[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
QUALIFIED MORTGAGES: EXAMINING THE
IMPACT OF THE ABILITY TO REPAY RULE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MAY 21, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-22
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81-757 WASHINGTON : 2013
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
SHELLEY MOORE CAPITO, West Virginia, Chairman
SEAN P. DUFFY, Wisconsin, Vice GREGORY W. MEEKS, New York,
Chairman Ranking Member
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
GARY G. MILLER, California MELVIN L. WATT, North Carolina
PATRICK T. McHENRY, North Carolina RUBEN HINOJOSA, Texas
JOHN CAMPBELL, California CAROLYN McCARTHY, New York
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, NYDIA M. VELAZQUEZ, New York
Pennsylvania STEPHEN F. LYNCH, Massachusetts
LYNN A. WESTMORELAND, Georgia MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri PATRICK MURPHY, Florida
MARLIN A. STUTZMAN, Indiana JOHN K. DELANEY, Maryland
ROBERT PITTENGER, North Carolina DENNY HECK, Washington
ANDY BARR, Kentucky
TOM COTTON, Arkansas
C O N T E N T S
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Page
Hearing held on:
May 21, 2013................................................. 1
Appendix:
May 21, 2013................................................. 47
WITNESSES
Tuesday, May 21, 2013
Carroll, Peter, Assistant Director for Mortgage Markets, Consumer
Financial Protection Bureau.................................... 10
Cochran, Kelly, Assistant Director for Regulations, Consumer
Financial Protection Bureau.................................... 8
APPENDIX
Prepared statements:
Huizenga, Hon. Bill.......................................... 48
Joint statement of Peter Carroll and Kelly Thompson Cochran.. 49
Additional Material Submitted for the Record
Capito, Hon. Shelley Moore:
Written statement of the American Land Title Association..... 55
Written statement of the Credit Union National Association... 59
Written statement of the Independent Community Bankers of
America.................................................... 61
Written statement of the National Association of Federal
Credit Unions.............................................. 138
Written statement of the National Association of REALTORS... 140
Written statement of WesBanco, Inc........................... 144
Duffy, Hon. Sean:
CFPB QM rule for Wisconsin................................... 153
Huizenga, Hon. Bill:
Written statement of the Real Estate Services Providers
Council, Inc............................................... 154
Peter Carroll and Kelly Thompson Cochran:
Written responses to questions submitted by Representative
Ellison.................................................... 161
Written responses to questions submitted by Representative
Watt....................................................... 165
QUALIFIED MORTGAGES: EXAMINING THE
IMPACT OF THE ABILITY TO REPAY RULE
----------
Tuesday, May 21, 2013
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Shelley Moore
Capito [chairwoman of the subcommittee] presiding.
Members present: Representatives Capito, Miller, McHenry,
Campbell, Pearce, Posey, Fitzpatrick, Westmoreland,
Luetkemeyer, Duffy, Stutzman, Pittenger, Barr, Cotton; Meeks,
Maloney, Watt, Hinojosa, Scott, Green, Ellison, Velazquez,
Lynch, Capuano, Murphy, Delaney, and Heck.
Ex officio present: Representative Hensarling.
Also present: Representatives Huizenga and Rothfus.
Chairwoman Capito. The subcommittee will come to order.
Without objection, the Chair is authorized to declare a recess
of the subcommittee at any time.
I now recognize myself for 5 minutes for an opening
statement. In January, the Consumer Financial Protection Bureau
(CFPB) released the final Ability-to-Repay rule for Qualified
Mortgages (QMs). This is a very important topic.
Called for by Title 14 of the Dodd-Frank Act, this 800-page
rule will potentially forever change the mortgage market in
this Nation. While the intent is to protect consumers from
fraudulent mortgages, the practical implications of this rule
could result in the constriction of mortgage credit for
consumers.
I fear, and I have heard this anecdotally, that this
approach of ``Washington knows best'' will harm the very people
that the rule seeks to help: borrowers who are on the fringe of
lacking access to mainstream financial services.
Since the release of this rule, I have heard from many
community banks and credit unions in my district about the
adverse effect of this rule and the adverse effect on the
communities that they serve.
These financial services professionals are on the front
lines of lending in their communities. They know their
customers and they also know what type of financial products
are appropriate for their customers based on their unique
circumstances.
Many of them have expressed great concerns about their
continued ability to serve their community's needs for mortgage
credit under the regime established by the rule.
One of the most glaring concerns of the rule is the overly
restrictive definition of what is a rural community. Bill
Loving, who is president and CEO of Pendleton County Bank in my
district in West Virginia, raised this issue at a subcommittee
hearing last month.
He said, ``I think the members of this committee would be
surprised at what counties in their own States and districts
fail to qualify as rural. For instance, in the State of West
Virginia, 26 out of 55 counties fail to meet the definition of
rural. Under any reasonable definition, the entire State of
West Virginia would be considered rural.''
I am certain my ranking member would consider my entire
State rural compared to where he lives. To assert that nearly
half of the State of West Virginia is not rural demonstrates a
lack of familiarity with what constitutes a rural community.
Having an accurate rural definition is essential for
community banks and credit unions that currently offer balloon
loans to their customers.
Linda Ashley, who is president and CEO of Poca Valley Bank
in my district, recently wrote to me about the importance of
this project: ``Balloon loans enable us to better manage
interest rate risk and balloon loans are a product with which
our customer base has been comfortable for many, many years. We
encourage you to help preserve our ability to serve our
customers.''
There is a niche demand for these types of loans in rural
communities. These loans allow borrowers who would not
otherwise be able to access credit to purchase a home. The
decision of whether or not a borrower should be able to access
this type of credit is best determined by the lender working
with the individual borrower. This type of labor-intensive
relationship lending is the linchpin of community-based
lending.
I see my time is running out, so I am going to shorten my
statement and submit the rest of the statement for the record.
I would also like to submit letters from my community
bankers for the record. Without objection, it is so ordered.
There is a very real concern that the implementation of
this rule will result in less credit, less borrowing, and less
availability of mortgages for many of our constituents.
With that, I would like to recognize the ranking member of
the subcommittee, Mr. Meeks, for 3 minutes for an opening
statement.
Mr. Meeks. Thank you, Madam Chairwoman, for holding this
hearing today.
And I would like to thank the distinguished panel for being
here as we examine what is very important: the impact of the
Ability-to-Repay rule on Qualified Mortgages.
Sometimes, I come to hearings and you have in your mindset
what should or shouldn't happen based upon what you have talked
about. Sometimes, you may come with a different perspective,
and in Washington, sometimes it might be a Democratic idea or
it might be a Republican idea.
This is what we have to get right. I still believe in the
American dream. And the American dream is owning a home, and
owning a home can mean the difference for a family and a
community.
It can mean the difference in someone's getting an
education and not getting an education. And that is why it is
tremendously important that we get this as right as we possibly
can.
I have never seen a perfect bill in my 14 years in this
House of Representatives, so I know that no bill is perfect,
but this really affects and can affect peoples' lives, so how
we get it done and how we do it is important.
I have concerns when we start talking about the QM rule and
the QRM rule and the differences and it becomes complicated and
individuals don't--especially some of the banks, small
community banks which did not cause the financial crisis that
we entered into; it seems as though they may be unfairly hurt
by this.
In fact, I was talking to one banker last night who said,
``Look, we are just going to stop giving out mortgages
altogether.'' In fact, they have, but they have made
arrangements with Morgan Stanley--they have Morgan Stanley in
the bank--to do the mortgages and they just got out of the
business altogether because they said they can't take the risk
of fines and not knowing what qualifies and what doesn't
qualify because a lot of the rules are not clear to them.
When you talk about whether or not the cap, the 3 percent
cap and what is included therein, it is not clear. And whether
or not you take in the whole person, as opposed to just having
a cookie box situation where you have to fall in this box and
you are not allowed to take in the consideration of the whole
person, that customer.
I have said it before in this committee and I say it again,
if it wasn't for someone taking in the fact that my parents,
their whole situation, they would have never owned a home. Had
they not owned a home, I would not be sitting here today
because that home helped finance my and my sister's education.
I want to make sure that we are not cutting out
opportunities for individuals who want to own a home which will
make the community good, and which changes their lives and
their children's lives for generations yet to come.
And I am concerned from what I have seen thus far and what
I am hearing from community banks and small banks that that
very well may happen if we don't get this thing right.
So I will be looking forward to hearing from the witnesses
as we move forward, and I yield back the balance of my time.
Chairwoman Capito. Thank you.
I would like to recognize Mr. Duffy for 2 minutes for an
opening statement.
Mr. Duffy. Thank you, Madam Chairwoman.
I want to address my comments at the CFPB in a broad sense.
I think this is an appropriate time after what has happened
over the last several weeks, the issues that have come out with
the IRS and the AP to reflect on the structure of the CFPB.
When my friends across the aisle in the House wrote this
portion of Dodd-Frank, they had talked about having a
commission of bipartisan members to run the CFPB.
The way the rule has come out, the CFPB is run by a single,
politically appointed Director. The CFPB is a very, very
powerful agency that has a huge impact on the kind of credit
and access to credit people in all of our districts receive.
And you look at that powerful agency and I think we can
learn some things from what happened with the IRS. You have an
agency that is also very powerful that targets Americans for
their political beliefs, their political views, and it has a
chilling effect on people with that political view and belief
to organize around that set of ideas; it has a chilling effect.
What has happened with the press? You have had an attack on the
AP, Fox News, I don't know who else; but they have told us that
has had a chilling effect on their ability to access
information from informants and whistleblowers in regard to how
the government is working.
What relationship does that have to the CFPB? I have a
chance to talk to a lot of bankers, big and small, and they
talk about the exams that are going on from the CFPB that are
nothing like the other regulators do to them.
You are very powerful. You are very aggressive, and when I
say, ``Golly, that is great information, we should expose this.
Come on in and testify. We want to hear your story,'' guess
what they say? ``No way, because we are afraid of the
retribution. We are afraid of the impact on our institution
from the CFPB because we are going to talk about what they are
doing to us.''
Again, a powerful agency that has a huge impact on a very
important segment of our economy shouldn't be run by one
director. It should be bipartisan, so we have a whole set of
people with different views overseeing what the agency is
doing. I yield back.
Chairwoman Capito. Thank you. The gentleman yields back.
I would like to recognize Mr. Ellison for 3 minutes for an
opening statement.
Mr. Ellison. Let me thank the chairwoman and the ranking
member for this excellent hearing; it is very important.
I think it has been said by some that if we have greater
rules regarding mortgages, and if rules contemplated now
regarding Qualified Mortgages go into place, it could result in
fewer loans and less borrowing. I must say, I hope so.
The fact is, there were a lot of loans that should not have
been issued in the last several years. Let's never forget that
we are not here simply by accident. We are not here because
people like regulation; 4 million foreclosures happened.
As a matter of fact, 92 percent of subprime mortgages were
rated AAA, but then after the meltdown, nearly all of them were
considered junk bonds.
So it is not entirely a bad thing that some mortgages which
seemed like a good idea before the meltdown may now be looked
at with greater scrutiny.
A great many of the products that we saw were predatory in
nature. As a matter of fact, 70 percent of the subprime loans
from 2005 to 2007 were refis with features like exploding ARMs,
negative amortization, and balloon payments.
Of course, balloon payments may be okay for some, but they
weren't okay for all the people who got them. And we should be
more diligent in making sure that the product fits the
customer.
The products weren't designed to extend credit to
creditworthy borrowers but to target vulnerable homeowners with
little equity built up in their homes.
Lenders often stood to gain more from a default and
foreclosure than the loan performed. And it was exactly this
perversion of economic incentives that led to a meltdown in the
economy and the foreclosure crisis that has only recently shown
any sign of slowing.
In the wake of that crisis, there have been many injustices
visited upon homeowners, and it is unlikely that many of the
homeowners and many Americans who were forced to bear the
burden of the economic crisis will ever be made whole.
But we did manage to do one thing right, and I think that
is the establishment of the Consumer Financial Protection
Bureau. Now as the ranking member very wisely said, there has
never been a perfect piece of legislation, there has never been
a Federal agency or a corporation that works perfectly.
Therefore, this committee will have the responsibility to
monitor and offer oversight, and where it appears that the
agency is too aggressive, we should say something. But where it
appears that consumers don't have an advocate, we should say
something there, too. What we are striving for is balance, not
to side with consumers or producers, but balance.
I yield back.
Chairwoman Capito. The gentleman yields back.
I recognize Mr. Miller for 1\1/2\ minutes for an opening
statement.
Mr. Miller. Thank you, Madam Chairwoman.
We see the housing market starting to recover and the
economy is going with it, which I think we all agree is
important. We need to ensure that policies we pass in
Washington don't disrupt that in a negative way, and that is
the problem I have with QM today.
It is not a personal attack, I just think we need to look
at the reality of what we are doing out there. The ATR rule
will govern lending for the foreseeable future. I think none of
us will disagree with that comment.
The definition of QM, which is meant to protect consumers
versus predatory lending, is a good definition. In 2001, I
started introducing language that defined predatory versus
subprime and that should be a goal we have. But I am concerned
that the QM definition as written will probably hurt more
people than it will help.
I looked at a recent study by CoreLogic, and it said that
mortgages made in 2010, half of them would not qualify under
the QM definition, and I have talked to loan originators up and
down the State, I have talked to GSA's and they say those are
some of the best performing loans that they have on the books
today because they used good underwriting standards.
But the lenders I am talking to say that we will not
originate mortgages that do not fall under the QM label. I know
that there is a period we have to come into that in the GSE's
but I don't think it is going to happen. They are saying they
won't do it, and I think the 3 percent point cap as determining
the ability to repay a mortgage need to be more flexible.
I think it is drawn too narrowly, but we need to identify
modifications to the QM that would make it workable in the
marketplace, and I don't believe it is today.
Like I said, the housing market is showing signs of
recovery and we need to make sure that eligible borrowers--I
don't want to be making loans to people who can't repay them,
but the QM rule has to be flexible enough to allow eligible
buyers to buy homes.
And I see my time has expired. I yield back.
Chairwoman Capito. The gentleman yields back.
I would like to recognize Mrs. Maloney for 2 minutes for an
opening statement.
Mrs. Maloney. Thank you.
And I welcome the witnesses. There were a number of
provisions within Dodd-Frank that tackled the important issue
of consumer lending, and the Qualified Mortgage rule is
certainly among the most important.
The CFPB in my opinion has worked diligently to write a
fair and balanced rule that followed the intent Congress laid
out for responsible home lending.
No one disputes that in the years leading up to the
financial meltdown, mortgage lending got out of hand, and
underwriting was nonexistent. The new QM rule will ensure that
borrowers are protected from the risky lending practices that
contributed to so many homeowners ending up in delinquency.
The Bureau has handled over 150,000 complaints. It has
helped 6 million consumers reap over $400 million in refunds as
a result of enforcement actions against deceptive practices,
all while testifying before Congress at least 35 times.
I want to especially mention the rule that the chairlady
and I worked on to treat stay-at-home moms fairly in their
access to credit and credit cards, and the Bureau has worked
diligently towards its mission, and I look forward to hearing
more about your work in your testimony today.
And thank you.
Chairwoman Capito. Thank you.
I would like to recognize Mr. Westmoreland for 1\1/2\
minutes for an opening statement.
Mr. Westmoreland. Thank you, Chairwoman Capito, and thanks
for yielding and for holding this hearing.
I do not believe that I have ever heard a good word from my
constituents about the Qualified Mortgage rule. From
homebuyers, I hear many might not be able to qualify for a home
because they fall outside QM's government-anointed standards.
From bankers, I hear that credit will not be available for
some borrowers and they have to prepare for possibly 30 years
of potential litigation from borrowers who cannot repay.
Policies like QM are the most dangerous to economic freedom
in this country. If a borrower doesn't fit into the government-
approved box, you pay higher prices. Ironically, for the
minority and low-income borrowers the QM rule will supposedly
help, in reality, it will limit the opportunities for these
Americans to better their lives through homeownership.
In the end, QM will create another housing bubble just like
the Clinton affordable housing goals of the 1990s created the
2008 housing crisis. This country needs sensible housing
regulation that allows the market to set the price and the
qualifications for eligible borrowers.
I urge this committee to swiftly vote to repeal QM and to
return all Americans to their economic freedom.
And with that, Madam Chairwoman, I yield back.
Chairwoman Capito. The gentleman yields back.
Mr. Green, for 2 minutes.
Mr. Green. Thank you very much, Madam Chairwoman.
I thank you and the ranking member.
And I thank the witnesses for appearing.
Somewhere along the way, in the 1980s we ceased to qualify
people as homeowners and we started to qualify them as
homebuyers. In fact, the Internal Revenue Code provided certain
advantages to buying homes and selling them within a certain
amount of time.
We decided that for some reason, it was not important to
have the person who qualified the purchaser, to maintain some
relationship such that that person wanted to be assured that
the person borrowing could in fact afford the loan.
This is how we got into the 3-27s, the 2-28s, the no-doc
loans, the loans that were in some ways making it available for
those who wanted to buy and flip and take advantage of the fact
that the market was moving, but it didn't help people who
wanted to simply buy a home and live in a home, and many
persons received mortgages that were not suitable for their
circumstances.
I am proud to say that we have this Consumer Financial
Protection Bureau. It is important that consumers have
advocates for them. There were allegedly agencies available to
help consumers at the time all of these things came into being,
but for whatever reason, they did not function efficaciously
for consumers.
I am hopeful that we will achieve the balance that Member
Ellison called to our attention. Balance is important, but as
we achieve the balance, let's make sure we continue to focus on
the consumer and make sure that the consumer receives the type
of product that he or she can afford.
I am also interested in a definition. I have heard many
definitions of community bank, community banks versus small
banks, and I am curious as to whether or not you have embarked
upon defining community banks versus small banks.
And finally, your Office of Servicemember Affairs; I care a
great deal about the persons who serve us in our military, and
my hope is that we will help protect them from some of those
who seek to encroach upon their financial circumstances with
fraudulent items.
I thank you Madam Chairwoman, and I yield back.
Chairwoman Capito. Thank you.
I would like to recognize Mr. Fitzpatrick for 1\1/2\
minutes.
Mr. Fitzpatrick. Thank you, Madam Chairwoman.
As I have been meeting with bankers and credit unions in
and around my district, the conversation inevitably turns to
this new Qualified Mortgage rule.
Lenders in Pennsylvania are very concerned, and
understandably so, because they serve the community by making
loans, and their ability to provide that service depends on the
ability to assess creditworthiness. And there is concern that
by constructing a box in which they must operate that is
inappropriate, that qualified buyers and borrowers won't have
access to credit.
We all want business to be successful and for capital to be
available in our communities but when it comes to this issue, I
mainly want to ensure that responsible, working-class families
in my district can still buy their first home.
We are all unified in our opposition to ever going back to
the pre-bubble days; however, we can't allow overregulation to
dry up credit for the families trying to participate in the
American dream.
So I hope to receive those assurances here today. I look
forward to the testimony, and I yield back.
Chairwoman Capito. The gentleman yields back.
That concludes our opening statements. I would like to ask
all of the guests and Members to join with me in a moment of
silence of our thoughts and prayers for those victims and
families in the State of Oklahoma. Thank you.
[moment of silence]
Thank you.
I would now like to welcome our panel of distinguished
witnesses. Our first witness is Mr. Peter Carroll, the
Assistant Director for Mortgage Markets at the Consumer
Financial Protection Bureau.
Ms. Cochran. Actually, I will start and--
Chairwoman Capito. All right. Let me introduce you, then.
Excuse me.
Ms. Cochran. Thank you.
Chairwoman Capito. Ms. Kelly Thompson Cochran is the
Assistant Director for Regulations at the Consumer Financial
Protection Bureau. Welcome, and we will recognize you for your
5-minute statement.
STATEMENT OF KELLY THOMPSON COCHRAN, ASSISTANT DIRECTOR FOR
REGULATIONS, CONSUMER FINANCIAL PROTECTION BUREAU
Ms. Cochran. Thank you, Chairwoman Capito, Ranking Member
Meeks, and members of the subcommittee for this opportunity to
testify about the Bureau's Ability to Repay a Qualified
Mortgage rule and address the concerns that you have raised
this morning.
I am Kelly Cochran, the Assistant Director for Regulations
at the Bureau, and my colleague, Peter Carroll, and I are
honored to represent the Bureau here this morning.
During the years leading up to the mortgage crisis, too
many mortgages were made to consumers without regard for their
ability to repay the loans. Loose underwriting practices by
some creditors such as failure to verify the consumer's income
and assets, so-called no-documentation loans, and qualifying
consumers for loans based only on their ability to repay low
introductory interest rates contributed to a mortgage crisis
that led to this Nation's most serious recession since the
Great Depression.
Congress, in the Dodd-Frank Act, adopted a provision to
protect consumers from such irresponsible practices by
requiring creditors to make a reasonable, good-faith
determination of consumers' ability to repay their loans based
on verified and documented information.
The Act also provides a presumption of compliance with this
requirement for a certain category of loans called Qualified
Mortgages. However, the statute did not define how strong the
presumption would be, for instance, whether it would function
as a Safe Harbor or could be rebutted upon certain showings by
consumers. And it also left significant discretion as to how
Qualified Mortgages would be defined.
The Federal Reserve Board issued a proposal to implement
these provisions prior to the transfer of authority to the
Bureau in July 2011. In January of this year, the Bureau issued
both a final rule to implement these provisions and a proposal
to make certain additional adjustments both to facilitate
access to credit and to clarify certain provisions defining
Qualified Mortgages.
We are now working to finalize that proposal so that the
new rule as a whole can take effect on January 10, 2014. Our
written testimony contains a summary of the outreach that we
conducted in connection with the rulemaking and of the rule
itself.
Today, we wanted to briefly highlight some of the major
policy considerations that underlie the features of the rule.
Our first consideration in crafting the rule was to protect
consumers by preventing the return to irresponsible lending
practices.
The General Ability to Repay Standard is designed as a
commonsense measure to ensure that creditors use reliable
information when they are underwriting and that they evaluate
consumers' ability to make payments throughout the life of the
loan.
Although this statute was not as specific with regard to
documentation and the underwriting requirements for Qualified
Mortgages, we felt that it was important to ensure that
creditors also consider consumers' individual financial
circumstances when making Qualified Mortgages.
Accordingly, the rule requires that creditors consider
consumers' debts, incomes, and assets in making Qualified
Mortgages in addition to meeting certain statutory limitations
on loan features and up-front costs.
At the same time, we also carefully consider the need for
long-term flexibility. We do not believe that it is possible by
rule to define every circumstance in which a mortgage is
affordable given that underwriting is a highly complex and
individualized process.
We therefore worked to structure the rule in a way that
allows room for a range of reasonable underwriting practices
and models that are used by different types of creditors today.
We were also concerned that as the mortgage market
strengthens, the rule should provide appropriate safeguards
without becoming a straitjacket.
We balance these considerations in many places within the
rulemaking, including both leaving flexibility under the
general ability-to-repay standards for reasonable underwriting
practices and creating different types of Qualified Mortgages
that use different sets of safeguards to ensure that
affordability is being appropriately considered.
My colleague, Peter Carroll, will now discuss those
Qualified Mortgage provisions and some of the additional policy
considerations that went into their formulations.
[The joint prepared statement of Ms. Cochran and Mr.
Carroll can be found on page 49 of the appendix.]
STATEMENT OF PETER CARROLL, ASSISTANT DIRECTOR FOR MORTGAGE
MARKETS, CONSUMER FINANCIAL PROTECTION BUREAU
Mr. Carroll. Thank you, Chairwoman Capito, Ranking Member
Meeks, and members of the subcommittee for this opportunity to
testify about the Bureau's Ability to Repay and Qualified
Mortgage rule.
I am Peter Carroll, the Bureau's Assistant Director of
Mortgage Markets. I am also honored to represent the Bureau
here this morning.
Building on our policy considerations, the Qualified
Mortgage provisions of the rule were the most complex part of
the rulemaking. This was in part because the creation of a
general ability-to-repay requirement that carries potential
liability for creditors and asset needs has created anxiety in
the market.
A 2008 Federal Reserve Board rule that requires assessment
of a consumer's ability to repay certain higher-priced mortgage
loans does not appear to have a caused a significant increase
in litigation; however, we recognize that concerns about
liability under the Dodd-Frank Act, the ability-to-repay
requirement might cause creditors to constrain their lending,
particularly in the first few years after the rule takes
effect.
Access to mortgage credit is already constrained in this
market and we were concerned about unduly exacerbating these
constraints throughout rulemaking, while still ensuring
responsible lending. Several features of the rule address this
concern.
First, we provided for different types of Qualified
Mortgages that we expect will cover the vast majority of
today's mortgage market. We created a general definition of
Qualified Mortgage based on bright line standards that include
a 43 percent debt-to-income ratio.
Second, we created a temporary Qualified Mortgage
definition based on eligibility for purchase or guarantee by
the GSE's while they are in conservatorship and certain
government agencies whether those loans were sold or held on
portfolio.
This definition makes it easier for creditworthy consumers
with debt-to-income ratios above 43 percent to access credit
while the industry gets more comfortable with the rule.
Third, we calibrated the strength of the presumption of
compliance for Qualified Mortgages based on the loan's pricing.
We believe the Safe Harbor will provide certainty to creditors
in the prime market and the rebuttable presumption of
compliance will create strong incentives for more responsible
lending in the nonprime market.
At the same time, the rebuttable presumption preserves
important consumer remedies in the nonprime market.
Therefore, we believe that the Qualified Mortgage
definition is structured to encourage responsible credit in all
parts of the market over time.
As my colleague, Kelly, stated, we do not believe that it
is possible by rule to define every instance in which a
mortgage is affordable, but we are also concerned that an
overly broad definition could stigmatize responsible
nonqualified mortgages or leave insufficient liquidity for
those loans which could restrict access to credit for some
consumers.
For this reason, we defined Qualified Mortgages to provide
greater protection to consumers and certainty to creditors
while leaving room for a market for nonqualified mortgages
where appropriate.
We will continue to watch the health of mortgage markets
once this rule takes effect to ensure it is working as we
expect it will. To address access to credit concerns, we also
made changes to the part of the rule that treats certain
balloon payment loans as Qualified Mortgages if they are
originated and held in portfolio by small creditors in rural or
underserved areas.
We significantly expanded the definition of rural areas
from the Federal Reserve Board's original proposal and made
other adjustments to make it easier for small creditors to
continue making responsible balloon loans going forward.
Several elements of the proposed rule that we issued along
with the final rule, particularly the proposal to extend
Qualified Mortgage status to certain portfolio loans by small
creditors, are also intended to address access-to-credit
concerns.
Finally, we want to highlight that the Bureau has made an
agency-wide commitment to provide implementation support for
this and our other mortgage rules. We did this in part because
we realized that such efforts are particularly important to
small creditors that do not have large legal and compliance
teams.
We recognize that an efficient implementation process will
ultimately benefit consumers in the market as a whole. For
example, we have published a plain English summary of the rule
and a compliance guide designed particularly for smaller
institutions that will need to update their policies and
procedures and provide training for staff on the rule.
We are also publishing clarifications to the rule as needed
to respond to questions from various stakeholders. We are
coordinating with other agencies to develop examination
procedures and are developing videos, checklists, and other
tools that might be useful to creditors as they prepare for the
implementation date.
Thank you again for the opportunity to appear before you
today and provide you with an overview of the Ability to Repay
and Qualified Mortgage rule. We would be happy to answer your
questions.
[The joint prepared statement of Ms. Cochran and Mr.
Carroll can be found on page 49 of the appendix.]
Chairwoman Capito. Thank you.
Thank you both, and I will recognize myself for 5 minutes
for questioning.
You mentioned in your statement, Mr. Carroll, that you
expect over time to see markets developed for the nonqualified
mortgage. That sort of goes against anecdotally what I have
seen and heard; most folks who write mortgages feel if it
doesn't fall within the QM, there is no way they are going to
write the mortgages. What evidence do you have that this market
is going to develop around this rule?
Mr. Carroll. Chairwoman Capito, thank you very much for
this question.
The definition of the nonqualified mortgage space was
something that was definitely a major part of the work we did
in defining the Qualified Mortgage.
We are really trying to calibrate the definition of a
Qualified Mortgage based on feedback we received from broad
sections of the market, including both industry advocates as
well as consumer advocates.
There was certainly consensus that a broad Qualified
Mortgage was needed, so the Qualified Mortgage would cover a
broad sector of the market. This was a key concern that was
expressed to us during the rulemaking process.
Also, that bright lines be created so that creditors knew
how to comply with whatever the Qualified Mortgage definition
would be, is something of which we heard a lot.
In the short term, while the market is recovering, we feel
it is very clear that the markets are going to be looking to
the Qualified Mortgage space. That is why we did extend our
definition to cover a majority of the market.
We are expecting that over time--based on our analysis, we
do think that it is possible to quantify the risks associated
with nonqualified mortgage lending--
Chairwoman Capito. Could you move the microphone up close
to you?
Mr. Carroll. I am sorry. Yes.
Chairwoman Capito. I might have to interrupt you here,
because I only have 5 minutes, but go ahead.
Mr. Carroll. Sure. No, no, it is fine.
We do think it is possible to quantify the risks associated
with nonqualified mortgage lending. We think that is something
market participants will do over the course of the next few
years as they become comfortable with the rule, but in the
short term, I think we agree that a broad Qualified Mortgage
space is going to be important--
Chairwoman Capito. So the statistics that I think
Congressman Miller pointed out, that 52 percent of the loans
that were written in 2010 would not fall into this Qualified
Mortgage space, that is, half the people are not going to be
able to get a Qualified Mortgage and therefore the lenders are
going to be much less and probably will be unable to write
those mortgages.
I have a banker in West Virginia who has written 3,800
loans a year. He says, ``The QM rules will cause us to offer
less credit and generally the customers who will fall off the
table are higher-risk, lower-income customers, and West
Virginia has many of these.'' And I think you will hear this
concern expressed a lot.
One of the questions you mentioned is that the phase-in is
going to be complicated. You are reaching out to help
institutions to do that. Do you have any contingency plans that
if we get up to January 10th and there is still mass confusion
when this comes on stream, you could push these dates back?
Ms. Cochran. If I can take that one, the Dodd-Frank Act
itself in Section 1400 sets certain requirements with regard to
the implementation process.
That provision required us, where rules are required to be
promulgated under the statute, to issue them by January 21st of
this year. Also, it requires for required regulations, that
they be implemented within 1 year after they have been issued
in final form.
That is why we are investing so much into the regulatory
implementation process, to facilitate and support particularly
with regard to small creditors. We realize that they have a
limited compliance and legal staff, and it is important for us
to do everything we can to help meet that deadline.
Chairwoman Capito. So at this point, no. No contingency
plans to push back.
My last question is--I have a bank in the northern part of
the State which has a charitable organization sort of modeled
after Habitat for Humanity, but they help folks who really--it
is under $100,000 loans--would and it is a gift basically, but
their customers who have, that they vet very well and it is a
wonderful charitable program are not going to fall into this
ability-to-repay tranche and this bank is saying, ``We are
going to have to stop this charitable program because we can't
take the risk.''
What kind of provisions do you have for exceptions to this
where you really--these folks are going to have no other way to
get a home, no other way to access credit without a charitable
program, confined to one county by a small and very benevolent
family who many years ago decided that housing was critical to
these families?
Ms. Cochran. As we mentioned, at the time that we issued a
final rule we also issued a proposal to make certain additional
adjustments. A number of those adjustments were focused on the
potential exceptions to the Ability to Repay and Qualified
Mortgage regime to address access to credit.
So this includes certain types of nonprofits, certain
housing stabilization programs, housing finance agencies, and
other very specialized lenders that are specifically focused on
low- to moderate-income populations and making sure that they
can access credit in situations where conventional lenders are
not willing to make those loans.
That proposal is still pending. We are working to finalize
it as quickly as possible because we think it is an extremely
important issue. It had not been proposed as part of the
original rulemaking, so we wanted to seek comment on it before
finalizing, but we are working very hard to tie that up.
Chairwoman Capito. Well, I would encourage you to move
forward on that.
And I will now recognize my ranking member for 5 minutes.
Mr. Meeks. Thank you.
And let me say as I have heard on both sides we know that
especially no-doc loans were the cause of this problem that we
had, the financial crisis. What my concern is, most of the
loans that we saw that caused the problem really were not
issued by credit unions or community banks.
Yet, it seems as though the rule as promulgated is going to
have a direct effect on them more so than anyone else. Now I
know that there was a comment period that was open where
individuals could raise comments and concerns in regards to
what you were looking at.
So my question to you is, did you receive comments and
concerns from some of the community banks and the credit
unions? What were those? And are any reflected in some of the
decisions that you made when you promulgated the rules?
Ms. Cochran. Thank you so much for the question.
Yes, we received extensive comment from small community-
based creditors, banks, credit unions, and so on, both in the
original rulemaking and as part of the concurrent proposal that
I just mentioned.
So in the final rule, we made a number of adjustments to
address concerns that had been raised by these institutions,
including significantly increasing the size of the provisions
for Qualified Mortgages that involve balloon payments.
Generally, the Dodd-Frank Act strongly disfavors balloon
payment loans, but Congress did provide a provision that allows
such loans under certain circumstances to receive Qualified
Mortgage status if they are made by small institutions that are
operating predominantly in rural or in underserved areas.
We significantly increased the size of the definition, and
in the concurrent proposal we also sought additional comments
about creating a fourth category of Qualified Mortgages that
would be available to small creditors, regardless of whether
they operated in rural or underserved areas.
We recognize that these institutions are using
relationship-based lending, that is highly effective, that
often leads to much lower foreclosure rates, and we believed it
was appropriate to propose a separate category of Qualified
Mortgages to recognize the fact that these institutions, when
they are holding the loans on portfolio, have significant
reasons to do a good job of underwriting, and are serving their
consumers well.
That proposal is still pending, but we are working to tie
that off as quickly as possible. We are very sensitive to
concerns about how this rule will impact small institutions.
That is one of the main reasons we went back out for comment to
continue to consider how the different parts of the rule were
going to influence small institutions.
We have also proposed increasing the threshold between
Qualified Mortgages that receive a Safe Harbor and those that
receive a rebuttable presumption for small creditors in light
of the fact that they often have higher costs of funds. So
those are still live issues, but we are taking them very
seriously, and are hoping to tie them off quickly.
Mr. Meeks. On those live issues, for example, because that
is what I also have concern about where the debt to income
capital for 43 percent looks like it unduly reduces the credit
for low- and moderate-income borrowers especially, you have
young people who are buying homes for the first time or who
still have student loans, so this could just knock them out of
the market altogether, of being able to look forward to buying
a home, and so that is a huge impact, I would think.
Ms. Cochran. For the balloon Qualified Mortgage rules,
which have already been finalized, we require that small
creditors consider debt-to-income ratios but not be bound by a
43 percent threshold. We have proposed the same approach with
regard to the new category of small portfolio Qualified
Mortgage.
As I said, we know that these institutions are using highly
individualized relationship lending models and that they are
highly effective. We did not feel in that circumstance it was
necessary to provide a bright line threshold as long as they
are considering consumers' debt, income, and assets.
Mr. Meeks. I only have 39 seconds, so I don't know if I can
get everything in.
My question is to Mr. Carroll, in that the CFPB addressed
the issue of affiliate discrimination in the calculation of
fees and points in the final QM rule, and I was wondering if
that has been causing a big issue in New York because of the
pending costs and whether or not that can be re-calculated?
Mr. Carroll. Thank you, Congressman.
Affiliate fees are required by the statute to be included
in the 3 percent point and fee cap. We did receive a lot of
comments on this issue.
On the one hand, there are arguments that affiliates create
challenges to competition in the market for those services. On
the other hand, there are arguments that affiliates create a
more streamlined process that can reduce costs in the market.
We have considered these arguments in our rulemaking and
right now we have reflected the statute's requirement that
those be counted in the points and fees test.
Chairwoman Capito. Thank you.
Mr. Duffy, for 5 minutes.
Mr. Duffy. Thank you, Madam Chairwoman.
Everyone on this committee, and probably in Congress,
agrees that we needed some changes to how our lenders were
making loans. Many of us are concerned about the no interest,
the negative amortization, the low or no downpayments. We
weren't verifying income or assets. There were big problems
that needed to be fixed, and I think all of us would agree with
that.
But I think what we are starting to see here too is an
agreement that we understand one size doesn't fit all, and I
know that we have tasked you to try to make one size fit all,
but you start to see all of the problems that come from a
government that is very large, very expansive, and says, this
is the cookie-cutter system that we are going to make you work
in.
And I think we see this pendulum swinging back and forth
where we had gone too far over, lax standards and that helped
us create the crisis.
Now I think with this rule we have swung the pendulum all
the way over to the other side, instead of maybe going back to
some of the standards that we used when the system actually
worked.
When we talked about the five C's--the character, capital,
capacity, collateral, and conditions--we did pretty well, and
we actually empowered people in this industry, our bankers to
evaluate their clients with sound standards to make good loans.
That actually did work.
Now, we have taken all of the discretion out of banking and
really we can get rid of all of our bankers. You can just go
fill out a form online and submit it and it can be approved or
denied based on the very rigid standards that we have with the
QM rule, and that is one of my concerns with how rigid this is.
And I also have a concern that many of the loans that have
been made over the last several years wouldn't fit this
definition--many of our mortgages wouldn't fit this definition.
Has the CFPB done a study to look at the mortgages that have
been made and what percentage of them would fit within the QM
rule that has been drafted and the percentage that would not
fit within your rule?
Mr. Carroll. Yes, Congressman, we did do that study as part
of our cost-benefit analysis within our rulemaking. We did size
the market, and by our numbers, we got our general definition
of a 43 percent debt-to-income ratio, and by our calculations,
that is roughly three-quarters of the market of recent vintages
that is covered. And that--
Mr. Duffy. So three-quarters of the mortgages you analyzed
would have fit within your QM--
Mr. Carroll. Within the Qualified Mortgage definition we
have laid out. Our objective with the rulemaking was to get
closer to 100 percent, which was why we created this temporary
definition for loans that are eligible for insurance or
purchase by the GSE's or FHA. When we size that in, we get
closer to 100 percent of recent year loans.
Ms. Cochran. If I might add to that, on two aspects.
First, with regard to the analysis we did, the one area
where we could not model was with regard to the 3 percent
points and fees cap because we did not have the data for that.
We were able to consider the loan features and other
underwriting requirements, so we were able to build that in and
model it. And as the chairman mentioned, there have been, I
think, other analyses of these that have come to different
percentages. We believe that our percentage and analysis was in
fact correct and that the overall number is above 90 percent.
One of the things that I wanted to mention about the
flexibility point is--and I discussed this in my original
testimony--we thought very hard about that issue and we really
did not believe that a one-size-fits-all approach makes sense.
So for instance, the ability-to-repay requirements provide
a fair amount of coverage with regard to using reasonable,
reliable, third-party methods, but even there, we provided
flexibility for lenders to use reasonable sources.
Also, the statute provides specific rules with regard to
how you calculate the monthly payments so that negative
amortization loans and so on are treated consistently.
But when it comes to considering underwriting criteria such
as how much you weigh debt-to-income ratio versus credit score
versus other features, the rule requires that it be considered,
but it does not dictate underwriting models.
We felt that it was extremely important to leave room for
reasonable underwriting practices in a range of models that are
being used today. So we were very carefully balancing it both
on the ability-to-repay side and through the different types of
Qualified Mortgages.
Mr. Duffy. And I don't know that the committee has received
that study--have you seen it, Madam Chairwoman?
Chairwoman Capito. I do not have that study.
Mr. Duffy. Would you mind providing your analysis to the
committee so we could take a look at what you have done?
Ms. Cochran. Absolutely. It is part of our Federal Register
notice on the final rule, but we can excerpt it and provide it
to the committee.
Mr. Duffy. Thank you, and I just want to make one other
point in my last 15 seconds.
There is a great concern in the part of the country where I
live, in rural Wisconsin, and the definition that allows for
our rural balloon mortgages.
I have a rural Wisconsin map here on the northwest corner,
and if you are driving between Chippewa and Taylor County or
Rusk and Chip or Dunn and Barron and Lincoln, listen, there is
no difference.
It is farms as far as the eye can see for 30 miles on
either side of the county line. And it creates some real
problems and disadvantages within my community the way the rule
is written.
Hopefully, we can consider some different standards on how
we are doing our balloon mortgages. I yield back.
Chairwoman Capito. Thank you. Mr. Watt?
Mr. Watt. Thank you, Madam Chairwoman, and Ranking Member
Meeks for convening this very important hearing.
I want to start by expressing my appreciation to the CFPB
for what I think is a very good effort in a very, very
difficult terrain and reminding the committee that one of the
reasons that we punted this responsibility to somebody other
than this committee or the Senate Banking Committee or the
conference committee was because of the difficulty of
addressing all of these are very delicate nuances.
We were operating in a period where obviously the pendulum
had swung way too far in the direction of allowing loans that
shouldn't have been allowed to be made and there was concern
that we were going to swing the pendulum back too far in the
opposite direction.
And so our desire under this bill, of which Representative
Miller and I were the primary sponsors, initially at least, was
to try to find a new balance without constraining credit
unduly, at least credit to people who were worthy of getting
credit, and still not allow the kinds of abuses that had taken
place in the marketplace.
So a lot of the the detail of this was really punted to the
CFPB and the Federal Reserve initially and then to the CFPB to
work out these nuances and the CFPB was very responsive in
listening to a whole range of people, including those of us who
had advocated aggressively for constraints on the market to
clean it up back in the opposite direction to define what a
Qualified Mortgage was.
And I think we really got to a pretty good balance as an
initial proposition. Obviously, there are always going to be
people second-guessing whether you got the correct balance.
Probably the people we would prefer to see doing this wouldn't
be Members of Congress sitting on this committee trying to do
this.
I do want to ask about this 3 percent cap. I know the 3
percent cap is in the law itself. You said you couldn't model
the 3 percent cap because you didn't have sufficient
information.
What would it take to do that model, because there are a
lot of questions being raised now about whether the 3 percent
cap itself, which is statutory, not something that the CFPB
did, is an appropriate cap? What would it take to model that?
Mr. Carroll. Thank you, Congressman.
It is a terrific question. I think what we would need is a
representative sample of affiliate fees across the country that
would represent just an ordinary course of typical mortgage
transactions--
Mr. Watt. Okay, so you could undertake that study and help
of the committee going forward if the committee decided to look
more closely at where the 3 percent ought to be 3.25 percent or
3.5 percent?
Mr. Carroll. We would be very happy to provide technical
assistance, yes.
Mr. Watt. Okay.
The second thing is that when we introduced the bill, Mr.
Clay on our side on this committee offered an amendment that
struck this differentiation between affiliated and unaffiliated
title insurance companies.
We actually supported Mr. Clay's amendment and the bill we
reported out did not have this affiliated/unaffiliated
dichotomy. You have looked at that. Do you think that the
affiliated/nonaffiliated distinction serves a useful purpose at
this point?
Mr. Carroll. With regards to affiliated title?
Mr. Watt. Yes.
Mr. Carroll. We have heard many comments, Congressman,
about affiliated title versus non-affiliated title.
Specifically, in that particular sector there could be
safeguards in place that should be considered, and that there
is generally State oversight of the premiums charged around
affiliate title. We did hear those comments during the
rulemaking process and--
Mr. Watt. My time is up, but could you just submit to the
committee some of the alternative approaches you think might be
considered to address this affiliated/unaffiliated title issue?
Mr. Carroll. I would be happy to follow up, Congressman.
Mr. Watt. Thank you so much.
Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you.
Mr. Miller, for 5 minutes.
Mr. Miller. Am I safe in saying that you are hearing
bipartisan unhappiness with your rule? If it is not--I think we
can all raise our hands saying we are on happy to begin with.
It appears to me that the rule is much more restrictive
than the legislation that enabled you to do what you are doing
and I can't believe you can't make this work without us having
to pass a new law to clarify a law that should have given you
flexibility to make it work.
So I think we are trying to tell you that we have a problem
with what we are hearing out there and you said you used--they
said three-quarters of the loans you reviewed met the QM rule.
What year were those loans made?
Mr. Carroll. That was looking at 2011 loans.
Mr. Miller. Okay, so half of them in 2010, CoreLogic says
would not meet your QM rule. Three-quarters in 2011 don't meet
the QM rule, and everybody, Freddie Mac and Fannie Mae,
everybody is saying that loans made in 2010 are performing very
well. FHA's are performing very well.
So, that is problematic. It raises a big flag saying, hey
guys, let's go back and see what we can do out there. You are
going to get us a copy of the study you used to make your
determination, is that correct? I heard you say that. Okay.
Recently, you gave a 7-year exemption to Freddie and Fannie
to implement the QM rule. Is that correct?
Mr. Carroll. Yes, Congressman.
Mr. Miller. That raises a huge concern on my part of why
would you give them 7 years if it is a good rule and then they
are coming back saying no, we are going to implement it
immediately, which is even more bothersome.
Can you please address that?
Ms. Cochran. If I might explain. We, as I mentioned,
created multiple definitions of Qualified Mortgage under the
rule. The first definition of Qualified Mortgage, the general
definition, uses a 43 percent debt-to-income ratio. We did that
because we received extensive comment from industry saying they
needed bright lines to determine exactly what was a Qualified
Mortgage and what was not.
This threshold, 43 percent, is the historical threshold
that has been used by the Federal Housing Administration and is
familiar to lenders. It is a relatively broad threshold
compared to certain other ones that are used and we felt it was
an appropriate and familiar threshold to use.
At the same time, we realized there was concern that
responsible, creditworthy borrowers over 43 percent would have
a difficult time in the first few years after the regulation
took effect--
Mr. Miller. That is a concern right there.
Ms. Cochran. --in getting--
Mr. Miller. And right on that point, we are in a very
moderate recovery, very moderate.
Ms. Cochran. We were very concerned about that.
Mr. Miller. Very sensitive. I am really concerned about it
and they are saying, FHA is saying no, we are going to
implement it day one. That has to create some concern for you
because your study obviously said we need to allow this more
time.
So I am saying based on their decision to implement
immediately, I am asking you I think you are hearing the
concern on both sides to go back and look at it and say maybe
we need to do something a little differently than we have
because every lender I am talking to, everybody says we are not
making any loans that do not meet the QM rule.
Ms. Cochran. Right.
Mr. Miller. That is a recipe for immediate disaster come--
this coming January, in my opinion. I am looking at a
marketplace that has been devastated for years. Now we are
looking at--I would say near the third quarter of last year you
started to see it get a little healthier.
This year, you are even seeing a little better marketplace.
Peoples' home values are starting to come back up a little bit.
Should we decide to implement a rule that devastates the
lending industry overall, those values are going to go right
back down. I am not mad--I am concerned.
Please don't take my comments as a personal criticism. I am
saying that I am hearing both sides of this saying, ``We have a
huge concern.'' I am hearing the private sector saying, ``We
have a major concern because we are not going to do anything
that puts us outside of the QM rule,'' and based on that, I
think you need to do something and also I heard a comment on
the 3 percent cap on points and fees--none of those were used
in your study because they weren't implemented in so that
didn't even apply.
And I am not sure you knew what was supposed to be even put
into the 3 percent when you implemented the rule.
Legislatively, it was kind of--it allowed you a broad area to
review before you implemented that, and I am not certain that
it is not critical that you did that.
So I think that needs to absolutely be revisited. Mr. Watt
also said the same thing. We don't have to go rewrite a law to
give you leeway that you already have, but I have a lot of
questions and I am not going to get to them because I am really
concerned about the comments you made because they are very
enlightening and they are not negative, they are just
enlightening and the comments that you are hearing us up here,
we are very concerned and if we don't do something to modify
this rule before January, I think you see the same recipe
coming that I see and it is not healthy. It is not good and I
would strongly encourage you to not force us to legislatively
change the rule to be more flexible in the rule.
I yield back the balance of my time.
Chairwoman Capito. Thank you
Mr. Green, for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman.
Please permit me to extend to Mr. Cordray my best wishes,
and let him know that I am looking forward to a future meeting
with him.
Madam Chairwoman, I would like to, if I may, call to our
attention an article in the New York Times entitled, ``U.S.
Consumer Watchdog to Issue Mortgage Rules.'' This article calls
to our attention the following: ``Mortgage bankers generally
applaud the new regulations saying they clear up uncertainty
that has hung over the home-lending business since the
financial crisis.''
It goes on to say, ``These rules offer protection for
consumers and a clear, safe environment for banks to do
business. I understand that you have not created a perfect
rule. But I also understand that we cannot allow the perfect to
become an enemy of the good,'' something we often say here.
So I am going to segue now to something else that I call to
your attention because I am concerned about servicemembers and
I am concerned that too many of them are still falling victims
to scams.
Some might ask, how many is too many? One is too many, and
here are some of the things that cause me a good deal of
consternation. I understand that the postdated check scam still
looms large.
Car titles are being utilized, too, as a part of scams.
They have businesses located just outside of military bases
because they can't engage in on-base solicitation.
We still have retirement benefits that may be a part of
scams. They are being reassigned. Some of these scams originate
in foreign countries. So could you just tell me quickly, are we
looking at the scams that are being perpetrated upon our
military personnel?
Ms. Cochran. Obviously, our Office of Servicemember Affairs
is taking the lead for the agency in working on all these
issues. They coordinate very closely with other parts of the
Federal Government and are trying to bring greater transparency
and awareness to all sorts of issues, including scams.
I believe that they have been aware and gathering
information about all of these issues, and we would be happy to
relay your question and provide more specifics. I don't think
either of us can speak to the details of what they have
learned.
Mr. Green. Thank you. I think that is a fair answer,
because I know what you came prepared to discuss today. I just
could not pass up the opportunity to speak up for
servicepeople.
Ms. Cochran. It is something we take very seriously. We
appreciate it.
Mr. Green. Thank you very much.
Let's move quickly to another topic that we brought up,
community banks versus small banks. I appreciate greatly the
question that the ranking member posed and I thought you gave
an answer that was acceptable, but could you kindly give me a
quick indication as to whether or not you are making a
distinction between a community bank and a small bank, and if
so, what is that distinction?
Ms. Cochran. We have looked at the impact on small
creditors throughout the Dodd-Frank Act mortgage rulemakings,
and in a number of places we have made accommodations or
changes in the way the rules apply to smaller institutions.
But we have done that in a context-specific setting. So we
are not applying a single definition in all circumstances.
Instead, we are looking at the particular activities at issue.
So for instance, in the Qualified Mortgage and escrow
rulemakings, we looked at a definition of small creditor that
was focused on what types of creditors might have difficulty in
escrowing and providing adjustable rate mortgages as compared
to balloon mortgages.
So we set one threshold there for those provisions and we
are proposing to continue that threshold with regard to the new
category of Qualified Mortgage. In the--
Mr. Green. If I may intercede just quickly, are you
focusing more on a small institution as opposed to a community
bank?
Ms. Cochran. We are looking at a number of factors when we
set those thresholds. What we set as a threshold was $2 billion
in assets and that the institution along with its affiliates
was originating no more than 500 first lien mortgages a year.
We were doing that because we were looking for institutions
that are using relationship-based lending that are accountable
to a specific community, so not only are they holding these
loans in portfolio, but because of the nature of their lending
practice, they have very strong incentives and very strong
practices to protect consumers.
In the servicing context, we also looked at and exempted
small servicers from certain parts of those rules.
Mr. Green. Let me intercede quickly to ask--
Ms. Cochran. But we put a different definition there--
Mr. Green. --because I have 3 seconds--
Ms. Cochran. --based on--
Mr. Green. --quickly, I must ask, when will this new rule
be available for us to visit with you about?
Ms. Cochran. We are working to implement it as quickly as
we can. We will issue it shortly because we want to get it
finished. We know it is extremely important as people are
working towards implementation.
Mr. Green. It is, and I thank you very much.
I yield back, Madam Chairwoman.
Chairwoman Capito. Thank you.
Mr. Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
Just one question, out of curiosity. Has either one of you
ever worked in the private sector and made a housing loan?
Mr. Carroll. Congressman, I have worked in the private
sector serving banks.
Mr. Luetkemeyer. Serving? What do you mean? Have you ever
made a house loan?
Mr. Carroll. No. No, Congressman.
Mr. Luetkemeyer. Ms. Cochran?
Ms. Cochran. I was in private practice mostly for financial
institution clients prior to going into government.
Mr. Luetkemeyer. But you never made a loan?
Ms. Cochran. No.
Mr. Luetkemeyer. Okay.
Just out of curiosity--one of the things you are working
through this morning is the results of the low-doc loans. We
went in and we thought we were really bright. We wanted to
start to make it all quick and easy and available. The system
was working and now all of a sudden we have low-doc loans and
now it is all messed up and now we are trying to fix it. Is
that roughly right?
Ms. Cochran. That was certainly one of the concerns--
Mr. Luetkemeyer. One of the problems we have? Okay.
So as we try and fix this, you now have been directed by
the law that Congress passed to try to figure out how Qualified
Mortgage--to come up with a standard.
I guess the question is--and I have this difficulty
sometimes with a lot of individuals who serve in the
bureaucracy from the standpoint of interpreting those laws
sometimes can be difficult and the intent of Congress.
And when they make a rule, suddenly they believe that is
the only way that this rule can be made and they become very
inflexible.
Do you have enough flexibility that you believe with the
way this rule was or the law was propagated, the law was put
before you that you have the flexibility to be able to make the
changes that can accommodate the things we are talking about
this morning?
Ms. Cochran. We structured the rule in a way that
specifically provided for flexibility. As--
Mr. Luetkemeyer. I am not talking about the lenders. I am
talking about you.
Ms. Cochran. Yes.
Mr. Luetkemeyer. Do you have enough flexibility to go back
and make the changes we are talking about this morning?
Because we have talked about a lot of things. We talked
about--Mr. Watt talked about the 3 percent, Mr. Miller talked
about a lot of things with regard to this. Somebody else, I
think it was Mr. Duffy, talked about the rural definition here.
There are a lot of things that need to be worked on. Do you
have enough flexibility to make those changes and are you
willing to do that?
Ms. Cochran. We have created a structure that we believe
will be helpful in considering where further adjustments are
necessary in the rulemaking. One of the things that we did, in
addition to creating the main definition of Qualified Mortgage
and the temporary definition of Qualified Mortgage, which is
not an exemption for Fannie and Freddie--
Mr. Luetkemeyer. You are not answering my question. All due
respect, Ms. Cochran, you are not answering my question.
It is very simple. Do you have the flexibility and are you
willing to use it to make the changes we are requesting this
morning and discussing? Yes or no?
Ms. Cochran. We made the best decisions that we could in
the rulemaking process--
Mr. Luetkemeyer. Okay. I will grant you have done--you have
made your decision. Now are you willing to go back and take a
look at changing it based on the things we are discussing this
morning?
Ms. Cochran. We are continuing to consider a number of the
issues that were discussed this morning in the context of the
concurrent proposal, and as I discussed we want to tie that off
as quickly as possible.
We do believe that we have flexibility there and we
proposed those changes to make sure that we address some of the
concerns that have been raised.
We have also structured the rules so that as the 7 years
progresses and the temporary category of Qualified Mortgage
would come to a close, we would have the ability to look at the
market, how it is developing, if it is developing as we
predicted, and make adjustments to the rule at that time, if
necessary.
Mr. Luetkemeyer. Okay, so is there enough flexibility in
the rule then to allow you to do that? Or in the law? You feel
you have enough flexibility then apparently, is that right?
Ms. Cochran. We believe that we have flexibility to make
important decisions and that we are continuing to use that
appropriately, yes.
[laughter]
Mr. Luetkemeyer. Okay. Well, no wonder we can't get
anything done here. We can't get a straight answer.
Okay, with regards to the level of participation you
anticipate by the different groups, agencies, you broke it down
to different banks, small lenders, big banks, mortgage lenders,
and we have had two different, three or four different numbers
around here this morning with regards to participation.
It would seem to me by the definition of a Qualified
Mortgage and the Safe Harbor that it provides that those loans
that are made outside that Safe Harbor would then have an
inordinate amount of liability risk for the lender, will they
not?
Do you not believe that will be the inference from
protecting and having Safe Harbor loans that are made that way
and those obviously that are not? Wouldn't you believe that
would be the case?
Mr. Carroll. Congressman, that is a very good question.
We calculated what we believe the litigation risk might be
in our 1022 analysis for nonqualified mortgages and then the
lesser amount of litigation risk for Qualified Mortgages that
carry rebuttable presumption of compliance.
Mr. Luetkemeyer. Where I am going with this is if there is
more risk, inherent risk with those mortgages that are made
outside that, and the lenders then are less willing to do that,
there is going to be an access to credit problem.
If you have an access to credit problem, where are they
going to go? Some will go to agencies like FHA, which is making
loans according to this testimony we have heard in this
committee, before that are kind of like Freddie and Fannie were
making, that are kind of beyond the scope.
Now, we are going to wind up forcing them into a government
agency that is already in trouble. So, this is a self-
fulfilling problem with the way we are structuring this.
And I see I am out of time, I appreciate the indulgence of
the chairman.
Thank you.
Chairwoman Capito. Thank you.
I would like to state that without objection, members of
the full committee who are not members of this subcommittee may
sit on the dais and participate in today's hearing.
I would also like to submit statements for the record from
the American Land Title Association; the Credit Union National
Association; the Independent Community Bankers of America; the
National Association of Federal Credit Unions; the National
Association of REALTORS; and the West Virginia Bankers
Association.
Without objection, it is so ordered.
Mr. Ellison is recognized for 5 minutes.
Mr. Ellison. Thank you, Madam Chairwoman, and Ranking
Member Meeks.
Please do convey my appreciation to Mr. Cordray. I hope he
does get confirmed. I think it will be for the benefit of the
country.
I would like to ask a question. There has been some
discussion about mortgages that may or may not be made that are
outside of the QM. I wonder if you could talk about those a
little bit and what the last several years has taught us about,
I don't know, no job, no income, no money down-type loans,
prepayment penalties, balloon payments, 2-28s, 3-27s.
There is a reason that you guys have focused on certain
types of loans, to say these would be considered the safe ones,
and there is a reason why some are not.
I wonder if you could elaborate on that, and I also wonder
if you could even discuss this question. The point has been
made there may be fewer loans made, some loans that were made
may not be made.
Is that necessarily a bad thing given some of the
difficulties that we have seen over the last several years with
loans that probably should have never been made? Would you care
to elaborate on that, please?
Mr. Carroll. Thank you, Congressman.
When we were creating the Qualified Mortgage definition, we
were working with a few kind of core principles.
At its core, it is an Ability-to-Repay rule where the
objective of the rulemaking is to eliminate some of the
practices that were problematic during the financial crisis.
So eliminating no-doc lending was an important part. Making
sure that when creditors do a debt-to-income ratio calculation
they are using the fully indexed rate, the actual rate, not the
introductory or teaser rates. It is just some basic practices
that creditors do today and have been doing for a long time.
We did hear very broadly, in the midst of the rulemaking
process, that a broad Qualified Mortgage definition was
important because, since the crisis, there has been a lot of
concern about risks of all shapes and sizes, whether they would
be operational, credit, interest rate, compliance-related,
litigation-related.
And so, we did hear very broadly that a broad Qualified
Mortgage was important particularly in this stage of the
market's recovery. We have endeavored to try to do that and
create a broad Qualified Mortgage space, but we did also in the
course of our work, try to analyze what we think the risks
would be in the nonqualified mortgage space.
And when we run numbers, we find that in a normal market
environment, that should be a fairly manageable risk that
lenders should be able to account for and really what it
relates back to is that when we draw a Qualified Mortgage
space, we want to try to draw standards that we think are
reasonable.
So what is a reasonable debt-to-income threshold if we are
going to provide clarity and bright lines to industry? We
locked onto 43 percent. We felt that was a standard that has
served consumers in the past.
It has represented an outer boundary of risk that the FHA
has used for a number of years and we felt that, as a core
definition, did cover a pretty broad set with about three-
quarters.
We were challenged in the short term to try to find a
mechanism that would get us closer to 100 percent. That is why
we did decide to look to the standards of FHA and the GSEs to
accomplish that, and this is an important point.
We are talking about this extension definition. What we are
really trying to accomplish is a way that we can, in this stage
of the market's recovery, have a mechanism so creditors can
extend beyond the 43 percent debt-to-income ratio. That was our
objective with this rulemaking.
Mr. Ellison. Thanks a lot. I guess the only point I am
trying to make is I am glad my colleagues on both sides of the
aisle are concerned about making sure there is credit
availability, but I hope we all also can agree that we believe
there was a bunch of loans that were done that probably never
should have been done.
And I hope that we keep that in mind, too. Because we can
go back to the Wild West and that won't be good either, so
let's keep the balance concept in mind.
Also too, last month the CFPB fined 4 private mortgage
insurers about $15 million for illegal kickbacks. There have
been other problems with inflated appraisals in other ways
consumers overpaid. Do you think a 3 percent cap on points and
fees will make loans more affordable and fair to borrowers?
Ms. Cochran. As we mentioned, the 3 percent points and fees
cap is in the statute itself. It does allow for up to two bona
fide discount points in addition to that threshold depending on
the rate of the loan.
We believe that Congress was looking at the up-front costs
to consumers and concerns that potentially, where up-front
costs are very high, creditors and other participants in the
process may not be as focused on the long-term performance of
the loan but rather the up-front cost recovery.
So we have implemented that as directed by the statute and
we are continuing to consider some aspects of that rule in the
concurrent proposal particularly as it relates to loan
originator compensation.
Chairwoman Capito. Thank you.
Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Chairwoman Capito.
Now, it is interesting, because so many of us have looked
at the Qualified Mortgage rule, the QM rule and realized that
our community bankers and our community credit unions are
telling us that they are not going to lend outside of the QM
standard--and you are nodding your head.
You have heard this as well, and I am sure you have heard
it this morning but Citizen Cordray, Richard Cordray, I like to
call him ``citizen'' rather than ``director'' based on the non-
Senate confirmed nature of his directorship, but Citizen
Cordray said in front of CUNA, the Credit Union National
Association, a short time ago, ``I know that complying with our
new regulations is a worry for many of you, so allow me to make
a few points clear. First, the criteria for Qualified Mortgages
are intended to describe only the least risky loans that can be
offered to consumers. But plenty of responsible lending remains
available outside of the Qualified Mortgage space, and we
encourage you to continue to offer mortgages to those borrowers
you can evaluate as posing reasonable credit risk. Those that
lend responsibly, like credit unions, have no reason to fear
the Ability-to-Repay rule.''
Now, it is not clear to me based on my conversations with
community bankers and credit union leaders that that is in fact
true.
Right? So if Mr. Cordray claims that this question of the
ability to repay is all right, you are not going to be subject
to it if you lend outside of it. So why did the CFPB create the
Qualified Mortgage so narrowly, Mr. Carroll, if in fact the
intent was to have lending well beyond?
Mr. Carroll. Thank you, Congressman, for the question. I
think our objective was to try to make it broad, and it sounds
like there is some disagreement today if we have succeeded in
doing that.
Our intention in developing the rule was to build a broad
Qualified Mortgage and it sounds like there has been some
concern about that.
Mr. McHenry. Okay. So we will just disagree on that.
Let me ask you a separate question. Do you believe that
lenders are going to originate nonqualified mortgages?
Mr. Carroll. We see it happening today--
Mr. McHenry. No. It is happening today because is the QM
rule imposed upon institutions?
Mr. Carroll. No, not until January.
Mr. McHenry. Okay. So therefore, you are talking about pre-
QM, and it is artful. It is a very artful, nice answer, but
technically, you are correct. Post-QM, let me restate the
question. Do you think the lenders are going to originate
nonqualified mortgages?
Mr. Carroll. We think some will, Congressman.
Mr. McHenry. Some?
Mr. Carroll. Yes.
Mr. McHenry. Okay. Based on what belief?
Mr. Carroll. We just believe that there will be lenders who
are going to make loans or that are, where they understand the
nature of the loans they are working with. For example, we have
seen some interest-only jumbo products that we suspect will
continue when the rule takes effect.
Mr. McHenry. Which is how much of the marketplace?
Mr. Carroll. It is not a very large--
Mr. McHenry. Excessively small or incredibly small?
Ms. Cochran, let me ask you this question about legal
liability. If an institution offers a Qualified Mortgage, there
are some liability protections, right? And if they do not offer
a Qualified Mortgage, what are the penalties?
Ms. Cochran. The statute provides a 3-year period during
which a consumer could bring an affirmative claim. The
penalties are up to 3 years of the finance charge within that
phase.
If the consumer goes into foreclosure, they can also raise
a claim as an offset and again, penalties are limited to 3
years. So it is less than what occurs under the current rule
that is already in effect--
Mr. McHenry. Let me ask you, if you have a box that gives
legal protection and then people--you have institutions lending
outside of that box, does that become a safety and soundness
issue?
Ms. Cochran. We believe that if people are doing
responsible loans, this is manageable and appropriate. There is
already an--
Mr. McHenry. Does it go to safety and soundness for
institutions?
Ms. Cochran. There is already an ability-to-repay standard
in effect for higher-priced mortgage loans. Institutions that
are managing--
Mr. McHenry. Higher-priced mortgage loans, okay.
Ms. Cochran. Yes, and institutions are managing that risk--
Mr. McHenry. So those mortgages are a large portion of the
marketplace?
Ms. Cochran. They are a smaller portion of the marketplace.
Mr. McHenry. They are a very small portion of the
marketplace. So your reference points are very small and you
are being artful about your answers today.
We have deep concerns about the impact this is going to
have and the CFPB's mismanagement of a really overly burdensome
rule.
I yield back.
Chairwoman Capito. Thank you.
Ms. Velazquez?
Ms. Velazquez. Thank you, Madam Chairwoman. Please bear
with me. I am suffering from laryngitis.
Most of my issues and concerns regarding this rule have
been asked. Of course, I am very much concerned about the fact
that the private capital has yet to reenter the mortgage market
and we have to strike a balance between protecting consumers,
and at the same time, keep access to capital and credit flowing
into underserved communities.
I have a question that I believe has not been asked, and I
would like to address it to Mr. Carroll. CFPB's final rule
applies the legal Safe Harbor to only low price loans whereas
the high-priced loans are tied to the rebuttable presumption.
Could you please explain the CFPB's reasoning for selecting
this structure rather than instituting a single lender
protection for QMs across-the-board?
Mr. Carroll. I would be happy to. Thank you for the
question, Congresswoman.
The statute required us to define a level of protection the
creditors would receive from the ability-to-repay liabilities
if they make a QM loan and so we had to navigate this question
and we ended up coming up with this bifurcation that says if
the loan is a prime loan, meaning the APR for the loan is
within 150 basis points over the average prime operate, we
would provide it Safe Harbor status.
And if it is above that in the nonprime space, we would
provide the creditor with a rebuttable presumption of
compliance. The intent here was to say that if you are
generally within the QM space and you are working in the prime
segment, these are borrowers who have a little bit stronger
credit profile, may not need as much protection as consumers
who are higher-priced who are in the nonprime space, and so we
thought it was appropriate to provide a little bit of extra
protection for the consumers in that nonprime space so that
they do have some remedies if the market is getting into some
of the subprime issues that we saw during the crisis.
Ms. Velazquez. Ms. Cochran, would you like to--
Ms. Cochran. Yes, we wanted to provide a certainty for the
market going forward. We wanted to provide strong incentives to
provide safer loans, and we believe the rebuttable presumption
Qualified Mortgage strikes that balance.
It does provide incentives for lenders to provide Qualified
Mortgages at the same time it preserves consumers' rights in
the event that there is a problem. We think such problems would
be extremely rare, but we thought it was important to preserve
that flexibility.
Ms. Velazquez. Thank you.
Thank you, Madam Chairwoman. I yield back.
Chairwoman Capito. Thank you.
Mr. Pittenger, for 5 minutes.
Mr. Pittenger. Thank you, Madam Chairwoman.
Thank you, Mr. Carroll and Ms. Cochran, for your testimony.
I would like to pick up or where Congressman McHenry left
off. Given that the FHA decision, that Fannie and Freddie would
only lend or only buy QM mortgages, do you believe that the
lenders will continue to lend given that they have to hold
these loans on their balance sheet?
Mr. Carroll. Congressman, I am sorry, which loans were you
referring to? I couldn't hear; I apologize.
Mr. Pittenger. Loans outside the Qualified Mortgages.
Mr. Carroll. Outside the Qualified Mortgages. Particularly
in the short-term, we heard loud and clear from industry that
nonqualified mortgages will be a smaller part of the market in
the short term.
That is precisely why we endeavor to create both the
general definition for a Qualified Mortgage as well as this
temporary extension. At least for the next few years, while the
market is continuing its recovery, what we hear from most
creditors is that they are going to want to stick to the
Qualified Mortgage space while they get acclimated to the rules
and get acclimated to the possible risks associated with doing
non-QM loans.
We do feel that over time, people will acclimate to that
risk, which is why we created this temporary extension which
covers, by our calculations, not including points and fees,
roughly three-quarters of the market.
So that would be a significant retrenchment from what we
now think is the vast majority of the market, the three
quarters of the market where we have a significant delta.
We intend to monitor the market to make sure that the rule
that we have constructed is operating as we expect it to, and
it is something we need to keep tabs on as it moves forward,
but we do think that over time, people will get acclimated with
those risks and we will see a market for non-QM loans.
Mr. Pittenger. You will assess that over time and make
adjustments if needed?
Ms. Cochran. Right. We expected that it would develop in
niches and specific parts of the market over time as people get
more comfortable and see specific business opportunities that
make sense for their models.
The thing that is helpful about the temporary category of
Qualified Mortgage is that it is based on eligibility for
purchase or guarantee or insurance by the designated entities.
It does not actually have to be purchased by them. And we
believe that provides a good balance that will allow people to
get comfortable both with portfolio loans and securitized
loans.
So it is an important bridge and a mechanism for us to
continue to assess how the market evolves. We know there are a
number of other capital, regulatory, and economic conditions
that are affecting the market causing uncertainty and this
gives a bridging mechanism and breathing room for the market to
evolve and for us to continue to assess as that temporary
provision comes closer to--
Mr. Pittenger. Okay.
Let me move on to something else. Given the severity of the
damages associated with violating the ability-to-repay
requirement, in writing this rule, did you consider the effect
on the safety and soundness of small banks and credit unions
that hold nonqualified mortgages on their balance sheets?
Ms. Cochran. The statute sets the remedies that are
provided here, and as I started to say earlier, the remedies
are actually more narrow than what is provided under existing
rules today for higher-priced mortgage loans. Under those
remedies, because of the way the rules were written, all
finance charges are recoverable.
In the Dodd-Frank Act, Congress specifically limited it to
a 3-year period, which we thinks helps significantly in terms
of being able to model litigation risk.
So yes, that is obviously something that we looked at. We
looked at litigation risks. We consulted with the prudential
regulators and they are of course continuing to evaluate that
issue as well.
Mr. Pittenger. But you do believe that this could lead to
further deterioration of the community banks?
Ms. Cochran. We are working very hard to structure the rule
both in the final rule and the concurrent proposal to
accommodate and recognize that small community banks provide
critical access to credit and that their processes and
practices are very responsible and should be accommodated
within the scope of the regulation. So, we are working very
hard to make sure that it does work for small banks as well as
other types of lenders.
Mr. Pittenger. I hope you will continue to talk to them,
especially the ones I talk to.
Thank you. I yield back the balance of my time.
Chairwoman Capito. The gentleman yields back.
Mr. Hinojosa?
Mr. Hinojosa. Thank you.
Thank you, Chairwoman Capito and Ranking Member Meeks, for
holding this important hearing.
And thank you to the distinguished panel members for
sharing your insights this morning.
We cannot forget how the housing market bubble happened.
Shortly, let me say that unaffordable and balloon mortgages
were sold to families who were not fully aware of the terms. We
also saw agents targeting communities of color to push their
most predatory mortgage products.
Fast-forward to 4 million foreclosures and the housing
market meltdown, and we are now faced with ensuring that these
unsafe practices never happen again.
With the mortgage rules written by the CFBP, including the
Qualified Mortgage rule discussed today, we begin the long
process of creating a healthy housing market for the long term.
There is a thin line between too little regulation and too
much. It seems to me that the QM rule released by the CFBP
comes close to that line.
My first question is for Mr. Carroll. Some of us have
constituents in rural areas such as in my congressional
district in deep south Texas or places where there just aren't
that many institutions that are able to extend credit to worthy
borrowers.
In our districts, it actually makes sense for borrowers to
have terms like balloon payments or other specialized products
they work out with their local banker. As the chairman of the
rural housing caucus, I have been fighting for affordable
quality housing in rural America for over a decade.
What kind of exceptions exist in the Qualified Mortgage
rule for small or rural lenders operating in these areas so
that they can participate?
Mr. Carroll. Thank you, Congressman, for the question.
We do recognize that rural communities in particular have
been hit hard by the financial crisis and that the creditors
who serve them have also had a difficult run during the
recovery.
We have tried to do a few things in the rulemaking process
to address smaller creditors operating in rural areas who have
these challenges. One is, we have attempted to increase the
coverage of designated rural areas for the purposes of treating
balloon mortgages as Qualified Mortgages. My colleague,
Assistant Director Cochran, mentioned this earlier.
We also have proposed, as part of a concurrent proposed
rule, an exemption for small creditors where, if you are within
$2 billion in assets, you don't originate more than 500 loans a
year, and you hold the loans in portfolios, as long as the loan
meets the Qualified Mortgage features of a fixed-rate loan or
an adjustable rate mortgage, and some of the other protections
built into QM, they can have an easier method of getting
Qualified Mortgage status, meaning they don't have to look
specifically to the 43 percent DTI. They can use their own DTI
measure and they have an easier access to the Safe Harbor; a
little bit broader space in the pricing where we used 350 basis
points over APOR rather than 150.
And we think these are some methods for providing some
relief to small creditors. We would be happy to hear from your
office if you have views on it.
Mr. Hinojosa. My second question will be directed to Ms.
Kelly Cochran.
I am going to give you a picture of a congressional
district that I represent which is in deep south Texas, 250
miles from San Antonio, South to McAllen Edinburg, and in the
middle, the coastal bend has what they call the Eagle Ford
Shale Oil and Gas Mine, which is bigger than Alaska's mines.
In the last 2 years, the actual production has been twice
as much as was estimated, so that of the 8 counties I
represent, 4 of them only have plus or minus 10,000 people, and
they have lots of banks because Karnes County, as an example,
received $2 billion in royalties and they have 10,000 people.
So the banks in that area have plenty of money, yet they
are not lending money. Do we in Congress need to soften up the
regulations because first, they said there wasn't enough money
to meet the requirements. Now, they have lots of money, and
they are still not lending money. So tell me, what do we have
to do in Congress to open it up?
Ms. Cochran. I think--obviously, I wouldn't purport to
advise Congress on what it should do, but I can say some of the
ways in which the Bureau is thinking about these issues.
As Pete talked about, we have expanded the definition of
rural and underserved under the regulation. The way it was
proposed originally, it would have covered counties that only
included 3 percent of the United States population.
We increased that to 9 percent and we also made a number of
other adjustments with regards to balloon payment loans to make
it easier for these institutions to keep lending.
As Pete mentioned, we also have a concurrent proposal which
is looking at a number of issues with regard to small creditor
impact and ways that we can accommodate them within the rule.
In general, this is a very complicated area. We are very
sensitive and thinking very hard about it. One issue that is
difficult is that there are so many different ways to define
``rural.''
Different Federal agencies do it differently for many
purposes. So, we know there are a number of issues here. We are
working very hard and we will be happy to report back to you as
we are tying off this concurrent proposal on what other
measures we have adopted that may be helpful here.
We would be happy to provide technical assistance.
Mr. Hinojosa. My time has run out, and I yield back.
Chairwoman Capito. Thank you.
Mr. Pearce?
Mr. Pearce. Thank you, Madam Chairwoman. I appreciate you
holding this hearing.
And I appreciate the participation of the witnesses today.
The subject of the high-cost loans is something that I
wonder about. What is the logic behind that? The logic behind
the concept of high interest or high-cost loans and why we are
going to regulate those?
Ms. Cochran. High-cost loans--are you talking about under
the--
Mr. Pearce. Section 1431, I think.
Ms. Cochran. With regard to high-cost mortgages under the
Home Ownership and Equity Protection Act (HOEPA)? HOEPA is an
existing regime that applies to certain lows depending on their
points and fee--
Mr. Pearce. Yes, just get down to the fine-tuning part of
why is it there.
Ms. Cochran. It was there because there were a number of
practices with regards to refinancing that were problematic in
prior decades. Congress enacted a law--
Mr. Pearce. Okay, just trying to stop corruption from
occurring, basically the high-cost people jacking up stuff. So
who on your staff is a specialist on manufactured housing?
Ms. Cochran. We have a number of people who have worked on
manufactured housing--
Mr. Pearce. No, who is a specialist? Who is the one that
represents this loan type as you have these discussions? What
is their name?
Ms. Cochran. We had a team of people who were--
Mr. Pearce. Now, do you lead that team?
Ms. Cochran. They report to me. Yes.
Mr. Pearce. Okay. So you understand the economics of
originating loans? Basically, it costs the same thing to
originate a $200,000 loan as a $20,000 loan?
Ms. Cochran. We analyzed this question through other rules.
We do understand, and we adjusted the thresholds for points and
fees based on the size of the loan because we realize that was
a concern.
The Dodd-Frank Act changed the thresholds and changed the
coverage for high-cost mortgages. We implemented the statute as
directed and have made adjustments--
Mr. Pearce. So you are telling me that the people who quit
making trailer house loans are interpreting incorrectly?
Because they are coming under the high-cost loans now because
the cost of origination of the loan is the same.
Whether it is $200,000 house or a $20,000 mobile home, that
percentage then mathematically works out to be above the
threshold and so a lot of the--most of the banks in New Mexico
have quit making new loans for trailer houses.
Fifty percent of the people in New Mexico live in trailer
houses, so you have effectively shut off the mortgage market to
basically half of New Mexico.
We have an average income of $31,000 to $35,000, something
in that range. So what you have is a de facto war on the poor,
and I just wonder if anybody up there is thinking about it, and
who is the person saying, we can't quite do this because they
are shutting off these poor people who were making $20,000 and
$30,000 loans, they are just in there trying to get into
something.
So who is it? Is that you, Ms. Cochran?
Ms. Cochran. We looked at this issue intensively during the
rulemaking for the high-cost mortgage loans, and I would be
happy to talk to you about our analysis.
Mr. Pearce. I would be happy for you to--
Ms. Cochran. We made adjustments with regard to both the
points and fees and the rates thresholds for high-cost
mortgages to account for the fact that manufactured housing has
certain unique features and also that smaller loans in general
have certain costs to originate.
It is something we thought a lot about, that we requested
data on, and that we looked at very hard. We have heard from
some people that they will cease to make loans if they are
above the threshold.
Mr. Pearce. I will just tell you that almost every bank in
New Mexico, and in fact, the one bank who still does it, Texans
are coming across trying to borrow money out of New Mexico. So
across the State line, it is the same.
The second--and by the way, I would gladly invite you to
our office to discuss this because it is a serious problem for
us.
Ms. Cochran. We would welcome that. Thank you.
Mr. Pearce. The second question is, so you have these QMs
and then do you have a Director, with Mr. McHenry's footnote,
who says, don't worry about it. Who is going to decide who
should have worried about it?
In other words, if people make nonqualified mortgages, who
is going to decide whether or not they come up against some
action or not. Is that the agency? Is that you all?
Ms. Cochran. If there is a violation, it could be--
Mr. Pearce. No, no, no. Mr. Cordray says, go ahead and do
those loans outside the QM. We have created a little box here,
but go ahead and feel free to step outside. Who is going to
decide you shouldn't have stepped outside the box?
The reason I am asking the question is we have an
Administration that is willing to check your Internal Revenue
Service returns. They are willing to subpoena all of the
records for all of the AP, not just the one or two people, but
everybody in the entire workroom. They have released
information on the whistleblowers and ``Fast and Furious'' and
tried to discredit them.
And I wonder, is the same Administration going to be the
one who decides who shouldn't have stepped outside the box and
who should have stayed in the box?
That is my question, but I think it is more rhetorical.
Chairwoman Capito. Thank you.
Mr. Scott, for 5 minutes.
Mr. Scott. Thank you very much, Madam Chairwoman.
I am one of the cosponsors of H.R. 1077, and I am trying to
work with this issue. Let me just ask you, why didn't you, the
CFPB, address the issue of affiliate discrimination and the
calculation of fees and points in the final QM rule?
Ms. Cochran. The Dodd-Frank Act specifically requires that
affiliate fees be counted towards the cap on up-front points
and fees for qualified--
Mr. Scott. Could you do me a favor and just move your
microphone a little bit closer?
Ms. Cochran. Yes, I'm sorry.
The Dodd-Frank Act mandated treatment of affiliate fees
with regard to the 3 percent threshold for Qualified Mortgages.
There are a number of places in Dodd-Frank where Congress made
a deliberate policy decision with regard to treatment of
affiliates of creditors and brokers.
Given that very clear policy choice had been made
throughout the statute, we did not feel it was appropriate for
us to vary from that. We implemented that provision as provided
in the statute because Congress had made the decision.
Mr. Scott. Do you think it doesn't make sense to
discriminate against affiliates on the basis of these fees? To
do so reduces the competition and the choice of title services
and insurance providers. Can the CFPB do with this without
repurposing the rule?
Ms. Cochran. As Pete mentioned, we have received a great
deal of comment on this issue on both sides. We recognize they
are very strongly held views. We--as we said--believed, given
the clear mandate from Congress, that it was our responsibility
to implement that.
Mr. Scott. So is it being considered?
Ms. Cochran. No, it is not. We would certainly not be able
to do it without a re-proposal as a matter of administrative
law that simply--
Mr. Scott. Wait a second. You would be able to do it if you
received some help from Congress, is that right?
Ms. Cochran. Congress made a very clear policy choice. If
Congress changes that policy choice, we would implement it as
directed.
Mr. Scott. Okay, now let me ask you about Fannie and
Freddie. What is the rationale of the CFPB for including Fannie
and Freddie loan level price adjustments in the calculation of
the fees and the points?
Mr. Carroll. Thank you, Congressman. That is a good
question. Loan level price adjustments is a topic that has come
up during our Qualified Mortgage rulemaking--
Mr. Scott. Maybe it is me, and I need to clean out my ears.
If you will just talk louder; I can't quite hear you. Go ahead.
Mr. Carroll. At the end of the day, loan level price
adjustments are additional costs imposed based on the credit
profile of the borrowers. The more credit risk posed by the
consumer, the more fees will be charged whether they may be
charged as an up-front fee to the consumer or may be factored
into the interest rate.
This was a tricky one for us, but when we look at these
types of charges, we don't see them like bona fide third-party
charges, which are just services like title or appraisal; we
see them as charges that are fairly integral to the rate
itself, to the product itself being offered to the consumer and
these are ultimately costs that are borne by the consumer.
They may manifest through, in this case, the GSE is
charging a fee to the lender for their guarantee services, but
that could just as easily be, in the private label space, an
aggregator who also originates loans.
We felt, given that these price adjusters are really
specific to the consumer, that they are borne by the consumer
and paid for by the consumer at origination, we thought it was
appropriate to keep them in the rules so that the rule would
function as we expected it to.
Mr. Scott. Would you consider changing that policy?
Mr. Carroll. We would always consider having a conversation
with Members of Congress to understand your concerns and have a
dialogue on that.
Mr. Scott. Now, let me ask you about escrows. Would escrows
for taxes and insurance ever be included in the calculation of
fees and points?
Ms. Cochran. No, we don't believe so.
Mr. Scott. Why?
Ms. Cochran. Because those are collections of charges to be
paid along the life of the loan distinct from the up-front
points and fees that are charged in connection with the
origination of the loan.
Mr. Scott. Okay.
Thank you very much, Madam Chairwoman.
Chairwoman Capito. Mr. Fitzpatrick?
Mr. Fitzpatrick. I thank the Chair, and I very much
appreciate the hearing.
I hope we can all agree that small community banks did not
cause the mortgage crisis of 2008. When I am back home in my
district in Pennsylvania meeting with local lenders, they tell
me that the QM rule is or will essentially and assuredly take
away the judgment that they have and have always had as local
lenders and will otherwise drive credit for qualified
borrowers.
One lender back home tells me that a main concern, and I
think the CFPB has heard this several times, is that by
branding a mortgage as ``qualified,'' you are essentially
saying that all mortgages that don't meet that criteria are
``unqualified.''
Even if the intent is not to create categories of desirable
or undesirable and not desirable mortgages, that is essentially
what is happening. So the question is, who is going to want to
have or to hold an ``unqualified'' mortgage?
Community banks often have certain niche programs that are
perfectly legal but serve small consumer bases because it is
specifically tailored for those consumers' or customers' needs,
and when the CFPB introduces qualified and unqualified
Mortgages, they are disregarding the necessity of these
programs and penalizing the local and community banks that know
their customers, know them well, what they want, and what is in
their best interest.
So my question for either Mr. Carroll or Ms. Cochran is,
was there any consideration for or would you be opposed to
providing exemptions for small institutions that keep these
mortgages in their own portfolios? And what is the chance that
is going to happen?
Ms. Cochran. If I could address that in a couple of ways.
First of all, of course, Qualified Mortgage is the term
used in the statute so we have continued to use that. I think
there are important pieces of consumer education that will come
with this rule as we get closer to implementation to make sure
the consumers understand what a Qualified Mortgage is, and what
it is not.
In terms of small lender programs, there are three
different types of Qualified Mortgages under the final rule and
we have proposed a fourth category of Qualified Mortgage that
is specifically for small creditor portfolio loans.
Many of the loans that small institutions make will fall
within the definition of Qualified Mortgage, and the reason we
proposed a fourth category is that we believed it was
appropriate to look at this, because we realized that
relationship lenders, small community institutions, have many
reasons and business models that are of great service to
consumers.
They provide critical access to credit and they have
extremely low foreclosure rates, and typically very responsible
lending practices. We wanted to make sure that we encouraged
and accommodated that type of lending within the scope of the
rule and so we have thought very hard to both, in the balloon
payment context and with regard to this new proposal, which we
are hoping to finalize as quickly as possible, to accommodate
exactly those kinds of--
Mr. Fitzpatrick. So, you have just described the community
lenders in my area of southeastern Pennsylvania. Do you agree
that those lenders did not contribute to or create the mortgage
crisis of 2008? We agree on that, correct?
Ms. Cochran. Exactly. And as I mentioned, their foreclosure
rates, their lending, their profile of the data shows that they
have generally very responsible models. We wanted to
accommodate and recognize that within the course of the rule.
Mr. Fitzpatrick. And those lenders most likely to hold the
loans in their own portfolio, correct?
Ms. Cochran. Right. Both of the Qualified Mortgage
provisions for small creditors, both the balloon payment and
the proposed new category, are specifically for portfolio
loans.
Mr. Fitzpatrick. So why not just exempt the small community
bankers from the rule? Why not?
Ms. Cochran. We believe that balance is important. This
strikes the appropriate balance by providing greater
protection, greater certainties for those creditors,
recognizing their good models, and at the same time providing
in the event that there is an abuse, that there is a small
creditor that is not operating under those same practices, a
consumer would have an ability to seek redress in such
situations.
Mr. Fitzpatrick. I yield back.
Chairwoman Capito. Mr. Capuano?
Mr. Capuano. Thank you, Madam Chairwoman.
Mr. Carroll, Ms. Cochran, I have heard a lot of detail
today and a lot of concern. I think some of it is legitimate. I
am sure you share some of the same concerns. My first, and
possibly my only question, is kind of simple.
I am interested in the availability of credit. Several
million people got mortgages last year.
There is no doubt that a handful of them probably shouldn't
have gotten a mortgage. They are going to get into trouble. My
question is, have you made an internal judgment as to how many
fewer loans will be made when this rule is adopted next year?
How many people who got loans this year do you expect to
not be able to qualify next year, not be able to get loans next
year, I guess?
Mr. Carroll. We think it will be small, Congressman.
I think that we have tried to calibrate this rule so that
again, going back to this notion of a broad QM, is to provide
minimal disruption to the market in the short term while we are
transitioning into this--
Mr. Capuano. When you say small, can you give me--1
percent, 10 percent, 20 percent?
Mr. Carroll. The vast majority are covered in the Qualified
Mortgage space. We expect those loans will continue to get
made.
There may be some loans on the margins that banks would
have to do as a nonqualified mortgage and choose not to because
they don't match our Qualified Mortgage--
Ms. Cochran. Part of it is that the lending practices have
changed so much from the height of the build-up to the crisis
that we think things like no-doc loans--
Mr. Capuano. I am not--that is why I asked about last year.
I didn't ask about 2008. I can't imagine anybody in their right
mind would want us to go back to the 2008 standard, and if they
do, I think they should say so.
So I am using last year because I am not sure we are at the
right point yet but I am just trying to get an idea. I think
most of us would see that last year was a pretty tight market
and most mortgages being made are probably pretty conservative
lately.
And I guess I am just trying--the reason I ask is because
there is one number out here that suggests 48 percent of the
loans made in 2010 would no longer be made because banks will
stop making them.
If that is the number, obviously I think that should
concern a lot of people and I am just wondering if you have a
competitive number--I am not going to hold you to a specific
number; a range, anything.
Mr. Carroll. Yes, let me describe the distinction, I think,
between our numbers and some of the other numbers that might be
in the market. We put our core definition at roughly three-
quarters of the market being covered by QM and then adding this
extension--
Mr. Capuano. The explanation can come later. I am just
looking for a relatively simple answer if there is one.
Mr. Carroll. I--
Mr. Capuano. Do you have a number, an estimated number, as
to how many people who got loans in the last year or the year
before, whatever your base your might be--how many of them
would not be able to get loans next year? Either based on QM or
because the people will not be making nonqualified mortgages.
Mr. Carroll. Based on QM, we think it will be a small
number. I would say though at the same time there is the
potential for credit to continue to loosen in the market on the
basis of factors that--
Mr. Capuano. Good. I am glad you said that. I agree with
you. When you say small, I need to get--is it less than 10
percent? Less than 5 percent?
Mr. Carroll. Yes, less than 10 percent. I would put the
number in my office and our calculations around the 5 percent
margin, at most.
Mr. Capuano. That is good. Thank you for the answer. I
guess the next question I have really is, what if you are
wrong?
What if this 48 percent number is right? And you find it
out, after a period of adjustment all of a sudden come March of
next year and mortgages given have plummeted, do you have the
ability to make quick adjustments to your rules?
And again, I know how long it takes to make a rule, have
you allowed yourself a back door out of this rule to make an
emergency declaration or whatever? What if you are wrong?
I am not arguing that you are. I am not qualified to make
that argument. What if they are right and you are wrong and all
of a sudden most of America can no longer get a loan or if
there is a hole--an unforeseen one for trailers or whatever it
might be? Do you have the ability to make a quick, even if
temporary, adjustment to your rule to address something that
maybe your estimates were wrong on?
Ms. Cochran. Yes, we would have to go through certain
procedures to do a quick adjustment.
We are in the process of making quick clarifications to the
rule now as different interpretive issues come up and we can do
some of these procedures in the event that there was a problem.
I think a lot of the debate is really about what happens as
the temporary provision expires. As we discussed, that is a
longer-term question. We specifically set the outside threshold
at 7 years because the Bureau is required to do a thorough--
Mr. Capuano. When you say quick, could you again, give me a
general idea, for the sake of discussion, come February 15th,
all of a sudden the entire country agrees that okay, you have
tightened up too much, 3 percent should be 4 percent or
whatever it might be. If you decide February 1st that you
agree, everybody agrees that it has to be changed, when can you
change it? March 1st, June 1st, next January?
Ms. Cochran. We would have to look at the specific
circumstances. Generally, we have to provide a brief notice and
comment period before we would change a rule.
Mr. Capuano. How brief?
Ms. Cochran. Obviously, there are different circumstances
under which the Administrative Procedure Act can allow
expedited process--
Mr. Capuano. Yes, but you are not--I am a defender of the
CFPB and I am concerned about some of the details and that is
all well and good, but for me details--we will work out what we
can do.
What I am concerned with is okay, with all of the best
interests at heart, with all of your best estimates, I am not
qualified to say that your estimates are wrong. I mean, they
are estimates. That is what they are based on. And you are just
more qualified than I am.
My concern is if you are wrong and it takes 9 months to
adjust that problem, then we are possibly on the brink of
another economic crisis that could be averted.
All I am asking is, have you built in or will you build in
a back door in case you are wrong? Not because I think you are
wrong, but if you decide you are wrong, and say, ``Oh my God,
the estimates were wrong,'' and it happens.
On occasion, even I have made a mistake that I have wanted
to correct, and I am simply asking, have you allowed yourself
the opportunity to do that and if it is 6 months, I have a
problem.
Ms. Cochran. The circumstances depend on what happens, but
we do have more flexibility than that--
Mr. Capuano. That is not an answer.
Ms. Cochran. --it would not be a matter of 9 months--
Mr. Capuano. I appreciate--
Chairwoman Capito. The gentleman's time has expired. Thank
you.
Mr. Capuano. Not good for a friend.
Chairwoman Capito. Mr. Barr?
Mr. Barr. Thank you, Madam Chairwoman.
Mr. Carroll, Ms. Cochran, thanks for your testimony today.
I think what you are hearing today is not any kind of
objection to the idea that there was some response that was
warranted to the mortgage subprime prices, but more concern
that the overreaction involved here is something that is
depriving the market, the mortgage marketplace of flexibility,
depriving consumers of access to mortgage credit, which is what
you all spoke to at the very beginning in terms of what you all
want to avoid.
But what I want to do is talk about, and I would encourage
you to take back to the Bureau, some of the bipartisan concerns
that have been expressed here today, and I would like to echo
or follow on the comments from the gentleman from Texas, Mr.
Hinojosa, in talking about the rural designation issue.
My district in central and eastern Kentucky includes a
number of counties that are manifestly rural, but fall outside
of the rural designation under your QM rule.
So my question would be to you all, obviously Kentucky
bankers, bankers all across this country use balloon mortgages
to mitigate interest risk, interest rate risk, balloon loans
held in portfolio give consumers significant interest rate
flexibility.
With these rural communities--and in my case, Bath County,
Kentucky, is a rural community but for whatever reason the CFPB
does not recognize it as a rural community, a rural county.
In light of this feedback that you are getting from both
sides of the aisle, what is the CFPB doing to revisit this
definition of rural? Are you thinking about changing the
definition through maybe use of the rural housing loan program
definition, or I have heard a process whereby interested
parties could petition the Bureau to be considered rural? What
are you doing to address this problem?
Ms. Cochran. As we discussed, there is a concurrent
proposal out right now that is looking at small creditor issues
with regard to access to credit, not just in the question of
rural balloons, but more broadly.
We are looking at that and looking at our options and how
then we can appropriately balance those considerations. We have
heard a great deal of comment about the rural definition in
particular.
There are a lot of interesting ideas about different ways
to define it, and over time, that is something I think that we
want to continue to consider.
We are looking holistically at this right now. We cannot
talk about a pending proposal, but our goal is to get it out as
quickly as possible. We are extremely sensitive to what we are
hearing about consumers on this issue and we are working to
strike an appropriate balance that will preserve access to
credit.
Mr. Barr. When you talk about regulatory straitjackets,
this is what we are talking about. When you define Bath County,
Kentucky, as nonrural, you are just flat out wrong. So please
consider that and take that back to the Bureau.
One quick additional question: I hear frequently from our
bankers that they are receiving mixed signals from regulators,
particularly with respect to the Community Reinvestment Act
mandates and the QM rule. And so what I want to ask you all is
what assurances can you give to Kentucky community banks that
they will not receive a negative CRA audit if their mortgage
lending decisions reflect compliance with your QM rule?
Ms. Cochran. The Community Reinvestment Act is
administrated by other agencies, not the CFPB. We have been
working with the prudential regulators and other appropriate
Federal regulators throughout our rulemaking process to
coordinate and get their feedback on our QM rule and also as
they think about implications of QM for their--
Mr. Barr. Do you acknowledge that there is a conflict? Do
you acknowledge that there is a conflict between the
requirements of the CRA and your Qualified Mortgage rule?
Ms. Cochran. I have not studied this issue in detail. I
would not, at this point, be comfortable saying that there is a
conflict. I can say that it is something we would be happy to
take back as we continue our discussion with prudential
regulators to continue to discuss and make sure that agency
coordination is appropriate.
In general, we think that is an important issue throughout
the rulemaking. We would be happy to follow up with you about
specifically what you are hearing on CRA.
Mr. Barr. We are hearing it. We are hearing it very loud
and clear, and what is really a problem is the contradictory
messages that lenders are receiving from the regulators.
My final question is on cost of compliance. Lenders are
obviously going to be tasked in implementing the QM rule with
systematically and comprehensively documenting that even though
they have followed safe and sound practices, they have to prove
that they followed the prescribed underwriting processes to
determine that the borrower has the ability to repay.
Have you all analyzed the cost of compliance of documenting
following all of the requirements to achieve a Safe Harbor
status, and what additional compliance costs that is going to
impose on some of these small community banks that simply don't
have the staffing that would be required to properly implement
this rule?
Ms. Cochran. Yes, we did consider, as Pete talked about
earlier, the cost of compliance and other impacts of this
regulation. Our sense is that, given how much underwriting
practices have changed, this is not a significant deviation
from what people are doing now.
Obviously, there are always concerns when a new rule comes
in and people need to calibrate and make sure that they are in
compliance. That is why we are working so hard on the
regulation implementation efforts, to make sure that we
facilitate that process as much as we can.
We are very sensitive to the concerns of small institutions
on this, and that is why we are providing a compliance guidance
and videos and all of the other things that Pete talked about.
Mr. Barr. My time has expired. I yield back.
Chairwoman Capito. Mr. Murphy?
Mr. Murphy. Thank you, Madam Chairwoman. And thank you both
for your testimony.
Back to this 3 percent rule. It looks like originally the
threshold was $75,000 and now it is $100,000. Number one, how
did you come to raise it? What happened there?
And then number two, did you think of tying this to an
average cost for an area, considering that New York City might
be different than a rural area in my district?
Ms. Cochran. We looked at this issue and we received
extensive comment on it. We did what analysis we could around
the costs to try and calibrate properly. I don't know that we
got a suggestion specifically about average costs in specific
areas, so that might be something that would be helpful to
follow up on.
It certainly was a concern and we adjusted significantly
from the proposal because we thought more flexibility was
needed. We understand that there are certain costs in
originating a loan that don't vary much based on the principal
side and so we were trying to accommodate that rule in how we
set the threshold. So it is something to which we are very
sensitive.
Mr. Murphy. Okay, so you would be open to perhaps tying it
to an average rate for a market, because as was mentioned
earlier, there are a certain amount of fixed costs that do go
into issuing these mortgages?
Ms. Cochran. We did the best analysis we could with the
information we had. I would be very interested in talking to
you about the idea. Obviously, it is something we have to look
at.
Mr. Murphy. Okay. One more question. With this Safe Harbor
approach, the CFPB is giving lenders the ability to know and
say that certain people meet this ability-to-repay standard.
Does this create an implicit inability to repay for loans that
are outside QM?
Ms. Cochran. No, as we have discussed, we have really set
the long-term threshold for Qualified Mortgage in a way that we
believe was important to recognize and acknowledge that there
are responsible good loans to be made outside of the Qualified
Mortgage space.
We believe it is appropriate for those loans to be
considered on an individualized basis without a presumption
that they automatically comply. We believe that there is
significant responsible credit in that and, over time,
creditors will see those opportunities and expand into that
space.
In the short term, while they are figuring that out and
getting comfortable, we have also expanded the definition of
Qualified Mortgage to provide the bridge as we discussed
earlier.
Mr. Murphy. So the complaints I am hearing from community
bankers and credit unions, do you think they are temporary or
do you think they are justified?
Ms. Cochran. We know this is a difficult time. We know that
there is uncertainty around this rule and a number of other
conditions in the market. And we believe those concerns are
real and they will affect business decisions in the short run.
That is why we structured the rule to provide a transition
mechanism over time. We do believe that, as conditions become
more certain, as other pieces fall into place and people get
more comfortable with the rule, they will feel more comfortable
expanding into other parts of the market.
We really tried hard to design a rule that would, in the
long-term, provide accessible credit in all parts of the
market. Obviously, that is a balancing act and it is a
difficult process to manage over time with so many sources of
uncertainty, but we believe this is a good framework for doing
that.
Mr. Murphy. Have you all sort of come up with some ideas
and theories for what you can do if you do see in a year or 2
years, kind of adding on to what Mr. Capuano said, that we can
do to loosen up to ensure that the private sector does in fact
enter the market if we see in a year that they are really not
because of the cost?
Ms. Cochran. We will continue to monitor the market on an
ongoing basis. That is part of the Bureau's basic mission and
also an important part of the accountability after any
rulemaking. So we expect we will continue to monitor over time
and specifically at the 5-year mark, when the Bureau is
required to do a very extensive evaluation of significant
rules. So we certainly expect that would happen before the
expiration of the 7-year period for the temporary definition.
We also expect to be doing this on an ongoing basis. This
is a core part of our mission, and if we start to see things
that are not developing as we expected, then obviously we would
have to consider whether adjustments would be appropriate.
Mr. Murphy. Okay, great. Thank you.
Chairwoman Capito. Mr. Westmoreland?
Mr. Westmoreland. Thank you. I think Mr. Luetkemeyer asked
you both if you have ever made a loan and I think both of your
answers were no. What experience professionally or just in life
have you had to come up with what a qualified borrower was if
you never made a loan? Have you ever made a loan to anybody in
your family or to anybody?
Mr. Carroll. No, Congressman, I have not made a loan to
anybody.
Mr. Westmoreland. Ms. Cochran?
Ms. Cochran. No.
Mr. Westmoreland. Okay. So how do you go about figuring out
who is a qualified borrower?
Mr. Carroll. First, we are working with the statute and
when--
Mr. Westmoreland. No, I am talking about--what if somebody
came in, what makes them a qualified borrower? Is it how much
he owes, what his credit history is, who his mom and dad are--
what gave you that insight to say, all right, this guy would be
a qualified buyer, and this guy is not.
Ms. Cochran. So, if I may address it. The statute set out
and directed the Bureau to define what is a Qualified Mortgage.
It did not tell us to define what is a qualified borrower. And
as I talked about in my original opening testimony--
Mr. Westmoreland. It is kind of the same thing. If you have
somebody who fits the Qualified Mortgage, isn't he going to be
a qualified buyer?
Ms. Cochran. What we believed was important was to create
flexibility. As I said in the beginning, we don't believe that
by rule we can define every single instance of an affordable
mortgage. Underwriting was too complex for that and it is too
individualized.
So what we were doing was defining a class of loans where
it made sense to presume that the creditor had properly
evaluated the ability to repay. Overall, that would provide
flexibility so that creditors will make that determination
using reasonable standards.
Mr. Westmoreland. But you are creating the rules, right?
Ms. Cochran. Yes. We are doing it the way Congress directed
us to do in defining Qualified Mortgage, but we very
specifically did not consider that to be defining the outer
limits of what is a qualified borrower.
We believe that is best left to the market. What we were
trying to do was implement the statutory provisions in a way
that provided certainty for the market so that they could go
ahead and use reasonable practices to continue doing what they
do best.
Mr. Westmoreland. Okay.
Now, Mr. Carroll, you had previously been at Overture. Is
that correct?
Mr. Carroll. Correct.
Mr. Westmoreland. And when did you leave Overture?
Mr. Carroll. 2011
Mr. Westmoreland. 2011. Did Overture come up with a program
or somebody at Overture come up with a program where Fannie Mae
could reduce their approval time from say 30 days to 30 minutes
or less?
Mr. Carroll. The company, Overture Technologies, was
involved in developing automated underwriting capabilities and
credit risk models for a variety of different banks.
Mr. Westmoreland. Okay. So you cut the time down from 30
days processing to 30 minutes or less.
Mr. Carroll. One of the features of automated underwriting
is to create a more efficient underwriting--
Mr. Westmoreland. Okay. So you can do a qualified borrower
in less than 30 minutes. What kind of documentation did you
have to get or how long did it take to fill out this online
application to get this Qualified Mortgage or buyer or whatever
you want to call it in less than 30 minutes? Was it like a no-
doc loan?
Mr. Carroll. The underwriting programs that were used by
the customers of the company ranged from full documentation
programs to Alt-A programs and subprime programs.
Mr. Westmoreland. So you could do a full documentation and
have it approved in less than 30 minutes online? That is
amazing.
Mr. Carroll. Well, it just--
Mr. Westmoreland. Great technology.
Mr. Carroll. The technology was very good to do full
documentation decisioning, but you still have to go and look at
the paperwork after the fact.
Mr. Westmoreland. Okay.
Ms. Cochran, you previously worked at a law firm and did
litigation, as far as I guess borrowers or consumers? What kind
of lawsuits were you involved in or who did you sue?
Ms. Cochran. Generally, my claims were financial
institutions that were defending against lawsuits. I also did a
fair amount of regulatory counseling and how to comply with
Federal consumer financial law for those same clients as well
as some other types of litigation that were not related to the
financial sector.
Mr. Westmoreland. So these consumer financial laws that you
were defending--
Ms. Cochran. I was generally working as a defense attorney
for financial institutions which had been sued for violations
of the Truth in Lending Act or other statutes and regulations,
and working with them both in defense of the lawsuit and in
counseling them in terms of ongoing compliance requirements
under those regulations and statutes.
Mr. Westmoreland. So you actually represented the
institutions that were being sued by consumers?
Ms. Cochran. Yes, in many cases I did.
Mr. Westmoreland. So now you are on the other side of the
fence.
I yield back.
Chairwoman Capito. Mr. Heck?
Mr. Heck. Thank you.
I think my question is most appropriately addressed to Ms.
Cochran. I am trying to better understand that this issue of
what happens to what is incentivized in the way of lending
practices vis-a-vis QM and non-QM.
And what I can't quite get my arms around is what the
change will be next year for borrowers in terms of their rights
of action under non-QM versus what it is today.
Ms. Cochran. So, under the rules that were adopted by the
Federal Reserve Board, the ability-to-repay requirement applies
today to higher-priced mortgage loans. If there is a violation
of that loan, the consumer can sue and recover all of their
finance charges.
The Dodd-Frank Act basically expands that requirement so it
applies to the broader mortgage market, not just higher-priced
mortgage loans, and it limits the remedies so that only up to 3
years worth of finance charges will be recoverable in the event
that there is a successful suit.
As we have talked about before, there are different
gradations here with regard to Qualified Mortgage, Safe Harbor,
and rebuttable presumption, inability to repay, but that is the
basic framework that applies to the statute.
Mr. Heck. I didn't follow you.
Ms. Cochran. Okay.
Mr. Heck. I am trying to understand if I am a non-QM
borrower next February--
Ms. Cochran. Right.
Mr. Heck. --on what kind of an expanded basis can I sue my
lender versus today?
Ms. Cochran. Today, the ability-to-repay requirements only
apply to a higher-priced mortgage loan. After January, they
would apply more broadly to the market in general. If the loan
was not a Qualified Mortgage so it was originated under the
general ability-to-repay standard, then in that case, the
consumer remedies would be up to 3 years of finance charges in
the event that the consumer was successful on the suit.
Mr. Heck. And today they--
Ms. Cochran. Today, they can recover the entire length of
finance charges, so depending on when the suit was brought,
that could actually be a larger amount of money. It depends on
the circumstances of the case.
Mr. Heck. Thank you, I think. I also want to ask about the
loans and fees. First of all, quickly, did I understand you
correctly that the 3 percent is actually specifically
stipulated in Dodd-Frank?
Ms. Cochran. It is. The statute provides for up to 2 bona
fide discount points in addition to the 3 percent depending on
the rate of the loan, but that is the general threshold.
Mr. Heck. Part of what I don't understand is how we have
over time allowed for increasing Federal regulation of title
insurance and what I don't understand is how that relates to
the foundational insurance regulation law, namely McCarran-
Ferguson.
I don't understand how it is that we can say regulation of
insurance is up to the States in exchange for which you are not
subject to antitrust but then first I gather it was in HOEPA
and now in this we effectively have intruded upon that
territory. Do you follow me?
Ms. Cochran. The statute provides that affiliate fees in
certain circumstances count toward the threshold for Qualified
Mortgage and the threshold for a high-cost mortgage.
So in the case of title insurance that is affiliated with
the creditor, that would count towards those thresholds. That
was the decision that Congress made in the Dodd-Frank Act, with
regard to Qualified Mortgages, and as we discussed earlier, we
have implemented that as the statute directed us.
Mr. Heck. Does that in any way compromise the underlying
covenant of McCarran-Ferguson?
Ms. Cochran. I am not sure that I am qualified to speak to
that. I think it is a decision that Congress made in the Dodd-
Frank Act based on a number of policy parameters, and I don't
know all that went into that decision. We have implemented the
statute as directed.
Mr. Heck. Thank you very much.
Thank you, Madam Chairwoman. I yield back the balance of my
time.
Chairwoman Capito. Thank you. I believe that concludes our
hearing.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
The hearing is now adjourned. And thank you both.
[Whereupon, at 12:17 p.m., the hearing was adjourned.]
A P P E N D I X
May 21, 2013
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