Kathy Kraninger, who was appointed head of the Consumer Financial Protection Bureau by former US President Donald Trump.
Andrew Harrer / Bloomberg via Getty Images
Both are a type of qualified mortgage, a category that provides legal protection for lenders from consumer lawsuits. This can happen, for example, when borrowers cannot make monthly payments and lose their homes to foreclosure.
The new rules should come into force on March 1st.
“It’s a big deal,” said Patricia McCoy, a professor at Boston College Law School, of the CFPB’s announcement that it may streamline Trump-era policies. “The Seasoned QM rule is a really dangerous rule for consumers.”
When the rulemaking process is carried out, it can ultimately change or override the rules that the CFPB has said.
Given its public statement on Tuesday, the agency is likely to act, said McCoy, who oversaw mortgage policy at the CFPB during the Obama administration.
“If you signal it, don’t say it lightly,” she said.
However, some groups believe that the Trump-era rules should be maintained.
According to Robert Broeksmit, President and CEO of the Mortgage Bankers Association, they will help banks and other lenders innovate and provide more mortgages to underserved groups such as Black and Hispanic homebuyers.
“We encourage the office to have it go into effect as planned,” said Broeksmit.
Consumer advocates are particularly affected by the rule of experienced QM. It creates a new standard for a mortgage to be “qualified”.
Qualified status is important for both home buyers and lenders. It is essentially a government stamp of approval that a lender reasonably determined that a borrower could afford their loan – the so-called “repayment ability”. Lenders get legal protection in court and consumers can rest assured they have sustainable credit.
According to the Center for Responsible Lending, around 95% of mortgages are qualified.
Before the Trump era recast, a loan was generally considered “qualified” if a borrower’s debt load was not too high (more than 43% of monthly income). The government sponsored companies Fannie Mae and Freddie Mac make exceptions in some cases due to other financial factors.
A borrower’s ability to repay helps to draw the line between high quality (high quality) and low quality loans.
“This is one of the fundamental reform rules emerging from the Great Recession,” said Mike Calhoun, president of the Center for Responsible Lending. “It goes to the heart of what caused the financial crash.”
The Seasoned QM rule gives a loan qualified status even if the borrower pays off his mortgage monthly over a period of three years.
Loans that were not considered “qualified” at the time they were granted could end up earning this label.
Consumer groups fear that doing so will provide legal protection for risky mortgages and make it more economical for lenders to issue loans with higher default rates. These risky loans could then be sold in the secondary market where they are bundled with other mortgages and bought by investors.
“We think it’s too loose and creates some poor incentive to hit some of the unsustainable endings we saw in the crisis,” said Calhoun. “We don’t want to encourage high default lending.”
But many protections remain in place to keep banks from taking out extremely risky mortgages, Broeksmit said. For example, variable rate mortgages and mortgages with a term of more than 30 years cannot be granted qualifying status. At the same time, banks could take a bit more risk and lend more credit to underserved communities, he said.
Trump-era rules would also eliminate the 43% debt-to-income ratio and replace it with another general QM standard. Instead, loans would qualify if their interest rate is below a threshold tied to the Average Prime Offer Rate, or APOR.
That change doesn’t seem incriminating, Calhoun said. Community banks have used the same standard for years and responsibly lending using this test, he said.