CFPB Proposes New Category of QM Loans: Does it Really Matter?

August 21, 2020 at 8:36 am Leave a comment

With the election fast approaching, the Consumer Financial Protection Bureau (CFPB) earlier this week introduced its most dramatic proposal yet to change the regulatory framework put in place by Congress (and the CFPB) with the passage of Dodd-Frank.  Whether or not this proposal has any impact on your credit union’s operations will ultimately depend on who is President next January.

When a mortgage is characterized as a Qualified Mortgage it makes it easier to sell the mortgage to third parties and creates a “safe harbor” against lawsuits and foreclosure defenses alleging that a lender did not properly determine that the borrower had the ability to repay a mortgage loan.  Right now there are two categories of Qualified Mortgages.  One in which the mortgage loan complies with criteria established by the CFPB which includes a debt-to-income cap and a second category which includes any mortgage eligible for purchase by Fannie Mae or Freddie Mac.  This second category is known as the “GSE Patch” which expires on January 10, 2021.  The latest proposal introduced by the CFPB would create a category of seasoned loans.  Under this approach a mortgage which is retained by a lender in its own portfolio and meets certain other conditions would season into a Qualified Mortgage with all its advantages.

The proposal would apply to first home mortgages which meet certain fee and point restrictions.  A loan would be considered seasoned if on-time payments are made for 36-months, beginning on the date on which the first periodic payment is due. In a nod to the pandemic, a forbearance resulting from a pandemic related emergency would suspend the 36-month period.

Typically, a proposal like this would generate a storm of analysis and a boat-load of comment letters predicting everything from housing nirvana to Armageddon.  But why then is the comment period a mere 30 days?  I’m going to go out on a limb here and surmise that now that the Supreme Court has made the CFPB Director an at-will employee of the President, Kathleen Kraninger wants to get as many regulations finalized as she can before leaving office.  It’s a little game Washington plays because one of the first things a new administration will do is freeze the implementation of newly enacted regulations.

That being said, if this proposal ever takes effect, it will have a profound impact on the mortgage industry.  Under this approach lenders who are willing to portfolio loans for the first three years of a mortgage will find it much easier to foreclose on property which subsequently comes delinquent.  It may also increase the availability of houses by enticing more lenders to take a risk on borrowers who don’t meet more stringent underwriting standards.

That last point is what has critics of the proposal so upset.  They would argue that a loan which shouldn’t have been made in the first place doesn’t become a better loan simply because the homeowner was able to make payments for a few years.

Entry filed under: Mortgage Lending, Regulatory. Tags: , , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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