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In Public Comment on Dodd-Frank Mortgage Rule Update, Civil Rights and Housing Groups Support a Broad Price-Based QM Definition to Ensure Access for Consumers of Color and Borrower Protections, Including Fair Lending

Thursday, September 10, 2020

“Qualified Mortgage” should be defined broadly to ensure that more borrowers are able to gain access to the safest mortgage products and the wealth-building opportunities of homeownership

Lenders that engage in pricing discrimination should not receive the QM statutory safe harbor

Washington, D.C. – With the Consumer Financial Protection Bureau (CFPB) set to update a rule stemming from the Dodd-Frank financial reform law that governs what is considered a borrower-safe “Qualified Mortgage” (QM), leading civil rights and housing groups provided recommendations in their public comment letter on how to ensure all creditworthy Americans have access to mortgages with borrower protections. The letter was submitted with the end of the public comment period by the Center for Responsible Lending, Leadership Conference on Civil and Human Rights, NAACP, National Association of Hispanic Real Estate Professionals, National Association of Real Estate Brokers, National CAPACD, National Community Reinvestment Coalition, and National Housing Conference.

In the run-up to the 2008 Financial Crisis, predatory subprime mortgage lenders targeted low-wealth families, including people of color, with abusive loans. In response to these abuses, the Dodd-Frank Wall Street Reform and Consumer Protection Act established rules ensuring that borrowers have a reasonable ability to repay their mortgage loans at consummation and requiring full documentation of income and assets. The QM statutory product protections ensured that most borrowers will not be placed in loans with built-in payment shock or excessive fees through the following features: 1) the loan cannot have negative amortization, interest-only payments, or balloon payments; 2) ARMs must be underwritten at the maximum rate in the first five years; 3) the mortgage term must be 30 years or less; and 4) total points and fees generally cannot exceed 3 percent of the loan amount.

CFPB issued its original Qualified Mortgage rule in 2013 and included a requirement of a 43% debt-to-income limit, except for loans eligible for purchase by Fannie Mae and Freddie Mac (known as the “GSE Patch”). This exception expires in January 2021 or once Fannie Mae and Freddie Mac exit conservatorship. CFPB has stated that it will extend the Patch through April 2021.

The Bureau now proposes to amend the definition of “Qualified Mortgage” by removing the debt-to-income limit and replacing it with a price-based approach. In their comment letter, the groups endorse this approach, asserting that instituting a specific debt-to-income threshold has a disproportionate and exclusionary impact on Black and Latino borrowers, and is limited as a standalone measure of ability to repay. The groups state that a broad definition of QM is necessary to ensure that the lowest cost loans with the safest product features are widely available to homebuyers. Additionally, data show that the price of a loan is strongly associated with its performance and the borrower’s ability to repay. The groups further provide recommendations to ensure borrower protections, including setting the appropriate pricing levels, fair lending protections, meaningful underwriting of borrower income and debts as well as consideration of the borrower’s debt-to-income ratio, and protections against payment shock from short-reset adjustable rate mortgages.

In their comment letter, the groups state:

An overly restrictive QM [Qualified Mortgage] definition is likely to recreate the dual market of safe products for some and risky and more expensive loans for others that prevailed during the subprime boom. Under such an approach, creditworthy low-wealth families, including families of color, would be more likely to be excluded from QM product protections, and perhaps excluded from homeownership altogether. This would perpetuate homeownership disparities and exacerbate the racial wealth gap.

As part of the Dodd-Frank law, if a mortgage earns QM status, the lender receives protection against litigation, which CFPB provides in the form of a “safe harbor” or “rebuttable presumption,” depending on the cost of the loan.

The letter states: “Pricing discrimination remains a major concern in the mortgage market and can have a deleterious effect on a borrower’s ability to repay a loan.” The groups urge the CFPB to “[p]rotect against pricing discrimination by ensuring that lenders engaged in price discrimination cannot take advantage of the safe harbor.” The letter also points out that: “A QM safe harbor loan may still violate the requirements of the Equal Credit Opportunity Act, the Fair Housing Act or state and local anti-discrimination laws, as well as other federal and state laws regulating mortgage lending.”

The comment letter in full is linked here and its executive summary is included below.

Executive Summary

Thank you for the opportunity to comment on the Consumer Financial Protection Bureau’s

(CFPB’s) qualified mortgage (QM) proposed rule. Given CFPB’s decision to end the GSE patch, we believe that a price-based approach is an appropriate and effective method to determine QM status. However, additional safeguards are necessary to ensure that the final rule effectively protects consumers and promotes access to responsible mortgage credit.

In finalizing its rule, CFPB should ensure borrower protections for four key issues: fair lending, pricing caps, short-reset adjustable rate mortgages (ARMs), and “consider and verify.” Our comment also addresses CFPB’s seasoning proposal and small balance loans.

We recommend that CFPB do the following:

  1. Protect against pricing discrimination by ensuring that lenders engaged in price discrimination cannot take advantage of the safe harbor;
  2. Adopt a price-based approach to QM rather than a DTI- or hybrid DTI/price-based approach;
  3. Raise the safe harbor threshold to 2% over APOR;
  4. Raise the overall QM cap for rebuttable presumption loans to 3% over APOR;
  5. Ensure that borrowers are protected from excessive payment shock in short-reset ARMs consistent with the QM statute;
  6. Clarify the requirement that lenders consider and verify debts and income and consider debt-to-income (DTI) or residual income by ensuring meaningful ability to repay (ATR) analysis under the safe harbor;
  7. Refrain from adopting a seasoning approach to turn non-QM or rebuttable presumption loans into safe harbor loans. If CFPB adopts the seasoning approach, ensure that none of the safeguards CFPB included in the proposed rule are weakened; and
  8. Engage in further data analysis for small loans, disaggregating chattel and real estate-secured loans.

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Press Contact: matthew.kravitz@responsiblelending.org