Regulation

CFPB’s Cordray: Constrained mortgage lending helped agency to craft QM rule

Richard Cordray

Richard Cordray

CFPB Director Richard Cordray said on Monday that constrained mortgage lending helped shape the agency’s creation of the ability-to-repay/qualified mortgage rule.

“By paying close attention to this input, and by obtaining and analyzing more up-to-date data, we came to more balanced conclusions about how to define a so-called Qualified Mortgage and tailor its legal consequences,” Cordray said of the rule, which will take effect in January.

Cordray said small creditors, including community banks and credit unions, have upheld good standards in the mortgage market and therefore have “little to fear” from the rule.

“Nothing about their traditional lending model has changed, and they should continue to offer the same kinds of mortgages to borrowers whom they evaluate as posing reasonable credit risk – whether or not they meet the criteria to be classified as Qualified Mortgages,” Cordray said.

Cordray also addressed concerns regarding whether the rule will ensure legal protections even for QM loans, saying the agency “believe[s] strongly” that it will do so.

The QM definition was expanded to include loans that satisfy the 43 percent debt-to-income ratio requirement, as well as loans eligible for purchase by Fannie Mae and Freddie Mac while they are in conservatorship.

“Though no data is available to model the precise impact of the three percent threshold for points and fees mandated by the statute, that threshold is more than three times the average lender origination fees reported by Bankrate.com in its most recent annual survey, and our rule provides an even higher threshold for smaller loans,” Cordray said.

Cordray also said the CFPB estimates that more 95 percent of mortgage loans made in the current market will be classified as QMs. He added that the rule applies a legal safe harbor to all prime QM loans to protect against legal challenges to whether a loan is a QM.

“We purposely drew bright lines to define the contours of a Qualified Mortgage, such as a 43 percent debt-to-income ratio, or eligibility for purchase by the GSEs while they remain in conservatorship, or portfolio loans made by small creditors,” Cordray said. “A large number of industry commenters asked for those bright lines, and we agreed that approach made sense. If those lines were not drawn as sharply as they are, then much would have remained to be fought out in the courts for years and years before the definitions were clear.”

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