QRM – Progress on a rule with good intentions but potentially very bad outcomes

QRM Progress

By Brian Collins
FEB 3, 2012 5:17pm ET
QRM: It May Be Back to Square One

By Brian Collins
FEB 3, 2012 5:17pm ET
Federal banking agencies seem to be making little progress in promulgating regulations that will set the ground rules for a revival of the private label MBS market.

The Dodd-Frank reform bill passed in 2010 created two inter-related rules to regulate mortgage lending. One sets an “ability to repay” standard for lenders, and the other determines which “qualified residential mortgages” are exempt from risk retention.

Six regulatory agencies working on the QRM rule issued a proposed rule in March 2011, but the measure immediately ran into a buzzsaw of criticism because it would require MBS issuers to retain 5% of the credit risk if the underlying loans don’t have a downpayment of at least 20%.

The Mortgage Bankers Association, and National Association of Realtors are only two of the many groups that want the regulators to withdraw the QRM proposal and return to the drawing board.The current QRM proposal will restrict access to credit for working class borrowers, including teachers, policemen and firefighters, unless the 20% downpayment requirement is eliminated, MBA chief executive David Stevens told a meeting of U.S. Mayors in late January. The downpayment restriction is “a direct attack on first-time homebuyers, African-American borrowers and Latinos,” Stevens said.

Some industry officials estimate the markup on a non-QRM loan would be 300 bps higher than a QRM loan. (The Dodd-Frank Act exempts Fannie Mae, Freddie Mac and Federal Housing Administration from the QRM rule.)

In early December, acting Comptroller of the Currency John Walsh told a Senate panel the regulators are still “grappling” with a set of issues related to the QRM rule. Nearly two months later, comptroller Walsh told an American Securitization Forum conference the regulators are still weighing several issues, including drafting a new proposal instead of issuing a final rule.

Sources told National Mortgage News the regulators are going to pull the QRM proposal and issue a new proposed rule for public comment.

“There are signs the QRM rule may go back to the drawing board,” Stevens told reporters last week.

Meanwhile, the Consumer Financial Protection Bureau is working on the “ability to repay” standard which is called the “Qualified Mortgage” or QM rule.

The Federal Reserve Board issued a QM proposal last spring before the CFPB was up and running. Now the CFPB has assumed sole jurisdiction over the QM rule, which will determine the kind of loans (and loan features) lenders can offer without facing potential legal liability of up to $100,000 per loan.

The rule likely will eliminate no-documentation, stated-income, non-amortizing loans, option ARMs and balloons from the marketplace.

The CFPB is working toward finalizing the QM rule during the second quarter. The QM establishes the outer boundary of lending standards while the QRM rule determines which QM loans are exempt from risk retention.

In other words, Comptroller Walsh and his fellow regulators need to have the QM rule in front of them before they can finalize the QRM rule.

However, CFPB director Richard Cordray and his staff still need to make key decisions regarding lender liability.

MBA, the American Bankers Associations and other groups are calling for a safe harbor provision that will shield lenders from lawsuits if they fully comply with QM rule. “Without a safe harbor, no lender will go anywhere near the line that is established in the QM rule,” Stevens said.

The Fed’s QM proposal included a “rebuttable presumption” alternative that is not as airtight and would make lending more risky.

Last week, CFPB director Cordray told the Senate Banking Committee that he is considering this issue. “I don’t have an outcome for you today,” Cordray testified. He noted that most lending institutions would like a safe harbor so the rule does not create litigation risk and uncertainties. “Others have taken a different point of view,” he added.

The consumer bureau director noted that the QM rule “intersects” with the QRM rule. Other regulators are waiting to see what language he comes up with. “We know we need to move it along,” Cordray said.

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