An Unrealistic Deadline for QM Rule Implementation

Last week’s big news story centered around the software debacle surrounding implementation of the Affordable Care Act (ACA, a.k.a. Obamacare). Health and Human Services Director Kathleen Sebelius was grilled by some legislative committees about what went wrong and about when exactly she and the president knew that there was a problem. It’s typical of Congress to hold feet to the fire when something does not go smoothly. Never mind that, perhaps, the problem was with Congress in setting unrealistic compliance dates in the law. While I am not a fan of the ACA, I do not enjoy seeing anything fail to meet the expectations of customers — in this case the American people who plan to utilize the benefits of the ACA.

Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), needs to be paying close attention to this clumsy rollout of the ACA. He should be particularly concerned about the negative media coverage being cast upon Director Sebelius, who I expect in the near future will be asked to step down from her cabinet-level post. Cordray may well face a similar situation.

A few weeks ago, several Indiana bankers and I were in Cordray’s office in Washington, DC, asking him to postpone the Jan. 10, 2014, implementation date for the Qualified Mortgage (QM) rules that will affect most mortgages made in the future. Cordray voiced certainty that all data processors for all banks will be compliant by the implementation date. None of the bankers that I have talked with are nearly as certain. As recently as mid-September, the CFPB was amending the rule, for the third time, that it had released in January 2013. Software companies need to write code, test the software and train their own staffs about supporting the product. Once it is released to the bank, it will need to be installed and tested, and all staff must be trained on how it works and, specifically, what each staff person needs to do in order for the bank to be in compliance. That sounds like a difficult task to successfully complete in about 100 days.

What is at stake? Well, beyond the reputation of the CFPB and Director Cordray personally is the potential closing down of the mortgage markets, or at least the closing down of some segments of the mortgage markets, thus endangering the already fragile economic recovery of the United States. There is simply no way of knowing today if everyone will be ready. What is lost if the deadline is postponed by a few months? Is it not better to err on the side of safety than to plow ahead to meet some random date? Cordray told us that he would not postpone the date, but instead would instruct examiners to not be very strict about compliance in the few months after its implementation. What I heard him saying was that it was more important that he meet a date imposed by Congress in legislation, and in the process put the mortgage markets and our economy at risk! The date he is so intent on hitting has been missed 70 percent of the time in the implementation of Dodd-Frank rules so far. What does one more missed date matter?

Why would Cordray believe that bankers, who have had their reputations unfairly sullied, would run the risk of not complying and being fined, based only on his word that the examiners would go easy the first time around? He does not even have examination authority over banks of less than $10 billion in assets, so he cannot tell the Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. or Federal Reserve examiners how to deal with their banks. No banker wants to participate in damaging the economy, but they fear regulators more. No banker wants to forego making good mortgage loans that create an income stream for the bank, but neither do they want to run afoul of their primary regulators.

It is past time for Director Cordray to end this game of chicken and postpone the implementation of the Qualified Mortgage rules for six months. He need look no further than the failed implementation of the ACA law to learn what is at risk.

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