MBA, Trade Groups Urge Federal Agencies to Continue Alignment of QM/QRM Frameworks

The Mortgage Bankers Association and a half-dozen industry trade groups asked federal regulatory agencies to hold implementation of new credit risk retention guidelines until the Consumer Financial Protection Bureau implements its updated Qualified Mortgage general definition.

The letter notes while the agencies delayed the Qualified Residential Mortgage review until the CFPB issued final rules with respect to the Qualified Mortgage framework, and the CFPB has since delayed the timeline by which use of the revised QM General Definition becomes mandatory (although market participants have begun to voluntarily adopt the terms of final QM regulation, issued in December 2020), the associations strongly support the continued alignment of the QRM and QM frameworks.

“We firmly believe that alignment between the QRM and QM frameworks facilitates a stable housing market and ensures access to conventional mortgage credit for borrowers across the country, including low‐ and moderate‐income and underserved households and first‐time homebuyers,” the letter said. “In addition, alignment will preserve high-quality, empirically sound underwriting, borrower-friendly product features and robust investor confidence.”

In 2014, the agencies—the Office of the Comptroller of the Currency; the Securities and Exchange Commission; the Federal Reserve; the Federal Housing Finance Agency; the Federal Deposit Insurance Corp.; and HUD—established the equivalency of QRM with QM as defined in section 129C of the Truth in Lending Act. The objectives of the QRM framework are to ensure investors are confident in the quality of mortgages underlying securitizations and that borrowers are able to obtain financing for sustainable home loans.

A broad coalition, including MBA, lenders, insurers, real estate professionals, consumer advocacy organization, and civil rights groups supported these objectives; and in the period since the QRM and QM frameworks have been in place, these objectives have been met, and the mortgage finance system has functioned well.

The letter emphasizes maintaining the alignment of the QRM and QM frameworks is beneficial for several reasons:

Investor Protections

The letter noted the QRM framework exists, in part, to protect investors by exempting only securitizations featuring loans with low credit risk from credit risk retention requirements. “For this reason, it is critical that QRM loans not exhibit high rates of delinquency or default,” the letter said. “The alignment of the QRM framework with the revised QM framework advances this objective as QM loans are designed to minimize the likelihood of delinquency or default.”

 In 2014, for example, the Agencies observed that loans that meet the QM criteria have a lower probability of default than mortgages that do not – most notably for loans originated near the peak of the market that preceded the 2008 financial crisis.

In December 2020, the CFPB finalized amendments to the Ability-to-Repay/Qualified Mortgage provisions of Regulation Z. The new rule revised the QM General Definition and will replace the GSE Patch and the standalone 43 percent debt-to-income (DTI) ratio threshold with a framework that continues to reinforce strong underwriting, safe product features, and affordability, by imposing a new rate spread cap.

“Elimination of a stand-alone DTI ratio threshold and associated Appendix Q facilitates a more vibrant market in which consumers maintain strong access to credit as well as appropriate safeguards to ensure their ability to repay,” the letter said. “In addition, the product feature limitations of the existing QM framework remain in place to ensure that risky mortgage products do not jeopardize the safety and soundness of the housing market.”

The letter emphasized data and analysis published by the CFPB support the that loan production under the new QM framework could lead to lower levels of delinquency or default risk. “Data analysis performed, and relied upon, by the CFPB shows that the QRM standard need not be narrower than the standard for the new General QM Definition. Alignment of the QRM and QM frameworks generates strong incentives for responsible lending and borrowing,” the letter said. “Loans meeting these standards will assure investors that securitizations exempt from credit risk retention requirements have low likelihoods of delinquency or default.”

Borrower Access to Credit

The letter also cautioned that any narrowing of the QRM standard relative to that of QM has the potential to cause a sharp reduction in borrower access to credit. “Because of the strong incentives for issuers to sponsor securitizations that are exempt from credit risk retention requirements, loans that do not achieve QRM status will be more difficult for borrowers to obtain – and are likely to carry higher costs,” the letter said. “Low- to moderate-income borrowers, underserved borrowers and first-time homebuyers, in particular, are likely to be impacted disproportionately if the QRM framework is modified to require higher down payments or tighter credit requirements.”

The letter noted in recent years, relatively stringent mortgage credit standards have led to high-quality lending that presents low credit risk. “As a result, credit availability is tight, even for well-qualified borrowers,” it said. “The most recent [MBA] Mortgage Credit Availability Index data shows that credit supply is near its tightest level since 2014 – coinciding with the introduction of the QM framework. Alignment of the QRM and QM standards will avoid unnecessary constraints on mortgage credit availability under the prevailing mortgage lending conditions.”

Narrowing the QRM framework also could impede borrower access to the conventional market and inhibit the responsible growth of the private-label mortgage-backed securities market, the letter warned. “Because Fannie Mae and Freddie Mac are exempt from the credit risk retention requirements only while in conservatorship, it is likely that they would limit their activities to a smaller set of QRM-compliant loans post-conservatorship if the QRM framework is narrowed,” the letter said. “Similarly, issuers in the private-label MBS market would be likely to eschew securitizations backed by non-QRM loans due to the costs associated with credit risk retention.”

By contrast, the letter said, preserving alignment in the two standards will support revival of this market, increasing the diversity of housing finance capital sources, making the system more resilient and promoting greater liquidity, while also lowering costs and increasing choices for borrowers. “These benefits would be diminished if the QRM standard were narrowed relative to the QM standard,” the letter said. “Absent alignment between the QRM and QM frameworks, QM loans that do not achieve QRM status likely would feature interest rates and fees that are higher than those associated with QM loans that do achieve QRM status. This outcome would segment the market further, reducing incentives for lenders to offer a broad array of QM-compliant loans for which borrowers are determined to have an ability to repay. Such an outcome would run counter to the rationale provided by the CFPB in its determination that the revised QM framework would promote safe and sound lending practices without unduly restricting borrower access to credit.”

Joining MBA in the letter: the American Bankers Association; the Housing Policy Council; the National Association of Home Builders; the National Association of Realtors; and U.S. Mortgage Insurers.