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Despite recent controlled tests showing that up to 20% of mortgage loans currently issued by lenders would not muster the Consumer Financial Protection Bureau's (CFPB) ability-to-repay/qualified mortgage (ATR/QM) rules going into effect in January, Richard Cordray, director of the CFPB, told attendees of the Mortgage Bankers Association's 100th Annual Expo and Conference in Washington, D.C., this week that 95% of all mortgage loans currently issued do, in fact, meet QM guidelines, and assured that lenders which engage in safe lending practices - including those which decide to offer "non-QM" loans - have "little to fear" when it comes time for the bureau to start enforcing its new rules.

"Qualified mortgages cover the vast majority of loans made in today’s market," Cordray said, "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 - for example, loans made to a borrower with considerable other assets or whose individual circumstances and repayment ability are carefully assessed - that are non-QM because they do not meet the 43 percent debt-to-income ratio or are not eligible for purchase by the government-sponsored entities (GSEs), but nonetheless, are based on sound underwriting standards and routinely perform well over time."

While much of Cordray's speech was essentially a review of the bureau's activities to date, parts of it were crafted to quell fears among mortgage lenders who are concerned they will be fined and/or sued should they inadvertently issue loans that do not meet the bureau's ATR/QM standards.

"Lenders that have long upheld [strict lending] standards have little to fear from the ability-to-repay rule; the strong performance of their loans over time demonstrates the care they have taken in underwriting to ensure that borrowers have the ability to repay," Codray said. "Nothing about their traditional lending model has changed, and they should continue to offer the same kinds of mortgages to borrowers whom they evaluate as posing reasonable credit risk - whether or not they meet the criteria to be classified as qualified mortgages."

Corday's speech exemplifies the tightrope the CFPB and other regulatory bodies are walking in attempting to rein in risky lending practices, while at the same time, keeping credit available to lower-income borrowers.

"The constrained mortgage lending so prevalent today was quite critical to our thinking about how to contour our mortgage rules, especially the ability-to-repay/QM rule," he said, while reviewing the development of the new rules. "By paying close attention to [lender] input, and by obtaining and analyzing more up-to-date data, we came to more balanced conclusions about how to define a so-called qualified mortgage and tailor its legal consequences."

Cordray's estimate that 95% of all loans currently made would meet QM guidelines comes from Moody's analyst Mark Zandi.

"Some, such as CoreLogic, have put out much lower figures, but by their own admission, those figures were not intended to take account of the expanded definition of QM that will actually take effect in January but, instead, were offered as projections of a distant future when the temporary expansion expires," he explained, referring to a recent CoreLogic white paper. "Indeed, CoreLogic acknowledges that as long as the temporary expansion remains in effect, which may well be for several years, the 'impact of the regulations will be minor.'"

Cordray reiterated that in creating the new rules - which provide safe harbor to all QM loans - the CFPB has attempted to draw "bright lines" that will help protect lenders from lawsuits stemming from wide-ranging legal interpretations. In doing so, the new rules afford "effective protection against legal challenges for loans that satisfy the QM criteria," he said.

"We left little room for legal challenges to whether a given mortgage is a QM," Cordray said. "We purposely drew bright lines to define the contours of a qualified mortgage, such as a 43 percent debt-to-income ratio, or eligibility for purchase by the GSEs while they remain in conservatorship, or portfolio loans made by small creditors."

He added that a large number of the industry stakeholders who commented on the rules during their development had asked for those bright lines, "and we agreed that approach made sense."

"If those lines were not drawn as sharply as they are, then much would have remained to be fought out in the courts for years and years before the definitions were clear," he said. "We crafted the rule to avoid that result, which is why critics are now forced to dream up hypothetical factual disputes about whether debts and income were correctly calculated in their efforts to criticize the rules or sow anxiety about them."

Feedback from industry stakeholders was, in fact, critical to developing the 'bright lines" in the regulations, Cordray said.

"As we became aware of critical operational or interpretive issues with our rules, we have addressed them," he said. "We made a commitment to respond to substantial interpretive questions that significantly affect implementation decisions in writing through amendments to the official interpretations and, if need be, to the rules themselves."

That feedback is, in part, why the CFPB issued so many amendments and revisions to its rules over the past year.

"By addressing and clarifying industry questions, we reduced the need for individual institutions to spend time reaching their own uncertain judgments on these matters," he said.

Cordray also emphasized that the CFPB's work is far from finished - and that it will continue working closely with lenders and servicers in refining the new rules.

"We have a team devoted to the regulatory implementation process," he said. "We are engaged in vigorous outreach and assistance to financial institutions. We view this as a joint enterprise, and we are interested in learning how we can make things go more smoothly and achieve better results."

Absent from Cordray's speech, however, was an explanation of how lenders that issue non-QM loans can know - when they originate - whether they are within the CFPB's underwriting guidelines and, more specifically, whether they are meeting safe-harbor requirements. What's more, he offered no explanation of what the CFPB can or will do should a non-QM loan end up in default.

To read Cordray's full speech, click here.


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