How QM Harms Homeowners -House Committee Hearing

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The House Financial Services Committee heard
testimony from five persons, almost all representing mortgage lenders, at a
hearing today entitled How Prospective
and Current Homeowners Will Be Harmed by the CFPB’s Qualified Mortgage Rule
.  Given the title of the hearing it is not
surprising that four of the five spoke out against the regulations.

Jack Hartings, President and CEO of The Peoples Bank
Company and Vice Chairman of the Independent Community Bankers of America told
the committee that reform of QM is a key plank of ICBA’s Regulatory Relief
Agenda. 

Mortgage lending by community banks represents
approximately 20 percent of the national mortgage market and is often the only
source of mortgage lending in the small communities they serve, he said.  The 20 percent actually understates the significance
of their mortgage lending as they make a larger share of their home purchase loans
to low-or moderate-income borrowers or borrowers in low- or moderate-income
neighborhoods and make a larger share of home purchase loans than loans for
other purposes such as refinancing or home improvement.

Hartings said there is question that the QM rule
will adversely affect his own bank’s mortgage lending even though it qualifies
as a small creditor
making fewer than 500 mortgage loans annually and having less
than $2 billion in assets.  “Even though
my asset size is well below the $2 billion, in 2012 I made 493 mortgage loans.  We believe this threshold is far too low and
is not consistent with the asset threshold.”   He later pointed out that such low thresholds
could prevent his bank from expanding its lending as the economy recovers.

Non-QM loans will be subject to significant legal risk
under the Ability to Repay (ATR) rule and the liability for violations is draconian,
he said.   Non-compliance with ATR could also serve as a defense
to foreclosure if the loan is deemed not to be a QM loan and small community
banks do not have the legal resources to manage this degree of risk. Thus these
banks, he said, will not continue to make some of the loans they have made in
the past such as low dollar amount loans, balloon payment mortgages, and higher
priced mortgage loans.

The full impact of ATR goes beyond QM compliance as
banks must still analyze each loan for ATR compliance, a costly and time consumer
procedure.  It is necessary to expect
that regulators will want to see documentation of the eight ATR underwriting
factors and if they are not sufficient the asset could be downgraded and
subject to high capital requirements. 

Without “small creditor” status, he said, his loans will
be subject to a 43 percent debt-to-income limitation, a lower price trigger for
“high cost” QM status which carries higher liability risk, and restrictions on balloon
loans.  ICBA is urging Congress to raise the
loan volume threshold. The problem could be easily addressed by disregarding loans
sold into the secondary market in applying the threshold,” Hartings said.

Daniel Weickenand CEO, Orion Federal Credit Union testifying
on behalf of The National
Association of Federal Credit Unions said that credit unions have always been some
of the most highly regulated of all financial institutions, facing restrictions
on who they can serve and their ability to raise capital and the Federal Credit
Union Act has strict consumer protection rules. 
Despite the fact that they were not the cause of the financial crisis, they
are still firmly within the regulatory reach of rules promulgated by CFPB.

The impact of this growing compliance burden is evident
as the number of credit unions continues to decline, he said, dropping by more
than 900 institutions since 2009.  One
cause of this decline is the increasing cost and complexity of complying with the
ever-increasing onslaught of regulations. 
“We remain concerned about the QM standard and that this rule will potentially
reduce access to credit and hamper the ability of credit unions to continue to meet
their member’s needs,” he said.

A number of mortgage products sought by credit union
members and offered by credit unions are non-QM loans and may disappear from the
market.  He said a forty-year mortgage loan,
a product sought by credit union members in high costs areas, exceeds the maximum
loan term for QMs, and because of a problematic definition, a number of credit unions
make mortgage loans with points and fees greater than 3% because they can leverage
relationships with affiliates to get the best deal for their members.

Because a credit union will not receive any presumption
of compliance with the ability-to-repay requirements for a non-QM loan, the least
risk to credit unions would be to originate only QM loans.  His own credit union, Weickenand said, has
decided to go that route and a recent NAFCU survey revealed that a majority of credit
unions will cease or greatly reduce their offerings of non-QMs.

Weickenand said that NAFCU strongly supports bipartisan
pieces of legislation in the House (H.R. 1077/ H.R. 3211) to alter the definition
of “points and fees”
prescribed by the QM standard and an exemption from the QM
cap on points and fees: (1) affiliated title charges, (2) double counting of loan
officer compensation, (3) escrow charges for taxes and insurance, (4) lender-paid
compensation to a correspondent bank, credit union or mortgage brokerage firm, and
(5) loan level price adjustments which is an upfront fee that the Enterprises charge
to offset loan-specific risk factors such as a borrower’s credit score and the loan-to-value
ratio.

Like Hartings, he supports an increase in the exemption’s
asset size and 500 mortgage thresholds. 
He said many credit unions are approaching one or both thresholds which
will render the small lender exemption moot for them. 

The Association also believes that all mortgages held
in portfolio should be exempt from the QM rule not just small credit unions and
would like to be able to continue to offer mortgages of 40 years or less
duration as QMs.  NAFCU also supports
Congress directing the CFPB to revise aspects of the ‘ability-to-repay’ rule that
dictates a consumer have a total debt-to-income (DTI) ratio of 43 percent or
less which will prevent otherwise healthy borrowers from obtaining mortgage loans
and will have a particularly serious  impact
in rural and underserved  areas where consumers
 have  a limited number of options.

Bill Emerson, CEO of Quicken
Loans and Vice Chairman of the Mortgage Bankers Association
spoke on behalf of the trade group, starting his testimony by saying, “I
can tell you categorically that Quicken Loans, like the overwhelming majority
of lenders, will not lend outside the boundaries of QM. In fact, even if we
wanted to, we wouldn’t be able to make non-QM loans because there is no discernable
secondary market
for them. The only place these loans can be kept is on a
bank’s balance sheet.”

“Beyond that, the liability for originating
non-QM is simply too great. Claimants can sue for actual and statutory damages,
as well as a refund of their finance charges and attorney’s fees, and there is
no statute of limitations in foreclosure claims. By MBA’s calculations,
protracted litigation for an average loan can exceed the cost of the loan
itself.

Given this uncertainty, at least for the foreseeable
future he said non-QM lending is likely to be limited to three categories; loans
where there are unintended mistakes, higher balance and non-traditional loans
to wealthier borrowers, and loans made by a few lenders to riskier borrowers,
but at significantly higher rates. He said the rate sheets he had seen suggest
borrowers could pay an interest rate of 9-10 percent for non-QM loans.

Emerson said it remains very important to make
adjustments to the QM rule. “The CFPB (Consumer Financial Protection Bureau) deserves
enormous credit for working with all stakeholders, lenders and consumer groups
alike, and fashioning a rule we think is a substantial improvement over
Dodd-Frank. We are also grateful the Bureau is open to making additional
revisions in the near future.”

There is a major problem with the 3 percent cap on
points and fees for QM eligibility. 
Because so many origination costs are fixed, a lot of smaller loans, particularly
in the $100,000 to $150,000 range, will trip the 3 percent cap and fall outside
the QM definition, pricing consumers, especially first-time homebuyers and
families living in rural and underserved areas, out of the market.

“Additionally, the final rule picks winners and
losers
between affiliated and unaffiliated settlement service providers, even
though their fees are subject to identical regulation. At Quicken Loans, we
have chosen to affiliate with title and other service providers to ensure our
customers have the best loan experience and that there are no surprises at the
closing table.”  His company, he said,
has won awards because its affiliated arrangements have led to a smooth closing
process.

Emerson said the MBA urges the House to promptly
pass H.R. 3211, the Mortgage Choice Act.

Michael D. Calhoun, President of the Center for Responsible
Lending was the only one of the five presenting testimony in favor of the CFPB’s
rules
.  Calhoun said those rules strike
the right balance of providing borrower protections while also ensuring access
to credit. 

The QM rule covers 95 percent of current originations
according to Moody Analytics he said that this broad coverage is because CFPB established
four different pathways for a mortgage to gain QM status. The first uses a 43
percent back-end debt-to-income ratio. A second is based on eligibility for purchase
by Fannie Mae and Freddie Mac and a third is specifically crafted for small creditors
holding loans in portfolio. Lastly, there is a pathway for balloon loans as well.
This multi-faceted approach will maintain access to affordable credit for borrowers.

“This broad definition is key for borrowers, including
borrowers of color who represent 70% of the net household growth through 2023.  The broad definition means that borrowers will
not be boxed out of getting a home loan and will also benefit from the protections
that come with a Qualified Mortgage.  In
addition, several lenders have said they will originate mortgages that do not
meet QM requirements, holding them in their own portfolios.  Calhoun said he expects this will only grow
over time. 

As a whole, these rules continue the CFPB’s approach
of expanding access to credit while ensuring that loans are sustainable for the
borrower, the lender and the overall economy, Calhoun said.

Also testifying was Frank Spencer, President and CEP
of Habitat for Humanity’s Charlotte, North Carolina Chapter.  Spencer was primarily asking for relief from
QM and ATR
requirements for his organization which currently services approximately
780 mortgages.  Spencer said that despite
the fact that the mortgages are non-interest bearing and that most of the
chapters that originate them fall far below the thresholds of QM, some of the
charity’s operations trigger the requirements and present significant liability
for its officers and community partners. 

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