As I am sure you are well aware, two of our mortgage rules will be extremely important in addressing some of the most serious problems that had undermined the mortgage market. The Ability-to-Repay rule (also known as the Qualified Mortgage or QM rule) is designed to end many irresponsible lending practices by making sure that consumers are getting mortgages they can actually afford to pay back. Our servicing rules contain provisions designed to ensure, among other objectives, a fairer and more effective process for troubled borrowers who face the potential loss of their homes.
Through extensive discussions with community banks and credit unions, we came to recognize that most of their traditional lending practices should not be put into question by the Ability-to-Repay rule. Especially where smaller institutions make loans that they keep in their own portfolios, they have every incentive to pay close attention to the borrower’s ability to repay the loan. They are more immediately subject to community norms, and their underwriting standards did not deteriorate in the heady days before the financial crisis; indeed, they often lost market share to those engaged in the more irresponsible lending practices of that era. So we avoided a “one-size-fits-all” approach by proposing and then finalizing specific provisions to meet the special circumstances of smaller mortgage lenders.
Qualified mortgages cover the vast majority of loans made in today’s market, but they are by no means all of the mortgage market. This point is important and it should not be misunderstood. There are plenty of good loans made every year that are non-QM. For example, loans made to borrowers with considerable other assets may not meet the 43 percent debt-to-income ratio, be eligible for purchase by the government-sponsored enterprises (GSEs), or qualify under the small creditor exemption, but nonetheless are based on sound underwriting standards and routinely perform well over time.
Read Cordray's full remarks.