QRM and QM: Shades of Grey

As partisan positions continue to render our federal government into inaction and polarization, a ray of sunshine comes peeking through. It is so rare that both sides of an issue actually agree on anything that, when they do, it is big news. That is, it should be big news, but in our convoluted world, last week’s “big news” has hardly been mentioned outside of financial circles.

This big news was the release by the Federal Reserve Board, on behalf of all of the federal banking regulators, that aligned the definition of a qualified residential mortgage (QRM) with the earlier defined qualified mortgage (QM). I have to admit that merely writing that last sentence makes me question how big this news really is. Admittedly the general public may fall asleep reading this article, but bankers, bank regulators and community activists may find it better reading than Fifty Shades of Grey.

To review, in March 2011 the banking regulators issued a proposed draft to define the rules surrounding the QRM. That proposal narrowly defined which loans would be exempt from the credit risk retention requirements. In other words, most loans would end up requiring a 5 percent retention of risk by the lender. Over time, that would mean that one out of 20 mortgages would not be made, because the bank might not be able to meet the capital requirements with a 5 percent retention of previously made loans that had been sold into the secondary market, thus allowing the lender to make another loan with the proceeds of the sale. Previously the QM had been defined by the Consumer Financial Protection Bureau as a mortgage loan that meets its ability-to-pay rules. Among the defining limitations is a 43 percent debt-to-income limitation. The original QRM had set that limit at 36 percent. That difference would have prevented many mortgage applicants from being approved.

The new QRM rule lines up with the previously approved QM rule substantially enough that the mortgage market should be able to retain existing lenders, both large and small. Lenders, particularly bank lenders, have spent many sleepless nights pondering how they would replace the loss of the mortgage business they anticipated, if they would be able to continue to make mortgages at all. Consumer advocates, who rarely side with bankers on any topic, stood shoulder to shoulder with our industry on this issue. They fully understood that the reduction of mortgage money available, caused by the restrictive rules definition in the March 2011 proposal, would effectively cut low-income persons out of homeownership.

And so we have it, that rare issue where usual adversaries — bankers and consumer advocates — joined together to express concern to bank regulators. The regulators agreed and came out with this new, more sensible rule that aligns these two new concepts of QM and QRM that resulted from the Dodd-Frank Act. It is truly inspiring to witness the system working the way it is supposed to. Now perhaps this new era of cooperation will spill over into Congress, so that it can solve our fiscal issues. It never hurts to dream!

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