In a bi-partisan letter to CFPB Director Richard Cordray, Senators Jerry Moran (R-KN), Roy Blunt (R-MO) and Mark Begich (D-Alaska) said that the definition of qualified mortgage in the ability to repay regulations should be defined broadly and transparently and should include a safe harbor for conforming loans. The qualified mortgage definition and the ability to repay regulations will define the mortgage market for years to come. Thus, it is imperative to get it right, emphasized the Senators, and overly narrow regulations could severely restrict access to mortgage credit. Further, the Bureau should craft a safe harbor so that credit is not restricted due to legal confusion or cost.
The Dodd-Frank Act contains several provisions establishing minimum underwriting standards for mortgages. The law also imposes significant legal liability for the life of the loan for violations of these standards. Congress also recognized the need to ensure that properly underwritten loans are not subject to unnecessary legal risk and expenses. With this in mind, the Dodd-Frank Act allowed federal agencies directed to implement these provisions to define a class of qualified mortgages.
Noting the strict and costly penalties associated with loans that failed to satisfy the ability to repay requirements, the Senators reasoned that lenders will be understandably reluctant to originate loans whose terms fall outside this definition. If the ultimate definition of a qualified mortgage is too narrow, said the Senators, otherwise creditworthy borrowers could find themselves unable to obtain affordable mortgage credit. In order to prevent this from becoming a reality, the Senators urged the CFPB to develop of definition of qualified mortgage using clear standards.
Moreover, the Senators believe that the final regulations should define a qualified mortgage such that it contains a safe harbor and not a rebuttable presumption standard. The Senators cited the Federal Reserve in noting that the drawback of treating a qualified mortgage as providing a presumption of compliance is that it provides little legal certainty for the creditor and thus little incentive to make a qualified mortgage.
The securities and banking industries have also urged the CFPB to implement a broad definition of qualified mortgage that includes a safe harbor and reject the alternative of a rebuttable presumption. In recent testimony before the House Financial Institutions subcommittee, SIFMA official and former US Representative Ken Bentsen also expressed concern that the qualified mortgage regulations may be constructed in a narrow manner with parameters that will not allow for the certainty of compliance at origination.