WASHINGTON Regulators' plan to unite two separate mortgage standards mandated by the Dodd-Frank Act is deepening the focus on the Consumer Financial Protection Bureau's ever-expanding role in the mortgage sphere.
Dodd-Frank established two distinct classes for safe mortgages: the "Qualified Mortgage" and the "Qualified Residential Mortgage." The designations have different objectives QM is designed to boost underwriting standards while QRM exists to provide investors with a class of ultra-safe loans yet they are often discussed in the same breath in part because of similar nomenclature.
But a recent proposal by the six agencies not including the CFPB charged with defining QRM would cement that bond by stating that loan characteristics for meeting both standards are the same. The plan would link QRM to the current, and any revised, QM definition set by the consumer bureau.
"In effect, the CFPB is writing the regs for what is QRM," said Kevin Petrasic, a partner at Paul Hastings. "The way that the re-proposal is structured, the six agencies wouldn't have to do anything and in effect a new regulation would be implemented for QRM by the CFPB."
Though both industry and consumer advocacy groups support the proposal because it would simplify compliance with both standards, the idea that the CFPB could essentially oversee changes to the securitization rule has raised eyebrows. (The proposal is open for comment until Oct. 30, and may include changes before it is finalized.)
"It goes from one extreme of having too many cooks in the kitchen to the other extreme of having a single decision-maker in the kitchen," said Tom Deutsch, the executive director of the American Securitization Forum. "If the CFPB wants to change QM, that would automatically flow through and change QRM. That means a regulator that is focused primarily on a borrower's ability to repay under QM will likely not be tailoring the rule to address the capital markets intent of QRM."
Dodd-Frank required the six agencies to mandate that lenders retain at least 5% of the loans they securitize, but also crafted an exception for QRM loans that would not be subject to risk retention. (The six agencies involved are the Federal Deposit Insurance Corp., Federal Housing Finance Agency, Federal Reserve Board, Office of the Comptroller of the Currency, Department of Housing and Urban Development and Securities and Exchange Commission.)
There is broad agreement that QRM should not stray too far from QM in order to prevent a compliance nightmare, and Dodd-Frank specifies that QRM cannot be broader than QM. But the six agencies' efforts to define QRM have been challenging. Their original proposal in 2011 drew sharp protests from both bankers and consumer groups for including a minimum 20% down payment requirement to meet the standard.
When regulators re-proposed QRM in August, they abandoned specific down payment requirements and instead said that QRM should equal QM. The latter definition was established under a final rule issued by the CFPB in January. The consumer agency created several criteria for QM, including a ban on interest-only and other nontraditional loans, a limit on points and fees of 3% of the total loan amount, and a maximum 43% debt-to-income ratio. (The original QRM proposal had a more rigorous 36% maximum DTI limit.)
The regulators' QRM proposal added that any change made by the CFPB to QM would automatically apply to QRM as well.
"The agencies are proposing to broaden and simplify the scope of the QRM exemption from the original proposal and define 'qualified residential mortgage' to mean 'qualified mortgage' as defined" in law "and implementing regulations, as may be amended from time to time," the proposal said.
In a statement, a CFPB spokesman said the banking agencies and the consumer agency have worked together throughout the process of defining both QM and QRM.
"The CFPB's Qualified Mortgage rule was informed by extensive interagency consultation with the other financial regulators, and the bureau has responded to requests for information from the regulators responsible for the proposed QRM rule during that rulemaking process," the spokesman said in an email. "Once the public comment period for the QRM rule closes, we anticipate reviewing the submitted comments and whatever final rule is ultimately issued. On this issue, as well as many other matters, the bureau will continue to coordinate and communicate with the other financial regulators as appropriate."
Mortgage groups and consumer groups have hailed the new approach. But some critics said regulators have thwarted the will of Congress by excluding down payment requirements and effectively exempting the vast majority of the mortgage market from risk retention requirements.
In a sign that the many regulators involved in writing the risk-retention rule perhaps have not come to a final decision, the proposal asks for comment on an alternative approach that would require borrowers to put down 30% of their purchase price to achieve QRM status.
But some, including certain regulatory officials themselves, worry the proposal as currently written could also grant the CFPB too much authority. Even though the proposal says the agencies would "review the advantages and disadvantages of aligning the definitions as the market evolves," it would leave the bureau effectively with the role of revising QRM if the six agencies failed to offer their own follow-up revision.
"The re-proposed rule would define the term QRM to mean QM as defined through the CFPB's implementing regulations as may be amended from time to time meaning that adopting the rule as re-proposed would leave the QRM definition subject to the whims of the CFPB," said Daniel Gallagher, a commissioner with the SEC, in a statement dissenting from his agency's issuing of the proposal.
Gallagher also opposed the broadening of QRM to allow more loans to be exempt from risk retention. "I find it unconscionable that the Commission would abdicate to another agency, in perpetuity and under any circumstances, its responsibility and authority to define such a key term, much less to allow that other agency to permanently enshrine the housing policy mistakes that were a central cause of the financial crisis," he said.
To some, the idea of enabling the CFPB to effect changes in a securitization standard, meant in part to protect the interests of investors in the capital markets, does not coincide with the bureau's main focus of protecting borrowers from getting loans they cannot afford.
Raj Date, the former No. 2 official at the CFPB who helped finalize the QM criteria, called the bureau's role in crafting both standards, as envisioned under the re-proposal, "a weird outcome."
"Under Dodd-Frank, the CFPB is in charge of the ability-to-repay doctrine and not in charge of risk-retention standards," said Date, who now runs the investment firm Fenway Summer.
To be sure, the regulators in charge of QRM are likely to stay involved in any revisions that CFPB makes to QM, and could issue their own revision to supersede whatever moves the bureau made.
"They haven't perpetually ceded authority," said Laurence Platt, a partner with K&L Gates. "If they don't like the direction" of QM, "they can always come up with their own regulation either under QRM or under the other exceptions [from risk retention] that are there that give authority to the regulators."
Michael Krimminger, a former general counsel at the FDIC and now a private attorney at Cleary Gottlieb Steen & Hamilton, said the banking regulators will remain engaged on the issue.
"It is unusual for those agencies basically to turn over their regulatory authority to an agency that doesn't have statutory rule-writing authority for QRM," he said. "Normally, regulators want to preserve their own prerogatives and flexibility to be able to make adjustments."
If the banking regulators do not remain actively involved, "The consequence of that is the CFPB would be driving the definition of QRM going forward," Krimminger said.
Date said whatever changes the CFPB made to QM would probably be made in close consultation with the agencies implementing QRM.
"If the CFPB proposed changes to QM, there would be a very long lead time before they issued a final rule," he said. "During that time, the bureau would be required by law to consult with the other agencies. And believe me, the other agencies are not especially shy about their perspectives. Any change to the QM rule would be done in full view of the QRM agencies and in full view of the public at large. There are no secret rule-makings; everything is transparent."