One of the most important regulatory decisions currently facing the Consumer Financial Protection Bureau is how to define the characteristics of a "qualified mortgage." This decision will have an enormous impact on the mortgage markets, and will ultimately determine the types of mortgages generally available in the United States, and the minimum qualifications for those seeking to obtain a home loan.
The qualified mortgage concept is found in Title XIV of the Dodd-Frank Act. Under this Act, a creditor may not make a mortgage loan without first determining that the borrower has a reasonable ability to repay the loan. Penalties for violating this test include fines, civil liability, and potentially class action liability.
Further, failure to comply with this standard can be raised as a defense to a foreclosure action brought by the original creditor or any assignee.
The legislation defines certain types of loans as being "qualified mortgages," and creates a presumption that these loans satisfy the ability to repay standard. The bureau is authorized to issue regulations to modify the definition. According to reports, the bureau is currently grappling with whether it should narrow the scope of the QM, in order to create a pool of non-QM loans that would be sufficient to develop a market in these products.
The legislative history shows that as the legislation moved through the Congress, concerns were raised repeatedly that imposing liability on mortgage originators and the secondary market for failure to meet a subjective "ability to repay" standard would have a negative impact on mortgage availability. These concerns were voiced by federal and state regulators, industry representatives, and by members of Congress. It was argued that non-QM loans may not be made at all, and if one was made, it would be much more costly than a comparable QM loan. As a result, the statutory definition of the QM in the predecessor bills expanded to include new classes of loans, restrictions on interest rates and points and fees were raised, and interest rate caps were eliminated.
During the House Financial Service Committee mark-up, an amendment was offered by Representative Dennis Moore (D-Kan) to add the concept of "ensuring responsible and affordable mortgage credit availability" to the bill. The amendment was eventually adopted, but was added to the section on Congressional findings, rather than congressional purposes.
When it was pointed out to House Financial Services Committee Chairman Frank that the amendment might not be effective because of its placement in the bill text, the chairman guaranteed that it would be fixed on the floor. Chairman Frank was emphatic: "Yes, it is a problem when people get mortgages they shouldn't get. It has been a historically greater problem that some people couldn't get mortgages they should get. I will guarantee … that doesn't happen."
Barney Frank kept his word. On the House floor, he amended the bill to state that the bureau can issue regulations modifying the QM "upon a finding that such regulations are necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of this section." This change is included in the final legislation. The history of this amendment is clear. It was added to the legislation to give the bureau flexibility to change the QM in order to ensure that it was not limiting responsible and affordable mortgage availability. The intent was to make the QM basket inclusive off all safe loans.
The legislative history demonstrates that Congress was concerned that the QM test could limit credit availability to creditworthy borrowers. The statutory definition of a QM loans was modified repeatedly to include more and more loans. The hearings were replete will warnings about the potential for cutting off mortgage credit for qualified borrowers, and warned that few, if any, non-QM mortgages would be made.
Chairman Frank was so concerned about the possibility of unduly constricting credit, that he guaranteed that the issue would be addressed in the final legislation. The final legislation includes an amendment authored by Congressman Frank that requires the bureau to consider mortgage credit availability as part of its rulemaking process.
There is nothing in the legislative history or statutory language to indicate that the QM was intended to be a narrow standard, or that Congress wanted to establish a market in non-QM loans. The legislative history shows that the opposite is the case. The bureau should carefully consider this legislative history when issuing rules regarding the scope of the QM.
Raymond Natter is a partner at Barnett Sivon & Natter, which represents financial institutions and trade associations that are involved in mortgage lending. He is a former deputy chief counsel at the OCC and a former counsel to the Senate Banking Committee.