bureau could consider expanding exemptions for small lenders from its qualified mortgage rule after it goes into effect on Friday, according to Richard Cordray, the agency's director.

During a discussion hosted by the National Association of Realtors on Tuesday, Cordray said the CFPB attempted to carefully craft the exemption to avoid burdening smaller lenders, but was open to adjustments once the agency sees the rule's impact.

"We will be sensitive to considering whether we got the line right, whether we should put it in a different place," said Cordray. "Let's see how they're working. ... And if we see something that's dramatically out of balance with what we expect in this market, we want to hear it from the Realtors, we want to hear it from the community bankers, the credit unions, anybody who has a line of sight on this market in order to think about what that means."

Under the qualified mortgage rule finalized last year, lenders with less than $2 billion of assets that make 500 mortgages or fewer per year are exempt from certain parts of the QM rule, including the debt-to-income ratio requirement if they hold the mortgages in their portfolio. Cordray said that exemption covers more than 90% of small creditors in the market. But he said the CFPB is watching the situation carefully and asking for feedback from lenders.

"We've asked them to continue to provide us with information as we go about these changes and how the market changes," Cordray said. "There will be other changes in the market, of course, that go well beyond and have nothing to do with our rules: interest rates will go up and down over time, the economy will go up and down over time, the interest people have in renting versus owning will change in various ways over time. So we will monitor all that as we go."

During a panel after Cordray's remarks, housing industry representatives and consumer advocates said they were encouraged by the CFPB's openness and sensitivity to market reactions.

However, they cited remaining concerns about credit availability and the appetite lenders will have to make non-QM loans, particularly nonbanks that are almost entirely dependent on being able to sell such loans in the secondary market.

"As a nondepository [lender], we just generally have no ability to generate a non-QM loan, but the CFPB's view of a community lender or what constitutes a smaller lender may be too restrictive in our view," said Jeff Kibbey, director of corporate services and general counsel of Kentucky-based Century Mortgage Company, during the meeting. "Because of the 100 organizations which are members of the Community Mortgage Lenders of America, that definition does not cover a single one of our entities."

A key requirement for a QM loan, which provides lenders with greater legal protections from liability, is that the borrower must have a debt-to-income ratio of 43% or less. Observers said consumers who are less likely to meet that standard would either be low-income borrowers or wealthy borrowers who tend to get jumbo mortgages that would fall into non-QM status.

The National Association of Realtors estimates that the QM rule will cut back another 5% to 7% of credit underwriting on top of the 15% cutback already seen in recent years, said Lawrence Yun, the Realtors' chief economist and senior vice president of research.

"The only compensating factor is for non-QM to increase" despite "the threat of lawsuits hanging over lenders" who make non-QM loans, Yun said. "Non-QM lending could increase but only on the upper-income segment ... so for people in the jumbo loan category."

But Barry Zigas, director of housing policy at the Consumer Federation of America, cautioned that the industry should not place the blame for credit tightening on the QM or ability-to-repay rules. Rather, it should focus its attention on broader and potentially more crippling issues like tighter underwriting standards for Fannie Mae and Freddie Mac loans, the need for housing reform and rising interest rates

"The restrictions of credit that exist today ... are not a result of fears about ATR or QM. They are a result of other factors. Some of them are a response, reaction to loose lending practices that led to the crisis," Zigas said. "It's a huge missed opportunity that's not at all a result of these consumer protection requirements written in Dodd-Frank or by the CFPB. And I think all of us need now to turn our attention away from focusing on this reg — which I think the bureau got plenty right — and focusing on these larger issues."

One of those issues, Zigas said, was for the other banking regulators to finalize the Qualified Residential Mortgage rule, which was re-proposed late last year to add more exemptions for mortgage securitizers from the risk retention requirement.

The rule is meant to accompany the QM rule, but the re-proposal has pushed off its implementation until well after QM goes into effect.

The QRM rule "is the last piece of the suite of regulations regarding the mortgage market that remains unfinished," Zigas said. "The quicker that we can get this resolved, the quicker the capital markets will have a much clearer road map for how they should move forward."