ABA Says Qualified Mortgage Rule Should Include Safe Harbor To Preserve Housing Credit

July 11 - In a letter to the Consumer Financial Protection Bureau, the American Bankers Association stressed that a qualified mortgage rule with a safe harbor is necessary to preserving access to mortgage credit.

“The qualified mortgage rule is the most significant regulatory issue affecting housing credit,” said ABA President and CEO Frank Keating. “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.”

Rebuttable Presumption Brings Significant Consequences; Safe Harbor Needed

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 percent indicated those changes would be “significant” to offset the uncertain litigation risk.
• Seventy-one percent of respondents indicated that the uncertainty of a rebuttable presumption would lead to reductions in mortgage lending, with 45 percent asserting the reduction would be “significant.”
• Ten percent 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,” said Keating. “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.”

Proposed Debt-to-Income Limit is Too Narrow

It is important that the thresholds defining qualified mortgages provide flexibility for banks to serve their customers. The proposed 43 percent 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 percent 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,” said Keating. “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.”

The American Bankers Association represents banks of all sizes and charters and is the voice for the nation’s $14 trillion banking industry and its two million employees. Learn more at www.aba.com.