ABA President and CEO Frank Keating spoke on the importance of a qualified mortgage (QM) rule with a safe harbor as necessary to preserving access to mortgage credit.
The qualified mortgage rule is the most significant regulatory issue affecting housing credit. The CFPB’s careful consideration of the balance between credit availability and proper consumer protections is essential to forming a market where qualified borrowers can get loans.Lenders need a safe harbor from frivolous suits to confidently rely on the qualified mortgage standards. The alternative to a safe harbor – the rebuttable presumption – is not well defined, therefore has limited protection for banks that fully comply with the rule.
Respondents to an ABA survey of bank attorneys and real estate lending officers detailed the consequences of a rebuttable presumption:
- Respondents unanimously agreed that they would move to more conservative underwriting standards, and 71% indicated those changes would be “significant” to offset the uncertain litigation risk.
- 71% of respondents indicated that the uncertainty of a rebuttable presumption would lead to reductions in mortgage lending, with 45% asserting the reduction would be “significant.
- 10% of respondents indicated their institution would potentially exit the mortgage business if a rebuttable presumption is included.
Legal risk is the most crucial part of the qualified mortgage rule. As our survey shows, a rebuttable presumption will make getting a mortgage more challenging and costly. A safe harbor provides the legal clarity need for lenders to offer mortgages, while avoiding the unnecessary consequences of a rebuttable presumption.It also is important that the thresholds defining qualified mortgages provide flexibility for banks to serve their customers. The proposed 43% debt-to-income limit is too narrow and would unnecessarily constrict credit to strong applicants.
An ABA survey of mortgage lenders found that this threshold would prohibit on average 14.3% of the mortgages made between Oct. 1, 2010 and April 1, 2012. Given that lenders will not likely offer loans outside of the QM standard, borrowers over the limit will struggle to access mortgage credit on reasonable terms.
The debt-to-income limit would put mortgages out of reach for a significant portion of borrowers who would otherwise qualify for credit, even under today’s stringent underwriting standards. Clear thresholds are helpful if set appropriately, but ones that prevent QM from being broad and restrict credit to qualified borrowers need to be reconsidered.