House Holds Another Hearing on Impact of Dodd-Frank Mortgage Requirements

The House Financial Servicesrnsubcommittee on Financial Institutions and Consumer Credit held a hearing onrnWednesday entitled “The Impact of Dodd-Frank’s Home Mortgage Reforms:  Consumer and Market Perspectives.”  Scheduled to speak at the hearing were representativesrnof the National Association of Home Builders (NAHB), the Manufactured HousingrnInstitute (MHI), National Association of Mortgage Brokers, National ConsumerrnLaw Center, the Securities Industry and Financial Markets Association (SIFMA), Centerrnfor Responsible Lending, the National Association of Realtors® (NAR), and the MortgagernBankers Association (MBA).  </p

NAHB First vice Chairman Rick Judsonrntold the committee members that proposed lending reforms under the Dodd-Frank Actrnmust be structured so as to cause minimum disruption to the mortgage marketsrnwhile ensuring consumer protections.  </p

 “NAHB urges the Consumer Financial ProtectionrnBureau (CFPB) and policymakers to consider the long-term ramifications of thesernrules on the market, and not to place unnecessary restrictions on the housingrnmarket based solely on today’s economic conditions. Overly restrictive rulesrnwill prevent willing, creditworthy borrowers from entering the housing market,”rnJudson said.<br /<br /Even with QM broadly defined, the flow of credit could be restrained if lendersrnface a high risk of legal challenges to their loan decisions.  Therefore Judson said NAHB supports a QM safernharbor definition that would provide more assurance to lenders that they willrnnot be subject to increased litigation if they use sound underwriting criteria.rnThe safe harbor should incorporate specific ability-to-repay standards. </p

NAR‘s Vice President and Liaison tornGovernment Affairs Scott Louser also urged Congress and the Administration torndevelop a broadly-defined QM regulation. rn”Creating a broad QM that establishes strong consumer protections,rnpromotes mortgage liquidity, incorporates important ability-to-repay standards,rnand offers lenders a safe harbor that reduces litigation exposure benefitsrnlenders, investors and consumers will help ensure the revival of the homernlending market.” </p

Louser testified that another arearnof concern is a provision in the QM which limits the total points and feesrncollected by lenders and their affiliates to 3 percent of the loan amount.  This discriminates against real estate and mortgagernfirms with affiliates involved in the transaction and limits companies fromrnoffering full services to clients. NAR urges Congress to pass H.R. 4323, thern”Consumer Mortgage Choice Act”, so that consumers can fully benefitrnfrom greater competition between affiliated and unaffiliated mortgage lenders.</p<form

SIFMA‘s Executive Vice President Kenneth E. Bentsen, Jr. noted in hisrntestimony that the vast majority of future mortgage lending is likely to fallrnwithin the guidelines established by the QM definition.  Due to liability, supervisory, reputational,rnand other concerns, SIFMA does not expect significant origination of non-QMrnloans.  </p

Bentsen’s testimony focused on two points.  First, SIFMA and its members strongly supportrnthe concept that lenders should determine whether borrowers have an ability tornrepay their loans before they extend credit.  But the ability-to-repayrnprovisions were not intended to outline the parameters of mortgage lending forrnthe most creditworthy borrowers, he said; that is the purpose of a provision ofrnthe risk retention statute which exempts Qualified Residential Mortgages (QRMs)rnfrom those requirements.  </p

Second, due to the risk of liability inherent in non-QM lending, thernparameters of the definition must provide clear, bright lines at the time ofrnorigination, and a safe harbor for compliance. Vague QM standards could lead tornsecondary market investors imposing their own more objective requirements wellrnwithin the bounds of QM to assure compliance with the standards. If brightrnlines are not implemented in the final rule, borrowers will pay more for theirrnloans and have a harder time obtaining them.    </p

Debra Still, Chairman-Elect of thernMBA joined others in saying that the definitions of QM and “ability to repay”rnshould be crafted “such that credit qualification parameters do not become evenrnmore conservative than they already are” and so all borrowers enjoy access tornsafe and affordable mortgage credit.<br / <br /Further, she said, a strong legal safe harbor is essential for a vibrantrnmortgage market in the future and that 'safe harbor' is misnamed.  'It isrnneither a pass for lenders, nor does it deprive consumers of an opportunity forrncourt review.  Under a safe harbor a borrower may opt to go to court andrnseek review of an alleged violation.<br / <br /"The issue is how extensive and expensive the legal proceedings willrnbe.  Uncertain and unbounded legal exposure runs counter to thernavailability of affordable credit to qualified borrowers.<br / <br /"Without bright-line standards and a legal safe harbor, lenders will havernno choice but to alter their business strategies. Some lenders may choose tornexit the business, lessening competition.  Others, to mitigate risk, willrncreate even tighter credit guidelines than the QM definition.  And stillrnothers will price their loans higher.  Whether it's less competition,rntighter credit, or higher costs, all of these outcomes will harm consumers."  <br / <br /CRLrnSenior Vice President Eric Stein emphasized the importance of definingrn”Qualified Mortgage” broadly to avoid shutting out creditworthyrnborrowers from the mortgage market. He recommended that QM include the use ofrnspecific “bright-line” standards so that lenders and borrowers arernclear on which loans qualify as QMs. He also made the case for allowingrnborrowers to pursue legal action if an alleged QM loan failed to meet thernappropriate standards from the outset. </p

Speakingrnfor the MHI, Tom Hodges, General Counsel for Clayton Homes said his organizationrnencourages Congress to support the creation of a secondary market that allowsrnfor all loans products, including those for manufactured homes, to compete on arnlevel playing field.  Improving the flowrnof capital to the manufactured housing financing sector will lower lenders’rncost of capital and draw more lenders to the market, increasing competition andrnlowering financing costs.  </p

MHIrnrecognizes the importance of responsible lending and improving the consumerrnexperience, Hodges said, but has also consistently urged Congress to considerrnthe unique nature of manufactured housing lending and to avoid measures thatrnwould inadvertently curtail lenders’ ability to make manufactured housingrnloans.</p

AlysrnCohen, Staff Attorney, National Consumer Law Center presented distinctlyrndifferent testimony than the other witnesses. rnShe was critical of tinkering with Dodd-Frank saying that the rules itrnoutlines “are nothing more than a codification of the basic precepts ofrnresidential underwriting that have been in place for decades but mortgage lendersrnignored these rules,” and suggested that further adjustments to the underwriting standards in Dodd-Frank arernbest done by agencies with substantive expertise, including the ConsumerrnFinancial Protection Bureau.” </p

She criticized the inclusion of arnsafe harbor.  “Creditors should bernencouraged to make mortgages that meet the definition of qualified mortgagesrnand those that do not are entitled to a presumption that they meet thernability-to-repay requirement.  “if thernability-to-repay rule provides a safe harbor, some creditors will focus on thernletter but not the spirit of the rule,” Cohen said.  “It will lead the door open to known types ofrnabusive lending and will predictably encourage the emergence of adjustable raternmortgages timed to reset at the end of six years instead of five.”</p

It would shut the courthouse doorrnto borrowers.  Once there was arndetermination that a loan met the ability-to-repay standards there would be nornredress for the homeowner even if the creditor made the loan with fullrnknowledge that the borrower could not afford it.</p

Finally, Cohen contended that arnsafe harbor could interfere with state sovereignty and reduce the rights thatrnconsumers currently have under state laws to challenge reckless and bad faithrnunderwriting.</p

She was also expressed concern about the effects of threernlaws pending before the subcommittee that would adjust the definition of brokerrncompensation under Dodd-Frank to exempt payments made to employees of the mortgagernloan originator; exclude, for the first time since the passage of HOEPA feesrnpaid to the creditor or an affiliate, thus gutting the restrictions on creditorrnprofiteering embedded in HOEPA’s point and fees test;   Also excluded are fees for title insurancernfrom the calculation of points and fees “even if the charge is per sernunreasonable, wholly retained by the creditor, or an illegal fee.” </p

Shernpointed to rulemaking from the Federal Reserve regarding originatorrncompensation that parallels Dodd-Frank but does not duplicate its provisions andrnwhich CFPB is charged with synchronizing. rn’Tinkering further with the Dodd-Frank definition at this point willrncomplicate and delay already difficult rulemaking and could introduce further uncertaintyrninto the mortgage markets. Moreover, while abusive markups were endemic in thernbrokered-loan market, incentives to make unaffordable loans also were common inrnloans made directly by lenders.”</p

She called changing therndefinition of points and fees for the riskiest loans risk unsettling to establishedrnprecedent.  “It is also bad policy.  Fees from affiliates continue to form a significantrnpart of creditor’s profits.  They arerntotally opaque to consumers.”  Moreover, shernsaid, there is extensive evidence that title insurance, in particular, has beenrna source of price gouging of consumers in recent years.</p

Complete advance transcripts forrnall testimony are here.rn</p

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