Could the CFPB be worried that its ability-to-repay/qualified mortgage rule is already contracting the availability of mortgage credit? In his remarks earlier this week to the Credit Union National Association, Director Richard Cordray told mortgage executives that “the current mortgage market is so tight that lenders are leaving good money on the table by not lending to low-risk applicants seeking to take advantage of the current favorable interest rate climate.”
Commenting that “plenty of responsible lending remains available outside of the Qualified Mortgage space,” Mr. Cordray stated that the CFPB “encourage[s] you to continue to offer mortgages to those borrowers you can evaluate as posing reasonable credit risk.” He also urged executives to overcome their concerns about regulatory scrutiny. Stating that they may be “initially inclined to lend only within the Qualified Mortgage space, maybe out of caution about how the regulators would react,” Mr. Cordray told the executives they “should have confidence in your strong underwriting standards, and you should not be holding back.”
Perhaps recognizing that, despite his encouragement, his audience might remain reluctant to lend “outside the Qualified Mortgage space,” Director Cordray also described the increased flexibility available to smaller banks under the QM rule. In particular, he noted the rule’s extension of qualified mortgage status to certain balloon loans held in portfolio by smaller banks operating in rural or underserved areas and the further exemptions the CFPB has proposed to liberalize the qualified mortgage standard for portfolio loans made by smaller banks. He also discussed the exemptions for smaller banks in the CFPB’s new mortgage servicing rules.
Overlooked in Director Cordray’s remarks is the main reason smaller banks and the industry overall will be reluctant to make residential mortgage loans other than QMs. While industry members are concerned about how the CFPB and banking regulators will assess them for compliance with the ability-to-repay rule, the main concern is private lawsuits and claims that will be brought when a lender seeks to foreclose. As adopted, the rule creates significant risk for a lender that operates outside of QMs. While lenders may ultimately be able to defeat many claims, the cost of winning will be expensive. Rather than having to defend against such claims, industry will want to avoid such claims to the extent possible by not making loans outside of the QM safe harbor.