HFSC Subcommittee on the Impact of the Qualified Mortgage Rule
At Jan. 14th’s Hous Financial Services Subcommittee on Financial Institutions and
Consumer Credit hearing entitled, “How Prospective and Current Homeowners Will
Be Harmed by the CFPB’s Qualified Mortgage Rule,” lawmakers discussed with
relevant stakeholders the Consumer Financial Protection Bureau’s (CFPB)
Qualified Mortgage (QM) rule
that became effective on January 10, 2014.
Opening
Remarks
Subcommittee
Chair Shelley Moore Capito (R-W.Va.) stated that the CFPB’s rules will
“fundamentally change the mortgage market” in the U.S. and have a negative
effect on the availability of credit for borrowers. She added that the QM
rule takes a “one size fits all” approach what will impair the ability of
lenders to work with borrowers and tailor mortgages for those in lower income
brackets.
Subcommittee
Ranking Member Gregory Meeks (D-N.Y.) said there is “no doubt” that there will
be “significant impacts” on prospective homebuyers and stated lawmakers should
ensure that the possibility to own a home is not eliminated for certain people.
He noted, however, that there is no data to base a discussion on the effects of
the QM rule and that “it may take years to have conclusive data.”
Rep.
Sean Duffy (R-Wis.) expressed concern that small banks and credit unions will
not make loans outside of the QM specifications, which will cause lower income
borrowers to be “left behind.”
Rep.
Carolyn Maloney (D-N.Y.) said that the QM rule “merely says” that mortgages
cannot have “risky features that may harm borrowers” and noted that the CFPB
has “already given a two year grace period to small lenders” and has said they
are open to making adjustments to the rule.
Rep.
Spencer Bachus (R-Ala.) said that the QM rule will result in mortgages being
harder to obtain and priced at a higher interest rate, which will impede the
housing market recovery and slow economic growth.
Witness
Testimony
Jack
Hartings, President and CEO of the Peoples Bank Co. on behalf of the
Independent Community Bankers of America (ICBA), stated
that the QM rule “has the potential to drive community banks with less
resources out of the market” and that community banks will not take the risk of
making non-QM loans.
Hartings
noted that many community banks do not have “small creditor” status under the
rule and said that loans sold in the secondary market should not add to the
small creditor threshold. He also suggested that safe harbor QM status be
granted to all community bank loans that are held in the bank’s portfolio.
Bill
Emerson, CEO of Quicken Loans, Inc., on behalf of the Mortgage Bankers
Association (MBA), stated
that his company will not write non-QM loans, as there “is no discernible
secondary market for them” and the risk of litigation associated with
originating these loans “is too great.”
He
said that borrowers could pay rates as high as eight to nine percent for non-QM
loans and that the three percent cap on points and fees, spelled out in the
rule, may cause small borrowers to be priced out of the market, as origination
costs are fixed. He then highlighted that the MBA supports the Mortgage
Choice Act of 2013 (H.R. 3211)
which seeks to address points and fees information requirements.
Daniel
Weickenand, CEO of Orion Federal Credit Union, on behalf of the National
Association of Federal Credit Unions (NAFCU), stated
that credit unions were not a cause of the financial crisis and thus should not
be subject to the same rules as the institutions that were. He said the
QM rule “will force us to turn away many credit worthy borrowers” and noted
that approximately 11 percent of his credit union’s current loans would be
considered non-QM.
Frank
Spencer, President and CEO of Habitat for Humanity Charlotte, stated
that the complexity of mortgage regulations is creating challenges for the
affiliate organizations of Habitat for Humanity. He said the costs of
coming into compliance “are significant” and that every dollar spent on
compliance functions is a dollar not spent on local housing needs. He added
that the “ability to repay” standards, as drafted, have unintended consequences
that discourage the improvement of mortgage products.
Michael
D. Calhoun, President, Center for Responsible Lending, stated
that the QM rule is needed because the mortgage market is “inherently a boom
and bust market” and lending standards erode on market upswings. He said the
CFPB adopted a broad, bright line rule with limited liability that comes close
to what is needed, but said he looks forward to identifying places where the
rule may “need massaging.”
Question
and Answer
Rep.
Capito set the stage for the question and answer segment, saying that the
hearing serves to establish a “baseline” so that the Committee can come back in
several months and gauge what happened in the industry in the interim. She then
asked how many of Quicken’s loans would be QMs. Emerson replied that
approximately 90-93 percent of the market would be served under the QM
definition.
Rep.
Meeks referenced reports stating that minorities will have a harder time
obtaining a loan under the QM definition and asked what lending options will be
available for people who do not meet the 43 percent debt to income (DTI)
ratio. Calhoun replied that borrowers can exceed the 43 percent ratio and
still have a QM loan, if they qualify for a Federal Housing Administration
(FHA) loan.
Rep.
Duffy asked if there are many low income borrowers who will not qualify for QM
loans and if lenders will charge higher fees and rates to those who do not fall
under the QM guidelines. Weickenand replied that his firm “can only hold so
much” on their books, and that rates mainly depend on interest rate
risks. Hartings added that if his firm did make non-QM loans they would
have to consider risks associated with their bond issuances and being subject
to a potentially higher level of scrutiny during regulator examinations.
Full
Committee Ranking Member, Maxine Waters (D-Calif.) stated that she wants to
ensure communities have access to credit while community banks have the ability
to make loans without too much government interference, but that people still
need to be protected. She then asked what the CFPB has done to distinguish
between community banks and the nation’s largest banks.
Hartings
said that the CFPB took a “step in the right direction” with their two tier
system and small creditor exemption but noted that his firm is “right at the
edge” of losing small creditor status. He stated that the small creditor
threshold should be expanded to allow smaller banks to grow and provide loans
to more people.
Rep.
Spencer Bachus (R-Ala.) noted that the QM rule includes affiliated, but not
un-affiliated, title insurance, and asked if there is any reason to
differentiate between the two for the purposes of the QM qualification.
Emerson replied that is there is no reason to differentiate between the two
systems of title insurance and noted that different treatment leads to less
competition.
Rep. Maloney asked what kinds of changes should be made to the QM definition. Emerson
replied that 1) the QM safe harbor should be expanded; 2) there should be a
sliding scale on qualifying loan amounts; 3) fixes should be made regarding
Housing for Older Persons Act (HOPA) loans; and 4) the CFPB should produce more
written guidance.
Rep.
Patrick McHenry (R-N.C.) asked if regulatory conflicts will arise due to the QM
rule, on one hand, and the “disparate impact” provisions from the Department of
Housing and Urban Development (HUD) on the other and if lenders who only make
QM loans may have disparate impact on less qualified and lower income
borrowers.
Calhoun
replied that a lender’s choice of only originating QM loans will not be used
against them, but Emerson said that the industry has not yet heard this from
HUD or the Department of Justice and they would like more guidance around this
issue.
McHenry
followed up on this line of questioning asking if only making QM loans will
affect a company’s requirements related to the Community Reinvestment Act
(CRA). Hartings said that the industry will “wait and see” how these
requirements are affected but said only making QM loans will make it more
difficult to receive a satisfactory CRA rating.
Rep.
Blaine Luetkemeyer (R-Mo.) asked why lenders will choose not to originate
non-QM loans. Emerson replied that there is a “stigma that a non-QM loan
is not a good loan” and his firm will only make QM loans to avoid reputational
risk as well as mortgage repurchase risk because there is no secondary market.
Luetkemeyer
then asked how the financial regulators would assess non-QM loans and if banks
would need to hold more capital against any of these loans held in their
portfolios. Hartings said that his bank has reached out to regulators but has
not heard anything back.
Rep.
Stephen Lynch (D-Mass.) stated that the litigation risk associated with QM
loans is “overstated” and that there will not be many lawsuits if a lender
conducts proper due diligence. Calhoun agreed and said that the QM rule makes
it “extremely hard to bring class action lawsuits” and that QM loan cases “are
not cases lawyers can make money on.”
For
more information on this hearing and to view a webcast, please click here.
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At Jan. 14th’s Hous Financial Services Subcommittee on Financial Institutions and
Consumer Credit hearing entitled, “How Prospective and Current Homeowners Will
Be Harmed by the CFPB’s Qualified Mortgage Rule,” lawmakers discussed with
relevant stakeholders the Consumer Financial Protection Bureau’s (CFPB)
Qualified Mortgage (QM) rule
that became effective on January 10, 2014.
Opening
Remarks
Subcommittee
Chair Shelley Moore Capito (R-W.Va.) stated that the CFPB’s rules will
“fundamentally change the mortgage market” in the U.S. and have a negative
effect on the availability of credit for borrowers. She added that the QM
rule takes a “one size fits all” approach what will impair the ability of
lenders to work with borrowers and tailor mortgages for those in lower income
brackets.
Subcommittee
Ranking Member Gregory Meeks (D-N.Y.) said there is “no doubt” that there will
be “significant impacts” on prospective homebuyers and stated lawmakers should
ensure that the possibility to own a home is not eliminated for certain people.
He noted, however, that there is no data to base a discussion on the effects of
the QM rule and that “it may take years to have conclusive data.”
Rep.
Sean Duffy (R-Wis.) expressed concern that small banks and credit unions will
not make loans outside of the QM specifications, which will cause lower income
borrowers to be “left behind.”
Rep.
Carolyn Maloney (D-N.Y.) said that the QM rule “merely says” that mortgages
cannot have “risky features that may harm borrowers” and noted that the CFPB
has “already given a two year grace period to small lenders” and has said they
are open to making adjustments to the rule.
Rep.
Spencer Bachus (R-Ala.) said that the QM rule will result in mortgages being
harder to obtain and priced at a higher interest rate, which will impede the
housing market recovery and slow economic growth.
Witness
Testimony
Jack
Hartings, President and CEO of the Peoples Bank Co. on behalf of the
Independent Community Bankers of America (ICBA), stated
that the QM rule “has the potential to drive community banks with less
resources out of the market” and that community banks will not take the risk of
making non-QM loans.
Hartings
noted that many community banks do not have “small creditor” status under the
rule and said that loans sold in the secondary market should not add to the
small creditor threshold. He also suggested that safe harbor QM status be
granted to all community bank loans that are held in the bank’s portfolio.
Bill
Emerson, CEO of Quicken Loans, Inc., on behalf of the Mortgage Bankers
Association (MBA), stated
that his company will not write non-QM loans, as there “is no discernible
secondary market for them” and the risk of litigation associated with
originating these loans “is too great.”
He
said that borrowers could pay rates as high as eight to nine percent for non-QM
loans and that the three percent cap on points and fees, spelled out in the
rule, may cause small borrowers to be priced out of the market, as origination
costs are fixed. He then highlighted that the MBA supports the Mortgage
Choice Act of 2013 (H.R. 3211)
which seeks to address points and fees information requirements.
Daniel
Weickenand, CEO of Orion Federal Credit Union, on behalf of the National
Association of Federal Credit Unions (NAFCU), stated
that credit unions were not a cause of the financial crisis and thus should not
be subject to the same rules as the institutions that were. He said the
QM rule “will force us to turn away many credit worthy borrowers” and noted
that approximately 11 percent of his credit union’s current loans would be
considered non-QM.
Frank
Spencer, President and CEO of Habitat for Humanity Charlotte, stated
that the complexity of mortgage regulations is creating challenges for the
affiliate organizations of Habitat for Humanity. He said the costs of
coming into compliance “are significant” and that every dollar spent on
compliance functions is a dollar not spent on local housing needs. He added
that the “ability to repay” standards, as drafted, have unintended consequences
that discourage the improvement of mortgage products.
Michael
D. Calhoun, President, Center for Responsible Lending, stated
that the QM rule is needed because the mortgage market is “inherently a boom
and bust market” and lending standards erode on market upswings. He said the
CFPB adopted a broad, bright line rule with limited liability that comes close
to what is needed, but said he looks forward to identifying places where the
rule may “need massaging.”
Question
and Answer
Rep.
Capito set the stage for the question and answer segment, saying that the
hearing serves to establish a “baseline” so that the Committee can come back in
several months and gauge what happened in the industry in the interim. She then
asked how many of Quicken’s loans would be QMs. Emerson replied that
approximately 90-93 percent of the market would be served under the QM
definition.
Rep.
Meeks referenced reports stating that minorities will have a harder time
obtaining a loan under the QM definition and asked what lending options will be
available for people who do not meet the 43 percent debt to income (DTI)
ratio. Calhoun replied that borrowers can exceed the 43 percent ratio and
still have a QM loan, if they qualify for a Federal Housing Administration
(FHA) loan.
Rep.
Duffy asked if there are many low income borrowers who will not qualify for QM
loans and if lenders will charge higher fees and rates to those who do not fall
under the QM guidelines. Weickenand replied that his firm “can only hold so
much” on their books, and that rates mainly depend on interest rate
risks. Hartings added that if his firm did make non-QM loans they would
have to consider risks associated with their bond issuances and being subject
to a potentially higher level of scrutiny during regulator examinations.
Full
Committee Ranking Member, Maxine Waters (D-Calif.) stated that she wants to
ensure communities have access to credit while community banks have the ability
to make loans without too much government interference, but that people still
need to be protected. She then asked what the CFPB has done to distinguish
between community banks and the nation’s largest banks.
Hartings
said that the CFPB took a “step in the right direction” with their two tier
system and small creditor exemption but noted that his firm is “right at the
edge” of losing small creditor status. He stated that the small creditor
threshold should be expanded to allow smaller banks to grow and provide loans
to more people.
Rep.
Spencer Bachus (R-Ala.) noted that the QM rule includes affiliated, but not
un-affiliated, title insurance, and asked if there is any reason to
differentiate between the two for the purposes of the QM qualification.
Emerson replied that is there is no reason to differentiate between the two
systems of title insurance and noted that different treatment leads to less
competition.
Rep. Maloney asked what kinds of changes should be made to the QM definition. Emerson
replied that 1) the QM safe harbor should be expanded; 2) there should be a
sliding scale on qualifying loan amounts; 3) fixes should be made regarding
Housing for Older Persons Act (HOPA) loans; and 4) the CFPB should produce more
written guidance.
Rep.
Patrick McHenry (R-N.C.) asked if regulatory conflicts will arise due to the QM
rule, on one hand, and the “disparate impact” provisions from the Department of
Housing and Urban Development (HUD) on the other and if lenders who only make
QM loans may have disparate impact on less qualified and lower income
borrowers.
Calhoun
replied that a lender’s choice of only originating QM loans will not be used
against them, but Emerson said that the industry has not yet heard this from
HUD or the Department of Justice and they would like more guidance around this
issue.
McHenry
followed up on this line of questioning asking if only making QM loans will
affect a company’s requirements related to the Community Reinvestment Act
(CRA). Hartings said that the industry will “wait and see” how these
requirements are affected but said only making QM loans will make it more
difficult to receive a satisfactory CRA rating.
Rep.
Blaine Luetkemeyer (R-Mo.) asked why lenders will choose not to originate
non-QM loans. Emerson replied that there is a “stigma that a non-QM loan
is not a good loan” and his firm will only make QM loans to avoid reputational
risk as well as mortgage repurchase risk because there is no secondary market.
Luetkemeyer
then asked how the financial regulators would assess non-QM loans and if banks
would need to hold more capital against any of these loans held in their
portfolios. Hartings said that his bank has reached out to regulators but has
not heard anything back.
Rep.
Stephen Lynch (D-Mass.) stated that the litigation risk associated with QM
loans is “overstated” and that there will not be many lawsuits if a lender
conducts proper due diligence. Calhoun agreed and said that the QM rule makes
it “extremely hard to bring class action lawsuits” and that QM loan cases “are
not cases lawyers can make money on.”
For
more information on this hearing and to view a webcast, please click here.