Fredric J. Gooch – General Counsel, DocuTech Corporation
An important issue that has previously been confined to mortgage industry professionals hit the primetime when Governor Mitt Romney raised the “qualified mortgage” rulemaking in the first presidential debate on Wednesday night. Romney used the qualified mortgage example to illustrate problems with the Dodd-Frank Act. He said:
Let me mention another regulation in Dodd Frank. You say we were giving mortgages to people who weren’t qualified. That’s exactly right. That’s one of the big reason for the great financial calamity we had.
And so Dodd Frank correctly says we need to have Qualified Mortgages and if you give a mortgage that’s not qualified, there are big penalties. Except they didn’t ever go on and define what a Qualified Mortgage was. It’s been two years. We don’t know what a Qualified Mortgage is yet.
So banks are reluctant to make loans … mortgages … try and get a mortgage these days. It’s hurt the housing market because Dodd Frank didn’t anticipate putting in place the kinds regulations you have to have. It’s not that Dodd Frank always was wrong with too much regulation. Sometimes they didn’t come out with a clear regulation. I will make sure we don’t hurt the functioning of our marketplace and our businesses cause I want to bring back housing and get good jobs.
The qualified mortgage is an important component of the ability to repay rule for mortgage transactions promulgated by the Dodd-Frank Act. The ability to repay rule was first proposed by the Federal Reserve Board on April 19, 2011 in 76 FR 27390. The rule was transferred to the CFPB on July 22, 2011 when it assumed rulemaking authority for Regulation Z. The comment period for the proposal expired on July 9, 2012.
The ability to repay rule requires lenders to make a “reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability, at the time of consummation, to repay the loan according to its terms.” The rule also provides for a “qualified mortgage” exemption which essentially states that if the loan meets the standards set forth for a “qualified mortgage” then the lender will either have a “safe harbor” or a “rebuttable presumption” that the borrower had the ability to repay the loan and complied with the rule.
At the current time the industry is waiting to receive a final rule from the CFPB that officially defines the ability to repay along with the qualified mortgage exemption. The bureau is also determining whether lenders will benefit from a qualified mortgage rebuttable presumption in litigation or a more clearly defined safe harbor which would serve to discourage litigation over the ability to repay standard.
It’s not very often that a little known detail of a mortgage rulemaking is discussed in the context of a presidential debate, however, this is a provision that could have a dramatic impact on the future of housing in our country. Governor Romney was using this issue to illustrate his position that uncertainty and fear of regulatory risk are hindering a housing and economic recovery in our country. His comments were not directly refuted by President Obama during the debate but there have been a few public statements made disputing his conclusions.
Barney Frank issued a statement through the House Financial Services Committee disputing that the qualified mortgage rule is preventing a housing recovery. Mr. Frank points out that the rule is not retroactive and it will have no effect on mortgages originated before the effective date of the final rule. Other commenters have noted that aggressive buyback practices from Fannie Mae and Freddie Mac, not pending rulemakings, are forcing lenders to be more and more conservative causing a constriction in the flow of credit to borrowers.
Regardless of whether you agree with Governor Romney or with Representative Frank it is very interesting that the public is debating the merits of the qualified mortgage. It is evidence of the importance this exception to the ability to repay requirement will have to the future of the housing market and to the future of the U.S. economy. If only for a short time, the qualified mortgage has hit the primetime with the American public.