House Rejects CFPB Testimony on Qualified Mortgage Rule

Members of arnHouse Financial Services subcommittee issued a press release Tuesday afternoonrnwhich essentially dismissed testimony heard earlier in the day from twornofficials of the Consumer Financial Protection Bureau (CFPB) regarding thernimpact efficacy of the new Qualified Mortgage Rule.</p

Peter Carroll, CFPB’s Assistant Director for Mortgage Markets, and Kelly Thompson Cochran, its Assistant Director for Regulations presented information to the Financial Institutions and Consumer Credit Subcommittee about the process the Bureau followed in developing the new Ability-to-Repay requirements of the Qualified Mortgage Rule required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rule, the two said, was only finalized after a process in which CFPB considered nearly 2,000 comments from stakeholders and a second comment period made with a special effort to understand potential impacts on small creditors.
 
Because access to credit remains so constrained, CFPB designed the rule “not just to ensure more responsible lending by curtailing certain problematic practices, but also to encourage creditors to provide responsible loans to consumers in all segments of the covered market.”  The two said the rule “strikes a careful balance between providing bright lines to give certainty and clarity to creditors while also allowing flexibility for the mortgage market to evolve and innovate in ways that encourage the provision of responsible credit.”</p

While the final rule describes certainrnminimum requirements for creditors making good faith determinations ofrnconsumers’ ability to repay their mortgages, it does not dictate that theyrnfollow particular underwriting models. rn”The Bureau believes that-subject to certain floorsrncreated by the Act-it is entirely appropriate for creditorsrnto employ a variety of standardsrnto evaluate theirrncustomers’ repaymentrnability.”</p

Atrna minimum, the rule requiresrncreditors to assess the borrower’srnincome, savings, otherrnassets, and debts usingrnreasonably reliable third-party records for verification.  It provides that monthly paymentsrnmust generally be calculatedrnby assuming substantially equal paymentsrnover the loan’s life and that the higher of thernfullyrnindexed rate or anrnintroductory raternbe used to calculate adjustable rate mortgage payments.  </p

“By rooting outrnreckless and unsustainable lending without dictating specific underwriting models, we believe the rule protects consumersrnand strengthens thernhousing market whilernpreserving flexibility for creditors,” Cochran and Carroll said.</p

The final rulernalso implements provisions creating so-calledrn“qualified mortgages.”rnThese mortgages are entitled to a presumptionrnthat the lender satisfied the ability-to-repay requirements because of additionalrnsafeguardsrnsuch as prohibiting loans with negativernamortization, interest-only payments,rnballoonrnpayments,rn”no doc” loans or terms exceedingrn30 years andrnsets levels for upfront costs in points and fees. The rule alsornestablishesrngeneral underwriting criteriarnforrnqualified mortgages, requiring use of the highest monthly paymentrnthat will apply in the first five yearsrnof the loan and provides that the debt-to-incomern(DTI) ratio cannot exceed 43 percent. rnThe rule also creates a safe harbor for lenders when loans meet therndefinition of qualified mortgage and are not “higher priced.”  “The line the Bureau is drawing isrnonernthat has long beenrnrecognized asrna rule of thumb to separate prime loans fromrnsubprime loans,” they said. </p

Inrndefining qualifiedrnmortgages, thernBureau did not intend to stigmatize loans that fall outside thosernboundaries or to signalrnthat responsible lending canrnonly take place within the qualified mortgage space. rnTo the contrary, it expects to see marketsrndeveloprnforrnnon-qualified mortgages and the final rule provides for a second, temporary category ofrnqualified mortgages that have more flexible underwriting requirementsrnso long as they satisfy the general requirementsrnfor a qualifiedrnmortgage and also are eligible for sale to the GSEs or certainrnfederal agencies.rn Thisrntemporary provision will phase out over timernand the Bureau will continue to observe the health of the mortgage market going forwardrnto ensure the availability of responsible creditrnoutside the qualified mortgage space.</p

The two said theirrnagency recognizesrnthat few community banks and creditrnunions engaged in therntype of risky lending thatrnled to the mortgage crisis and that these institutions may be more likely to retreat fromrnthe mortgage market if the regulations are too burdensome.  For this reason, the Bureau tailored the finalrnrule to encourage small creditorsrnto continue providing certain credit products,rnwhile carefully balancingrnconsumer protections. Exceptions were made for example tornthe prohibition on balloon payments for creditors operating in rural areas and byrnproposed amendments to the rule to accommodaternmortgage lendingrnby smaller institutionrneven where loans exceedrnthe 43 percent debt-to-income ratio. rnThe latter provision would coverrninstitutions with less thanrn$2 billion in assets that make fewerrnthan 500 first lien mortgagesrnper year.rn  Approximately 9,200 small institutions, such as community banks and credit unions,rnare likely to be affectedrnbyrnthe proposed definition which the Bureaurnexpects to finalize shortly.</p

CFPB has also made a commitment tornprovide implementation support; publishing a plain-English version of the Rulernon the agency website, a compliance guide designed for smaller institutions andrnis publishing clarifications to the rule as it responds to questions andrnconcerns from stakeholders.  The Bureaurnis also coordinating with other agencies to develop examinations procedures andrneducational tools.  </p

Amongrnthe considerations the Bureau made in formulating the new rules was an attemptrnto balance the desire for short-termrncertainty with the need for long-term flexibilityrnto benefit both consumers and lenders.   “We sought to structure thernrule in a way thatrnallows room for a range of reasonablernunderwriting models used by differentrntypes ofrncreditorsrnin today’s market.rn We were concerned that asrnthe mortgage marketrnstrengthens, the rule should functionrnto provide appropriaternsafeguards without becoming a straightjacket. rnWe balanced these considerations in many places, both in leaving flexibility for reasonable underwriting practicesrnunderrnthe ability-to-repayrnstandard and in crafting differentrntypes ofrnqualified mortgages that use different sets of safeguards to ensure that affordability is being appropriately considered,” the two officials concluded.</p

Following the hearing the subcommitteernissued the following press release.</p

Members of thernFinancial Institutions and Consumer Credit Subcommittee expressed concerns at arnhearing today that the Qualified Mortgage rule mandated by the Dodd-Frank Actrnwill reduce access to credit that qualified borrowers need to buy homes.</p

Banks and creditrnunions have already pulled back on extending mortgage credit and have tightenedrnunderwriting standards in response to the financial crisis. The QualifiedrnMortgage (QM) rule may well exacerbate this reduction in access to credit.</p

“My main concern</strongwith the QM rule is that the people who do not fit the one-size-fits allrncriteria for QM loans will not be able to access mortgage credit," saidrnSubcommittee Chairman Shelley Moore Capito (R-WV).  "Despite the CFPB'srnclaims that lenders will issue non-QM mortgages, my conversations with lendersrnlead me to believe that few, if any, will be willing to issue these types ofrnmortgages," Capito added.</p