How Will the CFPB’s New Mortgage Rules Impact the Market?

Starting in January of 2014, the mortgage market could be in for some major changes. In an effort to protect consumers, the Consumer Financial Protection Bureau has issued final rules for a qualified mortgage (QM), providing safe harbor for lenders who issue such mortgages. Mortgages that don’t qualify could expose lenders to lawsuits from borrowers. We asked a panel of attorneys to address the following question.

 “How will the Consumer Financial Protection Bureau’s new final rule on qualified mortgages – including the requirement that lenders ensure that borrowers have the ability to repay their loans – impact the mortgage market? ”

Podvin_John.pngThe reality of this rule will likely be that if a borrower does not fit within the box of a qualified mortgage, then the cost of credit will be much higher, if that person can find a lender who will lend the money. The QM rule is just one of several rules that need to be digested and integrated (some of them have not been finalized yet) in order to understand the full impact on the mortgage market. Once all these rules are finalized, institutions will need to look at the costs versus the benefits of offering mortgages and servicing mortgages in the new environment and make informed business decisions concerning whether and to what extent they should continue making residential mortgage loans in a profitable manner.

 John Podvin, Haynes and Boone, LLP

Veta_Jean.pngNonaka_Michael.jpgWhile mortgage lenders may not be thrilled with every provision in the CFPB’s new rule on qualified mortgages, most would agree that the rule provides much-needed certainty in an area that has been subject to debate and criticism. The rule’s safe harbor for qualified mortgages and the ability-to-pay standards give lenders a clear sense of what is required. This, in turn, hopefully will lead to increased mortgage lending. At the same time, the perceived heightened risk for non-qualified mortgages may make the secondary market even more skittish about these loans, thus driving more lenders to focus primarily, if not exclusively, on qualified mortgages.

— Jean Veta and Michael Nonanka, Covington & Burling, LLP

Lenet_Sara.pngDouglas-McClintock.jpgAlthough there are many valid reasons for the CFPB to provide incentives to lenders to make less risky loans and ensure a borrower’s ability to repay, the new rules might well disproportionately affect low-income and middle-income borrowers, which could lead to separate issues, such as fair lending and Community Reinvestment Act issues. Lenders will need to find the right balance in order to comply with the CFPB’s new rules and protect themselves from potential liabilities and penalties for noncompliance by making qualified mortgages, while still addressing the needs of their communities. Although the impact of the new rules on the mortgage market is not yet known, it should be noted that the mortgage market has already changed significantly since the subprime mortgage crisis, with increased regulation and lending standards, so the effect of these new rules is likely not to be as drastic as it would have been before the crisis, although it will certainly affect the mortgage market in a variety of ways.

— Sara Lenet and Doug McClintock, Alston & Bird

Marlatt_Jerry.pngThere can be little doubt that the Dodd-Frank Wall Act, particularly Title XIV?on mortgage reform and anti-predatory lending, was designed to reduce the availability of mortgage credit. One of the themes of Dodd-Frank is that undisciplined underwriting standards in the sub-prime mortgage market created or contributed to a bubble in housing prices by making excessive mortgage credit available. It is not a surprise then that the Consumer Financial Protection Bureau’s new rule on qualified mortgages will rein in mortgage credit in the private sector. The bureau itself has expressed the concern that its rule “could curtail access to responsible credit for consumers.”

In a very complex rule, the bureau tries to draw a line between responsible and irresponsible credit. The result leaves private sector creditors with significant compliance challenges and litigation risk. In recognition of the possibility that the rule will overly restrict mortgage credit, the bureau has built in a transition period in the hope that it will “help insure [sic] that sustainable credit will return in all parts of the market over time.” What seems clear is that there will be a sustained period of significantly reduced mortgage credit.

— Jerry Marlatt, Morrison & Foerster LLP

Lamson_Don.pngThe market is resilient and will respond to the new requirements, but there is a danger that the requirements concerning repayment ability will by their nature constrict access to credit for those who may need it the most.

— Don Lamson, Shearman & Sterling LLP

It is possible that when the rule becomes effective in January 2014, lenders may be reluctant to make loans that do not qualify for the Qualified Mortgage (QM) safe harbor. Non-QM loans will carry significantly higher litigation risks and may be more difficult to securitize. According to the bureau, as of 2011, non-QM loans would have amounted to about 22 percent of the market. In order to ease the transition to the new rule, the bureau is permitting lenders to obtain QM treatment for loans that would be eligible for purchase by Fannie Mae or Freddie Mac while they remain in conservatorship. Over time it is possible that the rule will result in a substantial reduction in the availability of mortgage credit.

— Robert Ledig, Dechert LLP

Kelsey Weaver