CFPB Mortgage Rule Signals Relief for Securitizers
Comptroller Tom Curry discusses whether Dodd-Frank ended "too big to fail," the blowback from community banks on Basel III, how he views preemption and lessons learned from the foreclosure settlement.
While consumer groups were unhappy, lenders were pleased that the definition of qualified mortgages was so broad and that banks were given a safe harbor for prime loans.
The CFPB released its long-awaited final rule laying out how lenders must ensure borrowers have the ability to repay a loan, including creating a carve-out for qualified mortgages.
The real-estate industry is using this week's Republican convention to flex its political muscles, defending the tax deduction for mortgage interest and calling for changes to the qualified residential mortgage exception.
WASHINGTON — The industry's positive reaction to the Consumer Financial Protection Bureau "qualified mortgage" rule, which governs mortgage underwriting, is prompting cautious optimism that a related securitization rule may also turn out better than expected.
The CFPB earlier this month used a broader definition for QM than previously feared, affording more loans legal protection under the CFPB's ability-to-repay standards. The bureau established a clear safe harbor for prime loans meeting QM criteria.
That positive development has intensified attention on an ongoing, related effort by other regulators to define so-called "Qualified Residential Mortgages", or loans exempt from pending securitization restrictions. With the QRM definition seen as being somewhat dependent on QM, industry observers hope the still-pending securitization rule will similarly expand the pool of loans exempt from credit risk retention.
"The fact that QM is much broader and more sound and good for lending would lead me to think, or at least hope, that it is taken into consideration when [regulators are] looking at QRM," said David Coleman, managing director at KPMG Advisory.
Under the Dodd-Frank Act, lenders must hold 5% of the credit risk for mortgages they securitize. But the law left it to six financial regulators — not including the CFPB — to define QRM, a new category of ultra-safe loan that can skirt the requirement. (The reform law also mandated QM.)
To limit the burden lenders could face if the two definitions are in conflict, regulators had been waiting to finalize the QRM rule until after the CFPB finished QM. With the bureau's rule in place, the risk-retention rule is expected to be completed later this year.
"Now we are going to get it in higher gear and get this in place. My hope would be by the second half of this year, we would have the rules in place," Comptroller of the Currency Thomas Curry, whose agency is among those writing QRM, said in a recent American Banker interview.
The industry is still critical of the regulators' 2011 proposal for QRM, which was seen as having an overly narrow exemption. Bankers and housing advocates were particularly opposed to a 20% down payment requirement for loans avoiding risk retention.
But analysts say the QM rule could now affect the outcome for QRM, including the down payment standard.
The belief is "if the government is blessing a certain quality of underwriting for QM, then why do you need to add an extra layer with QRM," said Jaret Seiberg, a policy analyst at Guggenheim Partners. "There's a legitimate policy debate starting to brew about whether a down payment requirement should be taken out of mix."
In a Jan. 14 research note, Seiberg even mentioned the possibility of Congress passing new legislation stating that QM loans, which face no down payment requirement, are also exempt from risk retention.
"Such changes could help revive the private-label" residential mortgage-backed security "market," he said.
The CFPB's rule not only established a safe harbor for prime loans meeting the QM classification. Industry observers also reacted positively to a provision in the bureau's regulation that a loan meeting the underwriting requirements of the government-sponsored enterprises — which is the vast majority of the market — would temporarily not have to follow debt-to-income requirements expected of other loans to receive QM treatment. The temporary treatment would last until broader reform of the GSEs is outlined, or at most seven years. (The QRM proposal included similar flexibility for GSE-backed loans.)
"Most people agree the final QM rule was much less burdensome than was expected six or 12 months ago," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "This was a positive development that should be taken in conjunction with the market expectations that regulators have intended to make the final QRM rule more lenient than the proposal."
Boltansky also noted that the leadership of several agencies involved in the QRM rulemaking has changed since the 2011 proposal, possibly lessening the agencies' interest in a strict down payment requirement.
"Our sense is the effort to use a 20% down payment threshold has dissipated amongst regulators," he said. "We expect the down payment threshold to go to at least 10% and potentially as low as 5%."
Some bankers are concerned that a high down payment coupled with the CFPB's debt-to-income ratio of 43% or less, as outlined in QM, would squeeze many borrowers out of the market.
"Younger people will have to wait a whole lot longer and save a whole lot more to get to that 20% down payment rule," said Robert Messer, the chief financial officer of The American National Bank of Texas, a $2.2 billion-asset institution. But, Messer added, the QM rule "wasn't as bad as I thought it was going to be."
Still, it is not entirely clear how alike the two definitions will turn out to be.
Raj Date, the CFPB's deputy director noted that the two rules "are targeted at different things so it's a distinct set of issues that those agencies" writing the QRM rule "will have to grapple with."
But the various agencies have been talking with the bureau.
"While we are not involved in the QRM rulemaking, we consulted with all of the agencies that are involved in the QRM rulemaking at multiple points along the development of the qualified mortgage definition" as required under Dodd-Frank, said Date. "It will be useful for them to know the nature of our thinking and analysis and rationale for creating the ability to repay standard and qualified mortgage definition within it as they set out to find the QRM."
Leonard Bernstein, a partner and chair of the Financial Services Regulatory Group at Reed Smith, said a QRM definition that is more restrictive than QM could pose difficulty for the industry.
"Because of the massive challenge of absorbing so many new regulations, hopefully the agencies will opt for consistency in the [QRM] definition, if not a broader definition," he said.