Lawmakers Press for Changes to QM

WASHINGTON — Just a few days after it took effect, House lawmakers began a renewed push for amendments to the "qualified mortgage" rule, arguing it will unintentionally squeeze out key borrowers.

Speaking during a House Financial Services Committee hearing, several members raised concerns about a provision of QM that places a cap on a borrower's debt-to-income ratio at 43%, saying make it harder for first-time homebuyers and small-business owners to obtain credit.

Officials at the Consumer Financial Protection Bureau have strongly disagreed that such borrowers will be hurt, arguing that 95% of the current mortgage market would meet the QM standards, but some lawmakers remain convinced it will be an issue.

"We don't want to overregulate. We don't want to go too far," said Rep. Spencer Bachus, R-Ala. "This rule does harm. It's going to deny people like [Congressman Gregory] Meeks or myself" when moving into their first home.

A handful of lawmakers on the committee, including Bachus, have proposed various pieces of legislation to address credit issues and availability in the market, but the bills have not gained significant traction. Those testifying before the committee were mostly lenders who spoke in favor of further amendments to the rule.

"Rate sheets we've seen suggest borrowers could pay an interest rate around 9% or 10% for non-QM loans. The bottom line is non-QM will be very limited and very expensive for all but the wealthiest borrowers," said Bill Emerson, chief executive of Quicken Loans and vice chair of the Mortgage Bankers Association. "That's why it remains so important to continue to make adjustments to the QM rule. The CFPB deserves enormous credit for working with all stakeholders, lenders and consumer groups alike and fashioning a rule we think is a substantial improvement over Dodd- Frank. … Further amendments are essential to ensure the QM rule promotes, rather than hinders, our tepid housing recovery."

All three lenders on the panel said they are only underwriting QM loans because they do not believe there is a market to buy non-QM products.

But Jack Hartings, the vice chairman of the Independent Community Bankers of America, urged lawmakers to press for the CFPB to expand certain exemptions for small banks. The bureau has written several provisions for smaller lenders, including providing QM status for lenders that have less than $2 billion of assets that make less than 500 mortgages per year and hold it in their portfolio.

But Hartings said the provision should also apply to small banks that sell such loans into the secondary market.

"Even as a small creditor, I am significantly limited by QM here," said Hartings, who is also the president and chief executive of The People's Bank Company, a $400 million-asset bank in Coldwater, Ohio.

Likewise, credit unions also said they are also struggling with making non-QM loans. Daniel Weickenand, chief executive of Orion Federal Credit Union in Memphis, told lawmakers that they will no longer offer non-QM loans because of "liability and liquidity concerns."

"I've talked with many of my fellow credit union CEOs about the issue. Some may be cautiously going forward with non-QM loans, but they have indicated they will be more stringent in making them," said Weickenand, who's also a board member of the National Association of Federal Credit Unions. "For Orion, approximately 11% of all of our mortgage loans in the past few years have been classified as non-QM."

A key issue is the extra protections that QM status confers if the loan is later challenged by a borrower. Many lenders fear if they make non-QM loans, they will open themselves up to more legal challenges.

"The liability for originating non-QM is simply too great. Claimants can sue for actual and statutory damages, as well as a refund of their finance charges and attorneys' fees, and there is no statute of limitations in foreclosure claims," Emerson said. "By MBA's calculations, protracted litigation for an average loan can exceed the cost of the loan itself."

But CFPB Director Richard Cordray has repeatedly attempted to dispel litigation concerns by the industry. During the hearing, Michael Calhoun, president of the Center for Responsible Lending, agreed, saying it would be difficult to form such a case.

"This [QM Rule] is tailored to make it extraordinarily difficult to bring a class-action lawsuit. And so that by itself is a major reduction," Calhoun said. "These are not cases that lawyers can make money on, and that's what lawyers look for."

Calhoun said that bankers originally sought specific guidelines such as a debt-to-income ratio before responsibility for the QM rule was transferred to the CFPB from the Federal Reserve Board.

"The original rule did not have a DTI [threshold]. It had very general standards. It was at industry's request that a bright-line standard was put in place, because that's essential to have the certainty needed to get secondary market capital in," Calhoun said. "And if you didn't have the bright line, lenders were going to be very conservative, because they wouldn't know where the line was."

Despite large support for changes to the rule, several representatives, including Democrat Stephen Lynch of Massachusetts, cautioned the industry and his fellow lawmakers about creating unnecessary hype.

"Now, I understand there are some concerns from the banking and the mortgage lending industry about constricting access to credit. But the bottom line here is that the CFPB's rule is supported by a lot of groups who were hurt very badly by that last crisis," Lynch said. "The qualified mortgage definition may need some tweaking, no doubt about that, going forward. And if it does, I hope we can work in a way that CFPB also supports. But I think the folks on this committee would do well to tone down the doomsday talk and rhetoric about the rule that is going to do enormous good for homebuyers and will allow a lot of people to own a home."