Weekend Economists Ring in the New! New Year 2015

[Demeter]

21. Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule

http://www.creditslips.org/creditslips/2013/01/usury-laws-are-dead-long-live-the-new-usury-law-the-cfpbs-ability-to-repay-mortgage-rule.html#more

The CFPB has come out with its long awaited qualified mortgage (QM) rulemaking under Title XIV of the Dodd-Frank Act. The QM rulemaking is by far the most important CFPB action to date and will play a crucial role in determining the shape of the US housing finance market going forward. The QM rulemaking also represents a return in a new guise of the traditional form of consumer credit regulation—usury—and a move away from the 20th century’s very mixed experiment with disclosure.

QM Rulemaking Overview

The Dodd-Frank Act requires that mortgages be underwritten based on the borrower's ability to repay. Failure to do so is an absolute defense against foreclosure. There is an execption allowed, however, for Qualified Mortgages. The CFPB rulemaking defined the term Qualified Morgage. Oversimplifying (but only slightly), a QM is defined as a mortgage that meets the following six criteria

regular payments that are substantially equal (ARMs and step-rate mortgages excepted) and always positively amortizing
term ≤30 years
limited fees/points (caps vary with mortgage size)
underwritten using the maximum interest rate in the first five years to ensure repayment
income verified
backend DTI ≤43% (including simultaneous loans)

Requirements 4-6 are considered satisfied if the loan is eligible for GSE purchase/guarantee or insurance by FHA/VA/USDA/RHS. GSE purchase/guarantee will cease to meet requirements 4-6 as of January 10, 2021, unless there is a receivership for imposed. FHA/VA/USDA/RHS insurance/guarantee will cease to meet requirements 4-6 when those agencies exercise their power to define QM for the mortgages they insure/guarantee. (Note that they may define QM differently than the CFPB.)

Significantly, the CFPB rulemaking distinguishes between regular QMs and high-cost QMs (150 bps over prime for first liens, 350 bps over prime for junior liens). Thus, the mortgage world is now like Gaul, divided into three parts: non-QM, high-cost QM, and regular QM. Non-QMs lack a safe harbor for ability to repay. High-cost QMs have a rebuttable safe harbor for ability to repay. And regular QM have an irrebuttable safe harbor for ability to repay. The result of all of this is to increase the risk of making non-QMs or high-cost QMs relative to the situation that exists today. That means there is no change in the law for regular QMs, as failure to ensure ability to repay has not previously been a defense to foreclosure.

Much of the commentary to date has been about the scope of the safe harbor, which is wider than consumer groups had wanted/banks had feared. I think it all kind of misses the point, as the QM rulemaking represents a significant expansion of lender liability and is a major step forward in creating a fair and stable housing finance market.

QM as a Usury Law

What I find interesting about the QM rulemaking is that it represents a return to the traditional mode of consumer credit regulation—usury, and eschews the 20th century’s disclosure-based regimes, including its behavioral economic tweaks. Indeed, the influence of behavioral economics is virtually undetectable in the rulemaking with one very small exception....MORE

FROM LAST JANUARY, AND STILL INCOMPREHENSIBLE