HFS Subcommittee Discusses the Forthcoming QM Definition
AT TODAY’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, members discussed housing finance reform and the Consumer Financial Protection Bureau’s (CFPB) forthcoming Qualified Mortgage (QM) proposal with industry and consumer finance experts.
In her opening remarks, Chairman Shelley Moore Capito (R-W.Va.) said the intent of Section XIV of the Dodd-Frank Act is to protect consumers, but urged regulators to pay special attention to the balance between consumer protections and credit availability. She also stressed the importance of legal certainty in keeping mortgages affordable and available for creditworthy borrowers. In closing, Capito announced that she and Rep. Brad Sherman (D-Calif.) would be sending a letter to CFPB Director Richard Cordray expressing their support for a legal safe harbor provision in the final QM rulemaking.
In his opening statement, Ken Bentsen, Executive Vice President of Public Policy and Advocacy for the Securities Industry and Financial Markets Association (SIFMA), gave a broad overview of SIFMA’s position on the QM definition, specifically highlighting the definition’s impact on the cost and availability of mortgage credit. He advocated for a broad QM definition that contains clear, bright lines so that lenders know whether a loan meets QM standards at the time of origination. Bentsen said a broad QM definition will ensure credit continues to be extended by reliable, well-regulated institutions, noting that few institutions would be willing to supply non-QM loans due to liability, supervisory, reputational, and other concerns. In closing, Bentsen expressed support for the inclusion of a safe harbor provision to keep the cost of credit low and credit availability high.
In his opening statement, John Hudson, Chairman of Government Affairs, National Association of Mortgage Brokers, broadly criticized the Dodd-Frank Act and called for an 18- to 24-month extension on all proposed mortgage finance reform deadlines. He said the Dodd-Frank Act was passed in “haste”, and claimed that the mortgage market quickly corrected faulty loan practices after the 2008 crisis. He specifically criticized the three percent cap on points and fees in the QM proposal and the narrow QRM definition, adding that without a legal safe harbor in the QM definition credit availability will be restricted. In closing, Hudson said loan originators and mortgage broker entities should not be defined the same way, urging the subcommittee to adopt the definition of mortgage loan originator from the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”).
In his testimony, Rick Judson, Vice Chairman of the Board for the National Association of Home Builders, discussed the impact of the QM proposal on the housing market. Stressing the importance of mortgage credit availability to the health of the economy, he said all regulatory efforts should refrain from unnecessarily disrupting the mortgage lending process or increasing the costs of mortgage credit. He called the QM definition “extremely important,” and supported a broad QM definition to capture most creditworthy borrowers. He advocated for a safe harbor, which he believes will ensure safer underwritten loans without limiting credit availability, and advocated for an exemption to the points and fees rule for affiliates, citing surveys that demonstrated the efficiency benefits affiliated settlement service providers offer to homebuyers. In closing, Judson supported the inclusion of mortgage insurance in the proposed rulemaking and urged the CFPB to be mindful of the effects of a narrow QM definition on minority groups, who could be disproportionately excluded from QM.
In his opening statement, Tom Hodges, testifying on behalf of the Manufactured Housing Institute, gave a broad overview of the effects housing reform could have on the manufactured housing industry. He explained that because the cost of origination is a higher percentage of the total cost of small loans, smaller-sized manufactured home loans are unfairly and unnecessarily classified as “high-cost or predatory” under the Home Owner’s Equity Protection Act (HOEPA). Hodges also argued that the lack of clarity in the implementation of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) will unduly categorize individuals associated with the manufactured home buying process as loan originators, and urged the Committee to support the Preserving Access to Manufactured Housing Act, which would reduce some of these negative effects. Finally, Hodges expressed his support of the safe harbor alternative in QM and called for excluding compensation paid in connection with selling homes from the points and feeds definition.
In his testimony, Eric Stein, Senior Vice President at the Center for Responsible Lending, discussed the predatory and irresponsible lending practices that led to the financial crisis. Commenting on the failure of federal regulatory agencies and the private market to prevent the recession, he applauded the consolidation of financial consumer protection agencies into the CFPB. Arguing that the crisis would not have happened if Title XIV of Dodd-Frank was in place, Stein praised the Ability-to-Repay and QM reforms for improving the mortgage market’s long-term stability. He expressed his support for a broad QM definition with bright line standards to encompass more creditworthy borrowers while reducing market uncertainty. Finally, he advocated the inclusion of a rebuttable presumption to better safeguard consumers from loans made in bad faith.
In her opening statement, Debra Still, Chairman Elect for the Mortgage Bankers Association (MBA), recommended using four principles to define a QM: a broadly defined QM definition to create a safe, affordable housing finance market; unambiguous underwriting standards to increase efficiency in the lending process; a guaranteed safe harbor to decrease litigation risk and lower borrowing costs; and avoiding unintended interactions between different regulations to help stabilize the mortgage market. However, Still said the MBA does not support relying on debt-to-income ratios to predict ability-to-repay. In closing, she recommended smaller loans be exempt from the three percent limit on points and fees, which would lower rates for lower-income borrowers, and said escrow accounts should not be included when calculating points and fees.
In his testimony, Scott Louser, Vice President for the National Association of Realtors (NAR), said lending standards today are too tight and endorsed a broadly defined QM definition with clear underwriting standards and legal protections, which he said will ensure “access to credit and mortgage market stability.” A narrow QM definition would directly limit the qualified residential mortgage (QRM) definition, he said, and minimize exemptions from the risk retention requirement. He also said a broadly defined QM will greatly reduce potential “steering” violations by pushing lenders to originate QM loans. In closing, he warned that the calculation of fees and points under the proposal will “discriminate” against mortgage firms with affiliates involved in the transaction, and urged Congress to pass H.R. 4323, the Consumer Mortgage Choice Act.
Alys Cohen, Staff Attorney for the National Consumer Law Center, discussed the importance and implementation of responsible, administrative mortgage market regulation in her testimony. Arguing that the financial crisis shows that prudential guidance on its own is insufficient, she said regulation is necessary and must be written by agencies with substantive expertise. Cohen expressed concern that altering the points and fees definition sets bad precedent and will unnecessarily cause costs to rise. She applauded the CFPB for its transparency in rulemaking, and expressed her support for a rebuttable presumption, which she believes will provide a better “backstop to reckless lending” than safe harbor. In closing, Cohen cited statistics demonstrating that rebuttable presumption will not result in substantial litigation risk from borrowers, calling the risk “minimal.”
Question and Answer
Capito asked Bentsen how Title XIV will affect smaller lenders. Bentsen said if QM is defined too narrowly, it will fail to capture a sufficient amount of the mortgage marketplace and fewer investors would choose to participate. Consequently, uncertainty over who would service the non-QM market and new capital standards could make lending untenable for community and rural banks, he said. Still added that including a rebuttable presumption in the QM proposal would create enough uncertainty and liability issues for small lenders to cease their operations.
Ranking Member Carolyn Maloney (D-N.Y.), and several other members, asked the panelists to explain their support or opposition to a rebuttable presumption or a safe harbor. Stein and Cohen said they believe there is enough certainty once a loan qualifies as a QM that a rebuttable presumption will be enough to mitigate litigation risk, which is what the safe harbor tries to eliminate. Cohen added that between 2005 and 2010, when “65 million homes were in the foreclosure process,” there were only 60 cases concerning the Truth-in-Lending rebuttable presumption. Louser said the NAR would prefer a safe harbor because of the litigation risks inherent in a rebuttable presumption.
Bentsen said SIFMA has two concerns with a rebuttable presumption. First, he said a rebuttable presumption transfers the potential liability of litigation to securitizers and investors. Second, he said SIFMA is concerned that lenders may institute “very strict” underwriting standards due to litigation concerns, restricting access to credit to only the most qualified borrowers, or lenders would consider loans as long-term investments, with few willing to take on the additional liability that longer-term investments carry.
Vice Chairman Jim Renacci (R-Ohio) asked Bentsen to identify the uncertainties that financial services firms are facing in the housing market. Bentsen said waiting for the promulgation of the final QM definition, the QRM definition, risk retention, and the restructuring of the Government Sponsored Enterprises is creating immense uncertainty among market participants.
Renacci and several other members asked the panelists to detail their objections to the three percent cap on points and fees. Hudson said the three percent cap is “way too easy to hit,” especially on smaller loans. He said if the provision is implemented as is, his firm will be forced to set minimum loan amounts or raise interest rates.
Rep. Rubén Hinojosa (D-Texas) asked Cohen and Hudson to explain the advantages of a broadly defined QM. Cohen said if a QM is defined broadly, more borrowers will be able to secure an affordable mortgage that provides legal certainty for the borrower and the lender. Hudson agreed, adding that a narrowly defined QM will limit credit accessibility to a large segment of the population, thereby forcing this segment to become a “permanent class of renters.”
Rep. Patrick McHenry (R-N.C.) asked Bentsen if a narrowly defined QM would have the unintended consequence of creating an active non-QM market. Bentsen said a non-QM market would be created, but, “from the perspective of the secondary market, the non-QM market would be very small, and [SIFMA’s] members do not believe it is a market they will participate in.” Following up, McHenry asked what segment of the population would be most affected by a narrowly defined QM definition. Bentsen said a narrowly defined QM definition would price out lower income borrowers and borrowers with higher debt-to-income ratios.
McHenry asked Still and Judson to comment on the 20 percent down payment requirement. Still and Judson both agreed that implementing a 20 percent down payment requirement would have an “enormously negative impact on the housing market.”
Rep. Al Green (D-Texas) commented on the increased paperwork smaller banks face as a result of increased regulation, and asked if there was a way to resolve the issue. Still said regulators are currently engaging in “defensive underwriting” and that a rebuttable presumption approach would only increase the “over-documentation of loan files.” When pressed further, Still said a clear definition of the ability-to-repay rule without a rebuttable presumption approach would reduce the amount of paperwork. Stein added that the new CFPB disclosure form will mean less paperwork for all originators.
Rep. Bill Huizenga (R-Mich.) asked if customers are benefiting from lender affiliates. Cohen responded that affiliate fees create an incentive to increase the loan amount in order to profit from enlarged corresponding fees. Still said affiliate relationships provide consumers with more choices and are ultimately beneficial.
Rep. Gary Miller (R-Calif.) asked Hudson to comment on effects of the loan origination compensation rule on consumers. Hudson said the rule prevents consumers from shopping around for better interest rates. He added that the rule does not force creditors and non-creditor mortgage companies to disclose compensation amounts.
Rep. Jon Carney (D-Del.) noted the panelists’ universal agreement on defining QM broadly with clear, unambiguous standards. He asked Still and Stein whether it will be a simple task to determine what a clear and broad definition of QM is. Still said it will be difficult, and suggested analyzing where specific states have set their ability-to-pay ratio. Stein said defining any loan under a 43 backend debt-to-income ratio (DTI) as a QM is a starting point.
For testimony and a webcast of the hearing, please click here.
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AT TODAY’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, members discussed housing finance reform and the Consumer Financial Protection Bureau’s (CFPB) forthcoming Qualified Mortgage (QM) proposal with industry and consumer finance experts.
In her opening remarks, Chairman Shelley Moore Capito (R-W.Va.) said the intent of Section XIV of the Dodd-Frank Act is to protect consumers, but urged regulators to pay special attention to the balance between consumer protections and credit availability. She also stressed the importance of legal certainty in keeping mortgages affordable and available for creditworthy borrowers. In closing, Capito announced that she and Rep. Brad Sherman (D-Calif.) would be sending a letter to CFPB Director Richard Cordray expressing their support for a legal safe harbor provision in the final QM rulemaking.
In his opening statement, Ken Bentsen, Executive Vice President of Public Policy and Advocacy for the Securities Industry and Financial Markets Association (SIFMA), gave a broad overview of SIFMA’s position on the QM definition, specifically highlighting the definition’s impact on the cost and availability of mortgage credit. He advocated for a broad QM definition that contains clear, bright lines so that lenders know whether a loan meets QM standards at the time of origination. Bentsen said a broad QM definition will ensure credit continues to be extended by reliable, well-regulated institutions, noting that few institutions would be willing to supply non-QM loans due to liability, supervisory, reputational, and other concerns. In closing, Bentsen expressed support for the inclusion of a safe harbor provision to keep the cost of credit low and credit availability high.
In his opening statement, John Hudson, Chairman of Government Affairs, National Association of Mortgage Brokers, broadly criticized the Dodd-Frank Act and called for an 18- to 24-month extension on all proposed mortgage finance reform deadlines. He said the Dodd-Frank Act was passed in “haste”, and claimed that the mortgage market quickly corrected faulty loan practices after the 2008 crisis. He specifically criticized the three percent cap on points and fees in the QM proposal and the narrow QRM definition, adding that without a legal safe harbor in the QM definition credit availability will be restricted. In closing, Hudson said loan originators and mortgage broker entities should not be defined the same way, urging the subcommittee to adopt the definition of mortgage loan originator from the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”).
In his testimony, Rick Judson, Vice Chairman of the Board for the National Association of Home Builders, discussed the impact of the QM proposal on the housing market. Stressing the importance of mortgage credit availability to the health of the economy, he said all regulatory efforts should refrain from unnecessarily disrupting the mortgage lending process or increasing the costs of mortgage credit. He called the QM definition “extremely important,” and supported a broad QM definition to capture most creditworthy borrowers. He advocated for a safe harbor, which he believes will ensure safer underwritten loans without limiting credit availability, and advocated for an exemption to the points and fees rule for affiliates, citing surveys that demonstrated the efficiency benefits affiliated settlement service providers offer to homebuyers. In closing, Judson supported the inclusion of mortgage insurance in the proposed rulemaking and urged the CFPB to be mindful of the effects of a narrow QM definition on minority groups, who could be disproportionately excluded from QM.
In his opening statement, Tom Hodges, testifying on behalf of the Manufactured Housing Institute, gave a broad overview of the effects housing reform could have on the manufactured housing industry. He explained that because the cost of origination is a higher percentage of the total cost of small loans, smaller-sized manufactured home loans are unfairly and unnecessarily classified as “high-cost or predatory” under the Home Owner’s Equity Protection Act (HOEPA). Hodges also argued that the lack of clarity in the implementation of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) will unduly categorize individuals associated with the manufactured home buying process as loan originators, and urged the Committee to support the Preserving Access to Manufactured Housing Act, which would reduce some of these negative effects. Finally, Hodges expressed his support of the safe harbor alternative in QM and called for excluding compensation paid in connection with selling homes from the points and feeds definition.
In his testimony, Eric Stein, Senior Vice President at the Center for Responsible Lending, discussed the predatory and irresponsible lending practices that led to the financial crisis. Commenting on the failure of federal regulatory agencies and the private market to prevent the recession, he applauded the consolidation of financial consumer protection agencies into the CFPB. Arguing that the crisis would not have happened if Title XIV of Dodd-Frank was in place, Stein praised the Ability-to-Repay and QM reforms for improving the mortgage market’s long-term stability. He expressed his support for a broad QM definition with bright line standards to encompass more creditworthy borrowers while reducing market uncertainty. Finally, he advocated the inclusion of a rebuttable presumption to better safeguard consumers from loans made in bad faith.
In her opening statement, Debra Still, Chairman Elect for the Mortgage Bankers Association (MBA), recommended using four principles to define a QM: a broadly defined QM definition to create a safe, affordable housing finance market; unambiguous underwriting standards to increase efficiency in the lending process; a guaranteed safe harbor to decrease litigation risk and lower borrowing costs; and avoiding unintended interactions between different regulations to help stabilize the mortgage market. However, Still said the MBA does not support relying on debt-to-income ratios to predict ability-to-repay. In closing, she recommended smaller loans be exempt from the three percent limit on points and fees, which would lower rates for lower-income borrowers, and said escrow accounts should not be included when calculating points and fees.
In his testimony, Scott Louser, Vice President for the National Association of Realtors (NAR), said lending standards today are too tight and endorsed a broadly defined QM definition with clear underwriting standards and legal protections, which he said will ensure “access to credit and mortgage market stability.” A narrow QM definition would directly limit the qualified residential mortgage (QRM) definition, he said, and minimize exemptions from the risk retention requirement. He also said a broadly defined QM will greatly reduce potential “steering” violations by pushing lenders to originate QM loans. In closing, he warned that the calculation of fees and points under the proposal will “discriminate” against mortgage firms with affiliates involved in the transaction, and urged Congress to pass H.R. 4323, the Consumer Mortgage Choice Act.
Alys Cohen, Staff Attorney for the National Consumer Law Center, discussed the importance and implementation of responsible, administrative mortgage market regulation in her testimony. Arguing that the financial crisis shows that prudential guidance on its own is insufficient, she said regulation is necessary and must be written by agencies with substantive expertise. Cohen expressed concern that altering the points and fees definition sets bad precedent and will unnecessarily cause costs to rise. She applauded the CFPB for its transparency in rulemaking, and expressed her support for a rebuttable presumption, which she believes will provide a better “backstop to reckless lending” than safe harbor. In closing, Cohen cited statistics demonstrating that rebuttable presumption will not result in substantial litigation risk from borrowers, calling the risk “minimal.”
Question and Answer
Capito asked Bentsen how Title XIV will affect smaller lenders. Bentsen said if QM is defined too narrowly, it will fail to capture a sufficient amount of the mortgage marketplace and fewer investors would choose to participate. Consequently, uncertainty over who would service the non-QM market and new capital standards could make lending untenable for community and rural banks, he said. Still added that including a rebuttable presumption in the QM proposal would create enough uncertainty and liability issues for small lenders to cease their operations.
Ranking Member Carolyn Maloney (D-N.Y.), and several other members, asked the panelists to explain their support or opposition to a rebuttable presumption or a safe harbor. Stein and Cohen said they believe there is enough certainty once a loan qualifies as a QM that a rebuttable presumption will be enough to mitigate litigation risk, which is what the safe harbor tries to eliminate. Cohen added that between 2005 and 2010, when “65 million homes were in the foreclosure process,” there were only 60 cases concerning the Truth-in-Lending rebuttable presumption. Louser said the NAR would prefer a safe harbor because of the litigation risks inherent in a rebuttable presumption.
Bentsen said SIFMA has two concerns with a rebuttable presumption. First, he said a rebuttable presumption transfers the potential liability of litigation to securitizers and investors. Second, he said SIFMA is concerned that lenders may institute “very strict” underwriting standards due to litigation concerns, restricting access to credit to only the most qualified borrowers, or lenders would consider loans as long-term investments, with few willing to take on the additional liability that longer-term investments carry.
Vice Chairman Jim Renacci (R-Ohio) asked Bentsen to identify the uncertainties that financial services firms are facing in the housing market. Bentsen said waiting for the promulgation of the final QM definition, the QRM definition, risk retention, and the restructuring of the Government Sponsored Enterprises is creating immense uncertainty among market participants.
Renacci and several other members asked the panelists to detail their objections to the three percent cap on points and fees. Hudson said the three percent cap is “way too easy to hit,” especially on smaller loans. He said if the provision is implemented as is, his firm will be forced to set minimum loan amounts or raise interest rates.
Rep. Rubén Hinojosa (D-Texas) asked Cohen and Hudson to explain the advantages of a broadly defined QM. Cohen said if a QM is defined broadly, more borrowers will be able to secure an affordable mortgage that provides legal certainty for the borrower and the lender. Hudson agreed, adding that a narrowly defined QM will limit credit accessibility to a large segment of the population, thereby forcing this segment to become a “permanent class of renters.”
Rep. Patrick McHenry (R-N.C.) asked Bentsen if a narrowly defined QM would have the unintended consequence of creating an active non-QM market. Bentsen said a non-QM market would be created, but, “from the perspective of the secondary market, the non-QM market would be very small, and [SIFMA’s] members do not believe it is a market they will participate in.” Following up, McHenry asked what segment of the population would be most affected by a narrowly defined QM definition. Bentsen said a narrowly defined QM definition would price out lower income borrowers and borrowers with higher debt-to-income ratios.
McHenry asked Still and Judson to comment on the 20 percent down payment requirement. Still and Judson both agreed that implementing a 20 percent down payment requirement would have an “enormously negative impact on the housing market.”
Rep. Al Green (D-Texas) commented on the increased paperwork smaller banks face as a result of increased regulation, and asked if there was a way to resolve the issue. Still said regulators are currently engaging in “defensive underwriting” and that a rebuttable presumption approach would only increase the “over-documentation of loan files.” When pressed further, Still said a clear definition of the ability-to-repay rule without a rebuttable presumption approach would reduce the amount of paperwork. Stein added that the new CFPB disclosure form will mean less paperwork for all originators.
Rep. Bill Huizenga (R-Mich.) asked if customers are benefiting from lender affiliates. Cohen responded that affiliate fees create an incentive to increase the loan amount in order to profit from enlarged corresponding fees. Still said affiliate relationships provide consumers with more choices and are ultimately beneficial.
Rep. Gary Miller (R-Calif.) asked Hudson to comment on effects of the loan origination compensation rule on consumers. Hudson said the rule prevents consumers from shopping around for better interest rates. He added that the rule does not force creditors and non-creditor mortgage companies to disclose compensation amounts.
Rep. Jon Carney (D-Del.) noted the panelists’ universal agreement on defining QM broadly with clear, unambiguous standards. He asked Still and Stein whether it will be a simple task to determine what a clear and broad definition of QM is. Still said it will be difficult, and suggested analyzing where specific states have set their ability-to-pay ratio. Stein said defining any loan under a 43 backend debt-to-income ratio (DTI) as a QM is a starting point.
For testimony and a webcast of the hearing, please click here.