TheMReport

TH E M R EP O RT | 53 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST GOVERNMENT The bipartisan legislation, originally introduced last year by Warner and Sen. Mike Rounds (R-South Dakota), aims to reopen lending to individuals excluded from the narrow QM defini- tion. Some time ago, Warner and Rounds reintroduced the Self- Employed Mortgage Access Act, with another sponsor, Sen. Cory Booker (D-New Jersey). The proposed bill addresses an important issue; however, this approach layers new legislation on top of existing legislation as opposed to the Consumer Financial Protection Bureau (CFPB) simply amending the QM regulation. The QM regulation was a flawed concept to begin with. Whether intended or not, the reality is that the regulation allows the government to legislate what credit risk mortgage lenders can and cannot take, and, as a consequence, which borrowers are ready and eligible to take out a mortgage. The plight of non-traditional borrowers demonstrates the challenges of this rigid, prescriptive approach to mortgage underwriting. The CFPB recent Ability-to- Repay and QM Rule Assessment Report found that self-employed borrowers, who do not qualify for a government-sponsored enterprise (GSE)-backed mortgage, face greater challenges obtaining a mortgage than traditional workers. The CFPB said, "Specifically for self-employed borrowers, lenders may find it difficult to comply with Appendix Q relating to the documentation and calculation of income and debt." These standards limit the industry's ability to offer mort - gage credit to a growing popula- tion of non-traditional workers. The Bureau of Labor Statistics estimates that the number of self-employed workers alone is expected to increase to 10.3 mil- lion by 2026, up from 9.6 million in 2016. The total population of non-traditional workers, including gig-economy workers, is estimated to represent as many as 42 million American workers and roughly 30% of the U.S. labor force. To deal with this, the legislation proposes new documentation options that would satisfy underwriting requirements but would be easier for non-traditional workers to supply, including Internal Revenue Service (IRS) forms for sole proprietorships, partnerships, and S corporations. While this is certainly com - mon-sense legislation, it shows how difficult it has been for the CFPB to accept that the QM rule is not working and actually harm- ing consumers—in terms of high fees and rates, fewer mortgage op- tions, and less access to credit for responsible households. The need to responsibly expand access to credit is so obvious and important that two senators from different political parties introduced this bill during the most dysfunc - tional legislative environment in recent memory. The bill addresses much-needed broader regula- tory or legislative action at the CFPB to relax or eliminate QM requirements, and reintroduce judgment and discretion back into the underwriting process. Lenders and investors should determine the risks that they are willing to take, and the CFPB should ensure that lenders have made a reason - able, good-faith determination of a consumer's ability to repay. In the absence of regulatory ac- tion by the CFPB, this bill would allow lenders to widen qualify- ing criteria using existing forms of documentation. Just as the Federal Housing Finance Agency and the Economic Growth, Regulatory Relief and Consumer Protection Act are reimagining credit score models, this legisla - tion would allow the industry to better serve qualified borrowers that don't fit into the tight QM box, and allow tens of millions of creditworthy households financ- ing to be homeowners and expe- rience the American Dream. A recent study from the Urban Institute confirmed that non-tradi- tional workers are being squeezed out of the housing market. From 2001 to 2016, mortgage use and the homeownership rate declined more for self-employed households than for salaried households. Rounds said in a statement, "We shouldn't unfairly punish entrepreneurs, farmers, and other small business owners because they don't earn income on a W-2. Our legislation gives financial institutions flexibility in the forms of documentation that can be used when applying for mort - gage credit, making it easier for [families] to realize their dreams of homeownership." Five years after implementation, it's clear the QM rule isn't provid - ing guardrails for homeowner- ship. For many, it has created a complete roadblock. Over time this is going to erode the health of the overall housing market and econ - omy, by taking aim at common- sense underwriting instead of the fraud and speculation that caused the housing crisis in the first place. Tim Rood is the Chairman of The Collingwood Group, which he co-founded in 2009. Rood was co- founder and managing director of the firm's predecessor company, Capital Financial Solutions. The Collingwood Group's primary focus is in the financial services sector, and it offers advisory and consultative services combined with access to decision makers, financial sponsors, corporate boards, and senior industry executives. Rood has over two decades of mortgage industry and entrepreneurial experience. He advises organizations to optimize the business opportunities and to mitigate and manage the risks in and around Washington, DC. Rood is a sought after and regular contributor to various national media outlets including CNBC, Bloomberg Television, FOX Business News, Washington Post, New York Times, Wall Street Journal, and the American Banker. Editor's note: The Collingwood Group is a client of the Five Star Institute, the parent company of MReport. "We shouldn't unfairly punish entrepreneurs, farmers, and other small business owners because they don't earn income on a W-2. Our legislation gives financial institutions flexibility in the forms of documentation that can be used when applying for mortgage credit, making it easier for [families] to realize their dreams of homeownership." —Sen. Mike Rounds (R-South Dakota)

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