Today, the Consumer Financial Protection Bureau (CFPB) issued the much anticipated Qualified Mortgage (QM) rule, which is a significant advancement in creating a more stable financial system. The QM rule was required under the Dodd-Frank Act to ensure that certain unsustainable practices in the mortgage market which were at the heart of the financial crisis would not happen again. Prior to Dodd-Frank, the Federal Reserve was empowered to identify risky mortgages and ban predatory practices, under the Home Ownership and Equity Protection Act of 1994. The Fed failed to use this authority in a timely manner. The initial rule was not even proposed for 13 years; until December 2007, long after the shenanigans in the mortgage market had reached their zenith and ironically the exact month that the Great Recession began. This delayed action was one of the clearest examples of regulatory failure which laid the seeds of the financial crisis.
Dodd-Frank changed the regulatory system in two fundamental ways. First, rather than require regulators to define risky mortgages, instead it required regulators to identify qualified mortgages. Second, it moved this authority from the Federal Reserve to the CFPB. Today’s action by the CFPB is proof that they can act in a timely manner. The CFPB’s achievement comes as no small feat. In Davis Polk’s January Dodd-Frank progress report, they calculated that regulators have missed nearly 60% of the congressionally set rulemaking deadlines in Dodd-Frank. This rule comes on the heels of a long and inclusive conversation with key parties. While it does not do the impossible, simultaneously satisfy everyone’s requests, it does appear to make a series of reasonable compromises designed to make sure that sustainable mortgages are widely available to qualified borrowers. CFPB should be commended for the process it ran, taking into account a wide variety of opinions and showing flexibility and creativity in trying to achieve the best result for consumers and lenders.
Though it is still too early to tell if the QM rule will work as intended, the Bureau should remain open and willing to listen to concerns and re-examine aspects of the rule as the market evolves. For example, the QM rule continues the long standing practice of using debt-to-income as the predominant metric for a consumer’s ability to pay, without considering the impact of the house’s location on transportation expenses, which consume 1 out of every 7 dollars for middle class Americans and are linked to the location of one’s home. The CFPB should continue monitoring the market to see what the ramifications of the QM rule are and adjust the rule accordingly.