The Trump administration has, for now, turned the Consumer Financial Protection Bureau into a respectable federal agency.
A creature of the Obama era, the agency had served as a rabid regulator bent on furthering political causes. Now, however, it has promised to stick to its statutory authority and to protect consumers from others rather than trying to protect people from themselves.
To that end, the bureau has announced some major changes in the way it does business. For one thing, it will review its own regulations annually to gauge their impact on small businesses. For another, it’s proposing to rescind the most harmful provisions of its 2017 payday lending rule, which threatened to lock millions of hard working Americans out of short-term credit markets.
The bureau’s new direction is laudable, but more reforms are in order. To continue paring back the excesses of former Bureau Director Richard Cordray, the agency’s next big move should be a foray into housing finance reform, where it can end the qualified mortgage (QM) patch — a loophole that has inflated home prices for consumers and left taxpayers on the hook for high-risk mortgages.
The good news is that the patch is set to expire in 2021 (or when Fannie Mae and Freddie Mac’s federal conservatorship ends, which may be sooner). So all the bureau has to do is let it die. But many in the housing and mortgage sectors don’t want to see it go. The bureau will have to withstand a ton of pressure from them.
For those unfamiliar with the QM patch, here’s a quick history.
Created by the 2010 Dodd-Frank Act, the QM is a minimum quality mortgage with legal protections for lenders. Congress left much of the details about what these loans should look like up to the bureau. The agency’s final QM rule, issued in 2013, included a maximum total debt-to-income ratio (DTI) of 43 percent.
While the rule stipulated that loans made to borrowers with a DTI greater than 43 percent should not be a QM loan, the agency also created a loophole – the patch – which effectively exempted the bulk of the market from having to comply with the 43 percent DTI limit. The patch allows higher DTI loans to qualify for QM status, provided they meet the Fannie Mae and Freddie Mac underwriting guidelines while the companies are under government conservatorship.
Astute readers will recognize that the problem with the patch is bigger than simply providing an escape clause from the original intent of the QM.
The patch, along with similar special rules for the FHA and other government agencies, all but ensured that most of the high DTI loans — the higher risk loans — would be backed by the federal government. And that’s precisely what has happened, even though the Bureau’s 2013 rule insisted that the goal was to give private lenders time to adjust to the new rule and establish a non-QM market “in light of the market anxiety regarding litigation risk under the ability-to-repay rules.”
This logic was, of course, completely twisted. There is simply no way that the non-QM market will ever develop for high DTI loans as long as the federal government is sponsoring those loans through Fannie, Freddie, and the FHA.
Naturally, the housing lobby wants the protected status of the QM for these higher risk loans, so now they are pushing hard to replace the QM’s 43 percent DTI limit with an interest rate test that does not actually stop lenders from writing higher risk QM loans.
The bureau can do the right thing, though, by simply announcing that it will do nothing to extend or amend the patch. Making the announcement now would give lenders time to adjust, slowly exposing more of the market to the original intent of the QM rule, the way Congress intended.
If the bureau wants to offer some sort of carrot, it can issue a new proposal to make it easier to comply with the QM rule. Many groups have complained that Appendix Q, the bureau’s standards for lenders to determine monthly debt and income for QM loans, is difficult to comply with and too inflexible. Providing more flexibility is sure to leave some groups unhappy though, because different market participants want different levels of certainty for various types of loans. (That’s why the rule is so prescriptive in the first place, but allowing all “seasoned” loans — those that are held on the books for a few years — to automatically convert to QM status would provide more flexibility.)
The most important thing is for the bureau to use its special independent status to protect taxpayers from backing more high risk loans. If the housing lobby doesn’t like it, they can do what they always do: lobby Congress.
This piece originally appeared in RealClear Policy