For much of the past year, if you wanted to give a mortgage banker heartburn all you had to do was mention three little letters: Q,R, and M.
Sweeping new federal regulations governing risk retention and loan terms have been set to go into effect in January for months, and for even longer the industry has been complaining that the complicated new rules threatened to choke the housing market by imposing too-stringent standards for sound lending, coupled with severe risks for non-compliance.
Last week, however, a coalition of six federal regulators unexpectedly plopped down a new set of revisions which provided a fizz of excitement and relief among industry advocates. Many agree the new rules are a substantial improvement over previous proposals.
“Everyone from the mortgage side and the title side is saying, ‘yup, we won, they’re changing QRM,” said Ruth Dillingham, special counsel for First American Title Insurance Company and a member of the Massachusetts Mortgage Banker’s Compliance Committee.
Crucially, the new rules reconcile the definitions of a sound loan used by the Consumer Financial Protection Bureau (the CFPB regulates violations of the Truth In Lending Act) and those used by the Fed, Treasury and FDIC to implement the Dodd-Frank Act’s risk retention requirements.
Loans that meet the CFPB’s standards for a “qualified mortgage” – meaning they are regarded as sound and banks face far fewer legal and compliance risk in issuing them – will also meet the Fed’s definition of a qualified residential mortgage, or QRM. That means banks won’t need to keep extra collateral on their books to back those loans, as the Dodd-Frank Act requires for other loans.
Having one set of standards will make it far easier for banks to make sure any new loan products they develop are in compliance with the rules, and to provide guidance to their loan officers and underwriters to make sure they’re staying in bounds.
The Mortgage Bankers Association, one of the most prominent advocates for revisions to QRM, pronounced itself “extremely pleased” with the realignment of the two standards.
“The [qualified mortgage] standard already clearly stipulates what is considered to be a safe and sound loan. Adding additional layers of regulation would have contracted credit for first-time home buyers and borrowers without large down payments, and prevented private capital from entering the market,” David Stevens, president and CEO of the MBA, said in a statement.
Compliance experts are still digesting the 500 pages of new rules the agencies have issued, however, and some questions remain. Commercial loans and other types of loans, like auto loans, also fall under Dodd-Frank’s risk retention requirements, and the tweaks to the proposals governing their retention requirements remain confusing.
“People are still getting their minds around this, [and] you have to remember that this applies across the board, so there may be some issues on the commercial side that people haven’t thought of,” said Jon Skarin, a spokesperson for the Massachusetts Bankers Association. “But generally the reaction has been positive.”
Also worrisome is the fact that regulators have asked for comment on a proposal to keep a high down payment requirement – as much as 30 percent – in order for loans to be considered QRMs, indicating that some regulators may still have some reservations about relaxing the rules. Such a move could “severely impair access to credit for all but the most well-heeled borrowers,” warned the MBA’s Stevens.
Perhaps most importantly for community banks, despite the fact that substantial changes to the rules have been announced over the last several months, regulators haven’t backed off on the January deadlines for when many of the new rules will kick in. That could leave smaller banks, which rely on third-party vendors for origination software, caught flat-footed if their vendors haven’t fully updated their systems to comply with the new rules by early next year.
“The worst possible thing that could happen is that, come January of 2014, everybody pulls back because they say, ‘well, we’re not up to speed yet, we don’t have the systems in place,’” said Skarin.
Email: csullivan@thewarrengroup.com
