Financial industry, consumer advocates await CFPB’s “qualified mortgage” rules

Richard Cordray

Consumer advocacy groups and U.S. financial institutions are on alert as the Consumer Financial Protection Bureau prepares to issue new rules defining a “qualified mortgage” that may afford lenders some legal protections.

Should a mortgage meet the definition of a QM, the lender has reason to expect repayment by the borrower. If the borrower defaults, the rule could protect lenders from lawsuits filed by borrowers who fail to repay. Some members of the financial industry see the QM rule as one of the most important Dodd-Frank issues, The Hill reports.

“It’s pretty high up there, because it’s ultimately going to define what loans get made,” Joseph Pigg, VP and senior counsel at the American Bankers Association, according to The Hill. “If you’re outside of the QM, those loans are not likely to get made.”

The CFPB, in issuing the new rules, could provide a “safe harbor” or “rebuttable presumption” protection. Many members of the financial industry are pushing for a safe harbor, which would allow a borrower to challenge in court whether a lender offered a QM, but if the lender did what was required under law, the lender should be able to avoid penalties and further lawsuits.

The “rebuttable presumption” protection would allow borrowers more litigation freedom, as a lender could state that it offered a QM, though the borrower could offer evidence that the lender did not offer a QM, The Hill reports.

Christine Hines, the consumer and civil justice counsel at Public Citizen, said that the rebuttable presumption would allow consumers to make their case in court better than the safe harbor.

“There’s a possibility that the rule doesn’t cover every bad practice…so there should be an opportunity for consumers to present evidence,” Hines said, according to The Hill. “A safe harbor would just shut the courthouse door to borrowers.”

Richard Cordray, the director of the CFPB, told the House Financial Services Committee that the agency faces a challenge in ensuring that the market remains workable for lenders and safe for consumers. Cordray said further that he could not comment on which protection the agency plans to implement, as the rules are still being written.

“That’s kind of like bringing a Supreme Court Justice in here last spring and asking, ‘Are you or are you not going to find the Affordable Health Care Act unconstitutional?’” Cordray said, The Hill reports. “It’s in the process. It’s not resolved. I have not taken a position because the bureau has not taken a position.”

Cordray emphasized that the agency’s goal was to make the rules clear for both lenders and borrowers.

“We understand here that if we write rules that are murky, that’s going to essentially be an abdication of our responsibility,” Cordray said, according to The Hill. “We’re making real efforts here to draw very bright lines.”

The QM provision of the 2010 Dodd-Frank Act is scheduled to take effect in January. The CFPB will likely have the rules in place before that time.