Tags: CFPB | mortgages | Dodd-Frank | House

House Subcommittee Looks at Complex Mortgage Rules

By    |   Monday, 03 June 2013 03:33 PM

On May 21, the House Financial Services Committee's Subcommittee on Financial Institutions and Consumer Credit, most of whose members have close ties to the mortgage industry, held a hearing on the ability to repay and qualified mortgage (QM) rules issued by the Consumer Financial Protection Bureau (CFPB) in response to complaints by members from both parties that the rules are too tight and will impair access to credit and to the "American Dream" of home ownership.

The witnesses were Kelly Cochran, assistant director for regulations at the CFPB, and Peter Carroll, assistant director for mortgage markets at the CFPB. The way the protocol works is that subcommittees are allocated less prominent witnesses than full committees are, and heads of agencies or departments usually don't testify before subcommittees. A friend once insisted on introducing me to Federal Reserve Chairman Paul Volcker, and he asked, and what do you do? When the answer was GOP counsel to a subcommittee, Volcker responded that he didn't bother with subcommittees.

First, it is necessary to talk about what the QM and ability to pay rules do. In response to the 2008 episode of the ongoing financial crisis, the Dodd-Frank Act mandated rules to ensure that mortgages would only be offered to people who have the ability to repay them over the life of the mortgage. The rules, originally drafted by the Federal Reserve, have been delegated to the newly created CFPB. The rules issued this year, scheduled to take effect Jan. 10, 2014, establish several categories of mortgage with varying degrees of liability for institutions that originate them.

The first category is a prime mortgage, where the ability to pay has been established according to eight criteria, including a 43 percent maximum debt-to-income ratio and an interest rate less than 1.5 percent above the available prime rate, with points and fees capped at 3 percent.

Institutions originating these mortgages will be provided a safe harbor against litigation on the ground that the borrower did not have the ability to repay.

In the second, temporary category, the interest rate would be 1.5 percent or more above the available prime rate, with points and fees capped at 3 percent, and eligible for purchase by the government-sponsored enterprises under guidelines of Fannie Mae and Freddie Mac or by another federal agency, such as Housing and Urban Development or Veterans Affairs. The originator would be presumed safe from litigation subject to a rebuttable presumption that the borrower had the ability to repay. Upon a successful suit, damages would be capped at three years of financing costs.

The third category consists of mortgages that do not qualify as QM and, therefore, offer no protection against liability for violation of the ability to pay standards.

The CFPB is considering adding a fourth category, which would be mortgages originated by so-called "relationship" lenders and held in portfolio. At the same time that the CFPB issued the QM regulation in January, it issued a "concurrent" proposal that is intended to carry some revisions to the original rule.

With each tweak to the rule, it becomes more complex, and members brought up additional issues that could be included in the concurrent proposal for the purpose of creating exceptions that would allow practices considered abusive to be allowed under prescribed circumstances.

One of these is the expansion of the definition of "rural" counties where small and community banks would be allowed to originate mortgages with balloon payments that would be held in the banks' portfolios. The justification is that along with moonshine and hayrides, these are a feature of rural America.

Another example is to permit banks to sell title insurance from affiliated title companies. In theory, it should be possible to offer the customer a lower-cost package by using a captive insurance company, but the CFPB has found this abusive and includes the cost of the title insurance in the total fees subject to the 3 percent cap.

Once again, what is happening here is that having enacted Dodd-Frank into law, legislators from both parties are pushing back against its implementation at the behest of industry groups seeking to chip away gradually at the reforms to get back to offering dodgy products and getting the fees flowing again.

The overall theme of the hearing was that the new rules are too restrictive and will cause some banks to withdraw from the market rather than risk the litigation exposure that could go with making "responsible" mortgages that do not meet the QM test.

Subcommittee members tussled with the witnesses over what share of the market would survive the new rules, with some members contending it could be about half, while the witnesses estimated it could be as high as 95 percent.

The witnesses agreed to help design a study that could determine who is right. They were also pressed to consider creating a mechanism for emergency adjustments in the rules if the housing market falters.

However, one member dissented from this view. Keith Ellison, D-Minn., suggested that the cutback in the availability of mortgage credit is a good thing, because too many mortgages were made during the boom period that turned out not to be in the interest of the borrowers who could not service them once housing prices declined or who never had the income necessary to support the mortgage in the first place. He also noted that the CFPB had fined four private mortgage insurers $50 million for paying kickbacks.

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On May 21, the House Financial Services Committee's Subcommittee on Financial Institutions and Consumer Credit held a hearing on the ability to repay and qualified mortgage (QM) rules issued by the Consumer Financial Protection Bureau (CFPB).
Monday, 03 June 2013 03:33 PM
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