Part of a recent executive order from President Trump that calls for potential changes to the qualified mortgage definition and its safe harbor could increase competition for certain types of loans, depending on how and if it progresses.
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Changes that the broader mortgage credit order calls for include having the Consumer Financial Protection Bureau look into “tailoring” the ability-to-repay rule and QM for “smaller banks.” It goes on to parenthetically suggest this could include a broader safe harbor for portfolio loans.
The order additionally calls for exempting or modifying “small-mortgage loans” from qualified mortgage points-and-fees limits, and removing “unnecessary and burdensome elements” from ATR and QM underwriting requirements for banks.
Some experts’ analysis of what this could mean follow:
New breaks for small mortgages
Expanding the QM points-and-fees limit for small-mortgage loans — a topic also addressed in drafts of the21st Century ROAD to Housing Act — could make it easier to extend credit to more borrowers buying modest homes.
It could help less sizable banks manage the higher costs of making small loans by allowing them to charge higher rates above the standard cap without incurring additional non-QM liability.
However, since lifting the QM points-and-fees-limit would allow for a higher interest rate, its impact on the cost of the loan to the consumer could be limited.
“We might pick up a couple more loans on the margin, but I don’t think it entirely solves the problem when it comes to the cost to originate,” said Ron Haynie, senior vice president of mortgage finance policy at the Independent Community Bankers of America.
Other rules have provided leniency for less-sizable loans because they may face more difficulty meeting the points-and-fees caps, but exempting them from the limits entirely could take this a step further.
It’s not clear how small a mortgage would need to be to qualify. In some other contexts they’ve been up to $100,000 or $150,000.
Other QM exceptions already in place
The broader extension of the safe harbor in line with references to tailoring QM and ATR requirements for smaller banks has precedents that could inform the path it takes.
These include:
- Community development financial institutions’ exemption from the CFPB’s ability-to-repay rule;
- Legislation passed in 2018, prior to a change in the QM definition, which called for a portfolio-loan safe harbor to be extended to institutions with up to $10 billion in assets in certain circumstances; and
- A more expansive portfolio loan exemption for less sizable “small creditors” also predates the 2018 legislation. The definition of smaller creditors has been set at $2.785 billion in assets and no more than 2,000 first-lien mortgages for 2026.
Portfolio loan possibilities
With the executive order suggesting a broader safe harbor for portfolio loans, one result could be that more sizable “smaller” banks making these mortgages may become eligible for breaks from non-QM liability than have been in the past.
The first part of the EO refers to the “smaller bank” universe referred to as going up to $100 billion while also noting that “community banks” with less than $30 billion in assets are “especially affected” by mortgage-related regulatory burdens.
Giving a larger range of banks a way to remove non-QM liability could cut some risk-based costs for making for nontraditional loans even if with the removal of points-and-fee cap opening up the possibility of raising the mortgage’s rate.
Self-employed borrower implications
QM’s definition is generally aimed at reducing liability for loans with standard pricing, underwriting and features. So loans outside its bounds are generally taken out by gig workers and business owners, some of which have been served by non-QM specialists.
That means companies making those loans could face some new competition if certain institutions get an QM exemption due to the executive order.
“This could give an edge to whichever banks it applies to in the self-employed space,” said Richard Horn, former senior counsel and special adviser for the CFPB. He is currently a co-managing partner at law firm Garris Horn.
While an extension of the QM safe harbor against liability provides some protection for nontraditional loans, it’s not necessarily bulletproof, he warned.
“There’s nothing to prevent a consumer from challenging the QM status of any loan,” Horn said.
Much depends on definitions
Many provisions in the executive order around a QM safe harbor are subject to interpretation, such as whether it gets extended fully or makes exceptions for any of its elements such as product features.
Key definitions “are left to regulators,” Kara Ward, an attorney at Baker Donelson, wrote in
Another important determinant of the outcome is what the boundaries of portfolio loan are, which hasn’t been consistently defined in other contexts.
Certain performing non-QM loans that become “seasoned” after being held in portfolio for at least three years do get a safe harbor after that time. So the executive order seems to suggest a broader definition than that.
If the portfolio loan definition were to be pegged to a three-year hold period, the question arises as to whether these loans keep or lose their QM safe harbor if sold after that time.
In some contexts involving the three-year hold, loans do retain their safe harbor after that time even if sold. In some cases a portfolio or seasoned loan safe harbor is only retained if it’s sold to a similarly eligible institution.
The broader view for the CFPB
Since a lot of the order’s language about changing ATR, QM and many other things is broad and potentially could go far beyond portfolio loans, there’s a possibility the seasoned loan definition and other things could be impacted too, changing the entire landscape.
“The statute gives the CFPB a ton of discretion,” Horn said.
That said, the line between what the bureau can do and where Congress should be involved has been questioned in court. Some advocates of deregulation might view that discretion in a new light if they back these attempts to loosen CFPB rules. Consumer advocates might too, Horn said.
A far-reaching change to ATR and QM could face some resistance because the rules around sizing up consumers’ ability to repay were considered a cornerstone of mortgage underwriting reform after the Great Financial Crisis.
Another potential hurdle when it comes to how or whether the proposed extension of safe harbor moves forward is how fast a downsized CFPB might move on drawing up a potential change. It could be a reason to sustain some bureau operations in order to get the EO fulfilled.
“It would be hard to undertake this massive reform effort if you’ve staged a reduction in force that affects 90% of the staff. So this could have the effect of preventing the complete shutdown of the CFPB,” said Horn. “It might not mean supervision and enforcement are operating as normal, but at least it could keep the Office of Regulations open.”