MBA, Others Respond to Proposed Revisions to Regulation Z and Ability to Repay Provisions

by devteam July 11th, 2012 | Share

The Mortgage Bankers Association (MBA) joined by 15 other tradernassociations has sent a letter to the Consumer Financial Protection Bureau supportingrnthe Bureau’s decision to reopen the comment period on proposed changes to RegulationrnZ and the Ability to Repay/Qualified Mortgage (QM) provisions of the Dodd-FrankrnWall Street Reform and Consumer Protection Act.</p

MBA said their 75 page letter was in response to specificrnquestions raised by CFPB but it believes that CFPB has sufficient latitude torncreate a rule that allows risky loans without stemming sound credit or unduly regulatingrnunderwriting and is working on an approach to ability to repay that will notrnharm consumers or undermine the economic recovery. </p

The Bureau had asked for specific comment on (1) data itrnreceived from the Historical Loan Performance (HLP) dataset of the FederalrnHousing Finance Agency (FHFA) regarding loan performance by year andrndebt-to-income (DTI) range as well as other data relevant to loan performance;rnand (2) estimates of litigation costs and legal liability risks associated withrnclaims alleging a violation of ability-to-repay requirements for a loan that isrna “not qualified mortgage” versus a “qualified mortgage.” </p

Comments on FHFA Data</p

MBA had earlier suggested that the QM could requirerncompliance with widely accepted underwriting standards but a mechanism shouldrnalso be established to approve standards available at other points in time fromrnother than the Government Sponsored Enterprises (GSEs.  The other approach offered would involvernusing objective, numerical standards such as a particular DTI and a “waterfall”rnof alternative criteria.  MBA said itrnsees no reason emerging from FHFA data to choose any specific DTI numberrnproposed from it as a default.  “Loanrnperformance and ability to repay does not markedly change at any of these pointsrnand a DTI number included in a waterfall should be greater.”</p

MBA also does not believe that relying exclusively on DTIrnratio is wise.  “There are multiplernfactors that along with DTI have a significant impact on predicting mortgagernperformance and ability to repay.”</p

The letter states that the Bureau should not establish QMrnstandards for the U.S. Department of Housing and Urban Development (HUD),rnFederal Housing Administration (FHA), Department of Veterans Affairs (VA),rnDepartment of Agriculture and Rural Housing Service (RHS) loans.  “Exercising their authority under Dodd-Frank,rnthe agencies should put out simple rules that say that their loans meeting thernproduct standards in Dodd-Frank, e.g., no negative amortization, etc., andrnmeeting the respective programs’ underwriting standards shall be QMs.”</p

The letter addresses other questions raised by CFPB overrnspecific performance data such as residual income, liquid reserves, and thernrole of stable income in a timely payment history and concluded and that an emphasisrnon documentation and verification of income, assets, and employment is likelyrnto be most beneficial for performance going forward.  “Fully documented purchase loans haverntraditionally shown much stronger performance than low documentation loans.”</p

Liability and Litigation Risks</p

MBA does not believe there will be many law suits allegingrnability to repay regarding non QMs simply because there will be few non-QMsrnoriginated is the QM is structured as broadly as it should be.  However, establishing the QM as a rebuttablernpresumption will invite litigation, increase costs, and cut off credit to toornmany qualified borrowers because attorney fees are awarded under the Truth inrnLending Act.</p

The availability of the new claim at foreclosure, if arnrebuttable presumption, will ensure that an action regarding ability to repayrnwill become nearly perfunctory for all foreclosures.  This will cause the costs of foreclosure tornrise dramatically and require lenders and investors to price that risk into allrnloans.  MBA included an extensiverndiscussion of litigation costs in their letter and the accompanying backgroundrnmaterials.</p

Considering the overarching significance of this rule to thernavailability and affordability of credit for consumers, there has been intenserndiscussion since it was first proposed nearly fifteen months ago.  Having considered this and the earlierrncomment request, MBA urges that the finalization of this rule be guided by thernfollowing principles:</p<ol

  • Define QM broadly so as to reach as manyrnborrowers as possible with safe, affordable, and sustainable financing.</li
  • The rule must include clear, specific, andrnobjective standards and government programs will likely require separate rulesrnand standards.</li
  • Most important, the QM must be a safe harbor,rnand</li
  • The requirements need to be crafted to avoidrnunintended consequences.</li</ol

    Among those signing the MBA letter were the American BankersrnAssociation, Community Mortgage Lenders of America, American EscrowrnAssociation, Housing Policy Council, and the U.S. Chamber of Commerce.

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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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