The seasoned qualified mortgage rule needs to be broader to spur innovation

Norbert Michel

The Consumer Financial Protection Bureau has released a new notice of proposed rulemaking that will create a seasoned qualified mortgage, a new category under the Dodd-Frank-created qualified mortgage (QM). The goal, it states, is to “encourage safe and responsible innovation in the mortgage origination market.”

That’s a laudable aim. And the Bureau deserves credit for trying to achieve it by acknowledging that a loan that seasons without delinquencies – the borrower makes regularly scheduled payments on time for many months – demonstrates that the lender did as good a job as possible when underwriting the loan.

In principle, it’s a great idea.

It stands to reason that, at some point during the term of a loan, any borrower default would be the result of an unforeseeable change in the borrower’s circumstances. When, for example, a borrower defaults five years after making consecutive payments as scheduled, it makes little sense to penalize the lender for a faulty initial assessment of the borrower’s ability to repay.

So the bureau deserves credit for trying to entrench this principle.

As always, though, the devil is in the details. And in context of the bureau’s new proposal to redefine the general QM, it’s doubtful that the new seasoned QM will result in very much innovation.

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Norbert Michel

Vice President and Director, Center for Monetary and Financial Alternatives

Cato Institute