A Qualified Mortgage Rule Facelift in 2019

 A mandatory review of the Qualified Mortgage Rule is coming

Will the overly restrictive rule get an update?

Ever since the Consumer Financial Protection Bureau (CFPB) published the Qualified Mortgage Rule (QM Rule) in 2014, mortgage lenders have complained that it is overly-restrictive and unnecessarily suppresses lending to creditworthy borrowers.  This may change in 2019, based on some upcoming deadlines and recent signals from the Administration and the CFPB.

A Mandatory 5-Year QM Review is Approaching

The Dodd-Frank Act required the CFPB to assess the effectiveness of each significant federal consumer financial protection law within five years of its effective date, after receiving public comment. The final QM rule was issued on January 10, 2014, and the CFPB labeled the rule as significant, so its assessment must be completed by January 10, 2019. 

In June 2017 (under former Director Richard Cordray’s tenure), the CFPB solicited public comments under this statutory mandate and announced that it would publish an assessment report with its findings no later than January 10, 2019.  A total of 485 comments were received, many of which recommended raising the 43 percent debt-to-income ratio and making changes to the 3 percent points and fees restriction.

The GSE Patch Will Expire

Another motivation for the CFPB to assess the QM rule is that the GSE patch, which allows GSE-eligible loans to qualify for QM status even if they exceed the 43 percent debt-to-income ratio, lasts only until Fannie Mae and Freddie Mac exit their government conservatorship or until January 10, 2021, whichever comes first. 

The Trump Administration released a proposal in June that would privatize Fannie and Freddie, but Congressional passage of GSE reform legislation in the immediate future is not considered likely.  If no other action is taken by January 2021, then approximately 13.1 to 15.6 percent of GSE borrowers and 35.7 to 38.9 percent of Fannie Mae borrowers may have to look to portfolio lenders to get mortgage financing, according to Bricker and Eckler, LLP.  Commenters responding to the CFPB’s 2017 solicitation had several suggestions on how to deal with the GSE patch, including removing or extending its deadline, raising the current 43 percent debt-to-income ceiling, and changing the 3 percent points and fees cap. 

The Treasury Department Recommends It

In June 2017, Treasury Department Secretary released the first specifics on how the Trump Administration plans to roll back parts of the Dodd-Frank Act. In its report, it labeled the QM rule as “the most significant post-crisis regulation impacting loan originations” and claimed that it eliminates access to mortgages for many creditworthy borrowers.  It recommended that the CFPB mitigate “overly prescriptive and rigid requirements” for determining borrower debt and income levels, ultimately phase out the GSE patch, and increase the $103,000 loan amount threshold for application of the 3 percent points and fees cap to encourage additional lending in the form of smaller balance loans.

Mulvaney Wants Change

Acting CFPB Director Mick Mulvaney’s recent words and actions reveal that changes to the QM rule are high on his priority list, which means they are likely to be high on the list of priorities for his nominated successor and former Office of Management and Budget colleague Kathy Kraninger.

“You’re going to see us try to bring some sanity to the largest market, including QM,” Mulvaney said at a May real estate conference. “If you think you can have a one-size-fits-all rule for every single mortgage, you don’t understand the mortgage business.”

In March, Mulvaney asked for public comment on regulations that the Bureau inherited from other federal agencies (Inherited Regulations) or issued under the authority of the Dodd-Frank Act (Adopted Regulations; including the QM rule). The comments it received, together with the comments the CFPB received in response to its 2017 solicitation of comments on the QM regulation, have built a foundation on which to recommend changes to the rule when its five-year assessment is due in January 2019. 


Summary

The CFPB has broad statutory authority to amend the QM regulation through rulemaking if it chooses to do so. The signs all point to 2019 as the year in which regulatory change may begin. While it could necessitate modifications to processes and systems, it also could mean more flexibility in mortgage lending and, ultimately, better pricing of mortgage loans. 

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