Congress showing increasing interest in Ability to Repay/QM Rule

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On Wednesday July 11, 2012 the House Subcommittee on Financial Institutions and Consumer Credit held a hearing addressing consumer and market perspectives of mortgage reforms made by The Dodd-Frank Wall Street Reform and Consumer Protection Act. Both consumer and industry members provided testimony, including the Mortgage Bankers Association [PDF] and American Bankers Association [PDF]. The ongoing CFPB rulemaking to implement the Dodd-Frank ability to repay rule and special status under the rule for qualified mortgages was the focus of both trade groups’ testimony.

The trade groups both believe that the concept of a qualified mortgage should be broadly defined in a manner that will permit safe loans to be made to a wide range of borrowers. The underlying concern of the groups is that, based on the significant liability that will apply to violations of the ability to repay rule, most lending will be limited to qualified mortgages and, therefore, if the concept of a qualified mortgage is narrowly constructed, many deserving consumers will not be able to obtain mortgage loans. Consumer representatives generally share this view.

The trade groups also believe that a safe harbor with clear standards should be adopted for qualified mortgages so as to provide greater certainly to lenders to assess compliance with the rule when making ability to repay determinations, and to limit challenges to a lender’s determination to the specific and clear elements of a qualified mortgage. If legal challenges could be mounted against lenders based on a variety of other factors not included within the qualified mortgage standards, the trade groups caution that lenders would face significant litigation risks and costs and, as a result, may significantly constrain lending through the tightening of already conservative underwriting standards and with some lenders actually exiting the business.

As you might expect, consumer representatives in general do not agree with the safe harbor approach, as they believe that in certain cases a safe harbor may shield a lender who could have foreseen the inability of a consumer to repay a loan. However, the ABA notes that Habitat for Humanity supports a safe harbor approach for qualified mortgages, and is concerned that the costs of a single legal challenge would exceed their resources.

Both trade groups also made the same points in comments recently submitted to the CFPB in response to the reopening of the comment period on the ability to repay rule with regard to discrete issues, including potential litigation costs(click here [PDF] for the MBA comment letter and here [PDF] for the ABA comment letter). Ballard Spahr LLP provided an analysis of litigation costs and related matters to the MBA in connection with its comment letter.