[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
EXAMINING HOW THE DODD-FRANK ACT
HAMPERS HOME OWNERSHIP
=======================================================================
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
__________
JUNE 18, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-32
EXAMINING HOW THE DODD-FRANK ACT HAMPERS HOME OWNERSHIP
EXAMINING HOW THE DODD-FRANK ACT
HAMPERS HOME OWNERSHIP
=======================================================================
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
__________
JUNE 18, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-32
U.S. GOVERNMENT PRINTING OFFICE
81-767 WASHINGTON : 2014
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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
----------
Page
Hearing held on:
June 18, 2013................................................ 1
Appendix:
June 18, 2013................................................ 43
WITNESSES
Tuesday, June 18, 2013
Calhoun, Michael D., President, Center for Responsible Lending
(CRL).......................................................... 18
Gardill, James, Chairman of the Board, WesBanco, on behalf of the
American Bankers Association (ABA)............................. 11
Reed, Jerry, Chief Lending Officer, Alaska USA Federal Credit
Union, on behalf of the Credit Union National Association
(CUNA)......................................................... 13
Still, Debra W., CMB, Chairman, Mortgage Bankers Association
(MBA).......................................................... 14
Thomas, Gary, President, National Association of REALTORS (NAR). 16
Vice, Charles A., Commissioner, Kentucky Department of Financial
Institutions, on behalf of the Conference of State Bank
Supervisors (CSBS)............................................. 9
APPENDIX
Prepared statements:
Calhoun, Michael D........................................... 44
Gardill, James............................................... 63
Reed, Jerry.................................................. 75
Still, Debra W............................................... 87
Thomas, Gary................................................. 104
Vice, Charles A.............................................. 109
Additional Material Submitted for the Record
Capito, Hon. Shelley Moore:
Written statement of the Community Associations Institute.... 124
Written statement of the Consumer Mortgage Coalition......... 128
Written statement of the Independent Community Bankers of
America.................................................... 265
Written statement of the National Association of Federal
Credit Unions.............................................. 341
EXAMINING HOW THE DODD-FRANK ACT
HAMPERS HOME OWNERSHIP
----------
Tuesday, June 18, 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, Duffy, Miller,
McHenry, Pearce, Fitzpatrick, Luetkemeyer, Pittenger, Barr,
Cotton, Rothfus; Meeks, Maloney, Hinojosa, Scott, Green,
Ellison, Velazquez, Lynch, Capuano, Murphy, and Heck.
Ex officio present: Representatives Hensarling and Waters.
Chairwoman Capito. The Subcommittee on Financial
Institutions and Consumer Credit will come to order. Without
objection, the Chair is authorized to declare a recess of the
subcommittee at any time.
I now yield myself 2\1/2\ minutes for my opening statement.
This morning's hearing is the second installment in a
series of hearings that this subcommittee is holding on the
effect that the Consumer Financial Protection Bureau's (CFPB's)
ability-to-repay rule will have on the availability of mortgage
credit for consumers. During the last hearing, we heard from
representatives from the CFPB about the status of the rule and
the feedback that they were hearing. There was almost unanimous
agreement from members of the subcommittee that the rule in its
current form could lead to a constriction of credit when it
goes into effect in January of 2014. The CFPB must give those
concerns serious consideration and address them in order to
avoid serious market disruption.
In the last 6 weeks, the CFPB issued amendments to the rule
addressing concerns that had already been raised. Although
these revisions attempt to provide clarity to lenders, the need
for these changes highlights the fundamental problem with the
ability-to-repay rule.
Mortgage lending can be a highly subjective business,
especially in rural and underserved areas. This element of
relationship-based decision-making is completely ignored by the
premise of the rule. It will be nearly impossible for the CFPB
to endlessly amend the rule to accommodate the ability of
lenders to make these relationship-based loans. Unfortunately,
the end result will be some consumers losing access to credit
and the ability to own their own home.
This morning, we will hear from mortgage professionals who
are best able to determine the real effects of this rule and
what effects it will have on the mortgage market. We are here
today to not only learn about how this rule will affect the
available mortgage credit, but also to begin discussion of
better ways to preserve access to mortgage credit and protect
consumers.
I fear that without significant revision or repeal of this
rule in its entirety, the consumers that proponents of the rule
are attempting to protect will be the very consumers who are
blocked out of the system. Without significant changes,
consumers who live in rural areas with low property values will
see a change in their availability of credit. The consequences
of this rule, whether intended or unintended, will be very real
to these communities. In fact, one of our witnesses today is
concerned that the institution he represents may no longer be
able to offer a charitable program for low-income borrowers.
This program has been in existence since 1951 and has helped
residents of Ohio County, West Virginia, who otherwise could
not attain the goal of home ownership. This is exactly the type
of case-by-case local lending that will be threatened by rigid
Federal standards.
I now yield to the ranking member of the subcommittee, Mr.
Meeks, for the purpose of making an opening statement.
Mr. Meeks. Thank you, Chairwoman Capito, for holding this
important hearing. Let me start by reaffirming the need and the
support for the Dodd-Frank Act. No bill that I have seen in my
15 years here is perfect. But the 2008 financial crisis was a
painful and regrettable demonstration of the need to reform our
financial institutions, our capital markets, and our regulatory
agencies, and to have laws to prevent the reoccurrence of the
excessive behavior that got us here in the first place.
That is why I have remained open-minded in my search for
true bipartisan solutions to address some of the shortcomings
of the bill, particularly those aspects of the law that affect
the most vulnerable. We need to make sure that we help our
local communities and our local banks, whose activities did not
blow up the global financial system, but are facing real
challenges in this modest economic recovery.
I support a balanced, risk-sensitive Qualified Mortgage
(QM) definition that protects consumers from predatory lending
practices while also ensuring that we maintain a competitive,
accessible, and liquid housing finance industry that serves all
niches of the population.
This is why I cosponsored H.R. 1077 to specifically address
and support home ownership and financing opportunities by
first-time home buyers and low- and moderate-income families.
H.R. 1077 addresses major concerns on regulatory agencies'
rulemaking on Qualified Mortgages as required by Dodd-Frank and
focuses on the Consumer Financial Protection Bureau's ability-
to-repay rule, which sets the baseline for a Qualified
Mortgage.
I am concerned that the Qualified Mortgage's 3 percent cap
on points and fees will especially affect first-time home
buyers and low- and moderate-income consumers, especially in
places like my hometown of New York, which has some of the
highest closing costs in home mortgages. It is problematic to
me to include some specific closing cost charges in the cap,
such as title insurance premiums from affiliated providers,
escrow charges for future payment of tax and insurance, and
low-level pricing adjustments which allow borrowers with not-
so-perfect credit scores to qualify for affordable loans, and
the double counting of loan officer compensation, which is
unfair.
With respect to title charges, we must be careful not to
treat title insurance companies differently under the QM rules
based on their business affiliations. The home purchase and
settlement process is complex and difficult for most home
buyers. If a buyer chooses the one-stop-shopping option by
selecting an affiliated title company, he or she ought to be
able to exercise that option without the penalty of extra
points on their mortgage.
To ensure that we have a thriving housing recovery that is
far-reaching and sustainable, we need to make sure that we have
a financial system that provides access to credit in
underserved communities and affordable loans to low- and
moderate-income households. Our financial regulations must,
therefore, be balanced between the need to protect against
excessive risk-taking and enabling a liquid, well-financed
housing industry.
Consistent with this balanced approach, I support risk-
retention rules as an important principle and risk-management
tool in the securitization process. And risk retention would
ensure that loan originators applied prudent underwriting
standards at the critical initial stage of risk assessment.
Under Dodd-Frank, securities-based Qualified Residential
Mortgage (QRM) loans would be exempt from risk-retention rules,
as these loans would have been vetted as having gone through
prudential underwriting standards.
The housing sector is vital to our economic recovery, and
H.R. 1077 is an important step in ensuring that this sector
remains vibrant and accessible to all niches of the population.
Chairwoman Capito. Thank you.
Mr. Duffy for 2 minutes.
Mr. Duffy. First, I want to thank Chairwoman Capito for
holding today's very important hearing, and I appreciate the
panel coming in and sharing your views with us on our mortgage
market.
I think everyone on this panel agrees that after the 2008
crisis, we have to have a review on what happened in regard to
our underwriting standards with regard to our mortgages. I
think it is fantastic that we have a bipartisan understanding
that Dodd-Frank isn't perfect and that there is room to improve
the law that was written a few years ago. I am hoping this can
be one leading committee on bipartisan activity.
One of my concerns is specifically the civil liability that
is imposed on banks in regard to assessing a borrower's
ability-to-repay, specifically in regard to those banks that
originate and retain their mortgages on their books. They
assume the traditional credit risk of that loan, but then now
they also have a civil liability on top of the traditional
credit risk. I am interested in the panel's views on how that
will impact the industry's willingness to write mortgages in
this new environment.
Also, I have read most of the testimony, and a lot of you
have talked about the safe harbor rule under QM, and I am
interested in the panel's views on whether we can pierce--or an
aggressive litigant can pierce that safe harbor rule and
actually successfully litigate a positive outcome when our
originators actually believe they were safely covered under the
safe harbor rule.
Listen, I come from a rural part of the country. It is
moderate and low income. I am concerned on how the ability-to-
repay standard, as well as QM, is going to impact my
constituents' ability to obtain mortgages as we move forward
with these new rules. I look forward to the panel's testimony
and our bipartisan work on this committee.
I yield back.
Chairwoman Capito. The gentleman yields back.
I now yield 3 minutes to the ranking member of the full
Financial Services Committee, Ms. Waters from California.
Ms. Waters. Thank you very much, Madam Chairwoman.
All of us on this committee know the 2008 financial crisis
was a complicated event without a simple explanation, and I am
sure there are differences of opinion on both sides of the
aisle as to what led us into the greatest economic downturn
since the Depression.
We can all agree on at least one thing: Mortgage lenders
were extending loans to people who couldn't afford to pay them
back. Underwriting standards went out the window as lenders
raced to push as many people into complicated loan products as
possible. Many borrowers who were eligible for prime rates
received subprime loans from unscrupulous lenders that were
compensated by yield spread premiums. The mortgage market
wasn't working for its customers at all and many homeowners are
still struggling with their lingering problems in the housing
market.
In court documents released just last Friday, several
employees of one of the Nation's largest mortgage servicers
claimed that their managers encouraged them to pretend they had
lost customer paperwork so the customers could be foreclosed
upon. As it turns out, when the servicer doesn't own the loan
it is servicing, it is cheaper to foreclose than to help a
homeowner with a loan workout.
This misalignment of economic incentives is what the CFPB's
ability-to-repay rule is all about. Rather than banning any
type of loan product or feature, the Dodd-Frank Act empowered
the Federal Reserve and the CFPB to go after lenders who
recklessly trapped borrowers in loans they couldn't afford and
provided consumers with additional rights to pursue
compensation for faulty loan products. But Congress also
realized it would be unfair to make lenders bear all of the
risk these new rules present, so we worked with the industry to
craft a set of standards which a mortgage could meet in order
to be automatically exempted from the penalty set up to catch
bad actors.
The CFPB has proposed a final rule on these so-called
Qualified Mortgages, and I believe that rule has struck a very
fair balance for the industry. The Qualified Mortgage rule
incentivizes lenders to avoid complicated and risky loan
structures with variable rates or features that allow borrowers
to stay current while actually accruing more debt on their
home, and it doesn't prevent them from doing so.
It encourages lenders to really look into a potential
borrower's income documentation and compare that to the real
payments the loan will require, not the tiny payments
associated with a short-term teaser rate, but it doesn't force
them to. And the Bureau has also made several adjustments to
that rule addressing industry concerns, and I hope they will
continue to work closely with the industry to strike the right
balance of protection, specifically for rural lenders where
credit availability is already a concern.
I believe that Director Cordray's establishment of the CFPB
Office of Financial Institutions and Business Liaison will be
very helpful to that effort.
I yield back.
Chairwoman Capito. Thank you.
Mr. Miller for 2 minutes.
Mr. Miller. I want to thank the Chair for holding this
important hearing today. We are starting to see a rebound in
the housing market, and that is really important to the
economic recovery of this country and for job creation. But we
need to be cautious that Federal policies don't have a negative
impact on that. And the CFPB's ability-to-repay rule governs
lending for the foreseeable future for all of us, without a
doubt.
But the rule contains Qualified Mortgage, called QM, and it
is meant to protect consumers from subprime loans that are
really predatory, but I have some real concerns with that. I
have had a concern with the definition between subprime and
predatory for years, and I am glad to see we are going to
finally deal with it. But when you look at the concerns we have
on that, the way it is written it could prevent creditworthy
borrowers from being able to actually get a home and get a
loan.
Some studies that have been released lately, one done by
CoreLogic, says that about half of the mortgages that
originated in 2010 could not be issued under this rule. The
problem I have with it is that the mortgages in 2010 are
performing very well. So if there is a problem with those
loans, I think we need to look at them, but from what I am
seeing, there doesn't appear to be a problem.
I have spoken with loan originators up and down the
spectrum, from mortgage brokers to mortgage bankers to retail
banks, and they all said basically the same thing: ``We will
not originate a non-Qualified Mortgage; there is too much
liability.'' The Administration doesn't seem to see a problem
with this, but the marketplace does notice a huge problem.
I support sound underwriting standards, but I am concerned
the QM definition is basically too narrow and sometimes
unclear. And there is an issue of a 3 percent point fee cap to
determine someone's ability-to-repay a loan, and there are so
many exclusions to that, it doesn't seem to make any sense. And
the thing that I have problems with is you can't even drop that
fee cap once you state what it is going to be in order to close
a loan, even to the benefit of the buyer and the seller.
So we need to look at that issue and say, is it going to
work, is it not going to work? But our housing market, as I
said, is finally showing signs of life and I am concerned that
what we are doing here could have a negative impact.
I yield back the balance of my time.
Chairwoman Capito. The gentleman yields back.
Mr. Ellison for 2 minutes.
Mr. Ellison. Thank you. Thank you, Madam Chairwoman. Thank
you, Madam Chairwoman and Mr. Ranking Member, for holding this
important hearing.
I was intrigued by the title, ``Examining How the Dodd-
Frank Act Hampers Home Ownership.'' I don't know a lot, but I
do know that homeowners paying fees completely separate from
the actual cost of the service they receive is a damper on home
ownership. Appraisal fees, title insurance, private mortgage
insurance, all manner of inflated fees raise the cost of a
mortgage by thousands of dollars.
I know that using language, or ethnic or religious
affiliation to trick people into high-cost mortgages when they
qualify for low-cost prime mortgages hampers home ownership. We
have a lot of examples here of that. For example, Wells Fargo
paid $175 million to settle accusations that it allegedly
discriminated against African-American and Latino home buyers.
An NAACP study found that African-American home buyers are 34
percent more likely to receive a subprime loan than White
borrowers even when other factors are equal.
Of course, foreclosures don't help home ownership, either.
We have had 4 million of them so far.
So when I think about the title of this hearing, and it
seems to imply that Dodd-Frank is the problem with home
ownership, I think that a whole lot of things that led up to
the establishment of Dodd-Frank actually are the real problem
with home ownership.
This isn't to say that we shouldn't look at how we can
improve things and we shouldn't continue to refine the bill,
but I do think that it is important to maintain some
perspective on how we arrived at Dodd-Frank and what we are
doing now, and I don't think that associating Dodd-Frank with
being some barrier to home ownership is fair.
The global financial crisis cost this economy $16 trillion
in wealth. The Qualified Mortgage and other elements of the
Dodd-Frank Reform and Consumer Protection Act are not hampering
home ownership. Dodd-Frank enables sustainable home ownership.
We don't want somebody to get into a home that they can't keep.
That is not promoting home ownership. That is putting somebody
in a situation where they are set up to fail.
So I hope that despite today's title of this hearing, we
can have some testimony that will actually show us how the
Consumer Financial Protection Bureau is doing some good things
and helping safeguard the American people's economic interest.
Thank you.
Chairwoman Capito. Thank you.
Mr. Barr for 1 minute.
Mr. Barr. Thank you, Chairwoman Capito, for holding this
very important hearing to examine the consequences of Dodd-
Frank on home ownership.
A theme that I consistently hear from the community bankers
in Kentucky's Sixth Congressional District is that they no
longer have the discretion and flexibility to serve their
communities in the ways that they know best. Whereas individual
business judgment and institutional knowledge of the community
should be considered strengths, and strengths that are
encouraged, these bankers tell me that rather than focusing on
their core business, they instead have to devote an increasing
amount of time to playing catchup with regulations from
Washington.
While each story is unique, the tale of the financial
institution where personnel hiring in the compliance department
dramatically outpaces hiring in the lending department is not
unique. Some bankers have gone so far as to tell me that this
new wave of regulations and lending rules in Dodd-Frank is
leading them to seriously rethink their business model and
whether they should get out of providing home mortgage services
altogether.
I am confident that many in this room have heard these same
concerns, and so I look forward to the opportunity presented by
today's hearing to further explore Dodd-Frank, the CFPB
rulemaking, the QM rule, and whether it truly strikes the
proper balance between safety and soundness of our financial
system and making sure creditworthy borrowers have access to
the mortgage credit they need to purchase a home.
Chairwoman Capito. The gentleman's time has expired.
The gentlelady from New York for 2 minutes.
Mrs. Maloney. I thank the chairlady and the ranking member
and all of the panelists for being here. It is no secret that
leading up to the financial crisis, mortgage lending was
literally out of control, with prudent underwriting taking a
back seat to profit-seeking.
The comment in New York was, if you can't afford to pay
your rent, then go out and buy a home: no documents, no
requirements, you can buy a home. And this hurt our economy, it
hurt homeowners, it hurt our overall country, and it really
alerted us to the need for greater standards and a minimum of
safeguards for mortgage lending practices. That is what Dodd-
Frank tried to accomplish, to show that we learned from our
mistakes and that basic underwriting standards to prevent this
from happening again were needed.
With the new QM rule, we will hopefully be able to assure
borrowers that they are better protected from predatory lending
practices. The debt-to-income ratio of 43 percent is one that
the FHA has used for decades. I understand that the CFPB has
granted an exception to that for community bankers to have
their discretion with balloon loans to make appropriate loans
that they feel are appropriate for that individual. But it does
come forward with an overall standard, which I believe is
necessary and that Dodd-Frank dictated.
We have to start somewhere. We can't go backwards. I
compliment the CFPB on their hard work and for giving us a
document to work from. And I look forward to the testimony of
the witnesses and your reaction to the proposed rule that the
CFPB has put forward. Thank you for your hard work. Thank you
for being here.
Chairwoman Capito. Thank you.
Mr. Pittenger for 1 minute.
Mr. Pittenger. Thank you, Chairwoman Capito, for calling
this important meeting and for allowing me to make an opening
statement.
We are here today to focus on the rules and regulations
coming out of Dodd-Frank and out of these new policies that
will affect home ownership across America, specifically
regarding the ability-to-repay QM rule.
However well-intentioned, it will end up restricting
mortgage credit, making it more difficult to serve a diverse
and creditworthy population. The definition of QM, which covers
only a segment of loan products and underwriting standards and
serves only a segment of well-qualified and relatively easy to
document borrowers, could undermine the housing recovery and
threaten the redevelopment of a sound mortgage market.
The CFPB's QM rule has caused great concern among banks and
credit unions, especially with the new exposure to litigation
from borrowers not being able to repay the loan. During
meetings back in the district, I have found the fears from
banks, large and small, and credit unions that the regulators
will view any loan outside the QM standards as a risky loan
that will be used against the financial institutions as a
safety and soundness issue.
With these new policies set to take effect in January of
next year, my fear, as well as that of other Members, is that
these new regulations will ripple throughout the economy and
could lead to further anemic economic growth. It is my goal
from this hearing that the CFPB hears the--
Chairwoman Capito. The gentleman's time has expired.
Mr. Pittenger. --bipartisan calls of concern and addresses
these issues. Thank you.
Chairwoman Capito. And last, but not least, Mr. Fitzpatrick
for 1 minute.
Mr. Fitzpatrick. Thank you, Madam Chairwoman. And I
appreciate the witnesses coming before the committee to discuss
this really important issue.
I meet on a regular basis with REALTORS, community banks,
credit unions, and homebuilders in my district back home in
Bucks and Montgomery Counties, Pennsylvania. We discuss ways to
improve access to home ownership and to boost the housing
market.
And while we all support the CFPB's efforts to ensure that
consumers are able to repay their loans, I continue to hear
concerns that the Qualified Mortgage rule discriminates against
small lenders, minimizes consumer choice in lending, restricts
access to credit, and makes providing credit much more costly.
As a result, the QM rule may significantly cut down the number
of mortgages being made, and many small lenders have indicated
a reluctance to provide any mortgages at all under the rule.
This is a pretty tough economic market condition we find
ourselves in. I believe Congress and the CFPB should instead be
improving lending conditions so that individuals and families
who have the ability-to-repay their loans have access to the
affordable credit that they need. And so, we are all looking
forward to the testimony here today.
And I appreciate the hearing, Madam Chairwoman. I yield
back.
Chairwoman Capito. Thank you.
And that concludes our opening statements. I would like to
yield to the gentleman from Kentucky, Mr. Barr, to introduce
our first witness.
Mr. Barr. Thank you, Madam Chairwoman.
I am very proud today to welcome Commissioner Charles Vice
to the Financial Services Committee. A resident of Winchester,
Kentucky, Commissioner Vice has earned an outstanding
reputation in the area of financial institution supervision,
and we look forward to him sharing his expertise with the
committee today.
Mr. Vice currently serves as the Commissioner of the
Department of Financial Institutions for the Commonwealth of
Kentucky, a position he was appointed to in August of 2008. In
this role, Commissioner Vice has responsibility for the
regulatory oversight of all State-chartered financial
institutions in Kentucky, which includes examinations,
licensing of financial professionals, registration of
securities, and enforcement. It is a credit to Commissioner
Vice that the financial institutions in my congressional
district, which he interacts with on a regular basis,
consistently tell me that he is knowledgeable, thoughtful, and
fair in his role.
Commissioner Vice is also well-regarded by his peer
supervisors. He serves in a national leadership capacity
through the Conference of State Bank Supervisors, where he has
been a member of the Executive Committee. Commissioner Vice
formerly served as treasurer and chairman-elect of the CSBS
board, and in May 2013, he officially became chairman of the
governing board.
In addition to his service on a number of supervisory
boards and committees aimed at improving examinations of
financial institutions, Commissioner Vice previously worked for
18 years as an employee of the FDIC. During his tenure with the
FDIC, Commissioner Vice served in the Lexington, Kentucky,
field office, where he was the office's expert on subprime
lending and capital markets. In recognition of his outstanding
work, he received the FDIC Chicago Region employee of the year
award in 2007.
And on a personal note, I just want to thank Commissioner
Vice for his courtesy in being available to me and my staff,
for answering our questions, and for sharing his considerable
expertise and insights with us. I am honored to welcome
Commissioner Vice to the committee, and we look forward him
sharing his expertise on the impact of Dodd-Frank on home
ownership.
Chairwoman Capito. Thank you.
Welcome, Commissioner Vice. You are recognized for 5
minutes.
And I would ask all the witnesses to please pull the
microphones close to them, and make sure they are on, because
sometimes it is difficult to hear, and we want to hear every
single word.
So, Commissioner Vice, you are recognized for 5 minutes.
STATEMENT OF CHARLES A. VICE, COMMISSIONER, KENTUCKY DEPARTMENT
OF FINANCIAL INSTITUTIONS, ON BEHALF OF THE CONFERENCE OF STATE
BANK SUPERVISORS (CSBS)
Mr. Vice. Good morning, Chairwoman Capito, Ranking Member
Meeks, and members of the subcommittee. Thank you, Congressman
Barr, for your service to the Commonwealth of Kentucky and for
your kind introduction today.
My name is Charles Vice, and I am the commissioner for the
Kentucky Department of Financial Institutions. I am also the
chairman of the Conference of State Bank Supervisors. And I
appreciate the opportunity to testify today.
I have been a financial regulator, first with the FDIC, and
now with the Commonwealth of Kentucky, for more than 20 years.
During that time, I have observed a troubling trend. Federal
regulators and policymakers seem to be taking a blanket
approach to supervision, applying statutes and regulations to
all banks regardless of size, location, ownership structure,
complexity, or lending activities. This concerns me.
While today's hearing focuses on the ability-to-pay rule on
the Qualified Mortgage, the broader issue for State supervisors
is a one-size-fits-all approach to supervision and regulation.
State regulators are dedicated to understanding the impact of
the current regulatory environment on community banks. CSBS has
established a Community Banking Task Force to explore these
issues. Additionally, CSBS is partnering with the Federal
Reserve System to host an upcoming community bank research
conference.
State regulators have found that regulation and supervision
needs to be more tailored to how community banks lend.
Policymakers should not hinder portfolio lending; instead, they
should ensure community banks are able to positively impact
local and national economic conditions.
As a basic tenet of responsible underwriting, I believe
lenders should determine a borrower's ability-to-repay a loan;
however, community banks that hold loans in portfolio are
motivated to ensure the borrower can make their mortgage
payment. As such, lenders that retain the full risk of a
borrower's default by community banks that retain mortgage
loans in their portfolio should be presumed to have determined
a borrower's ability-to-repay.
The CFPB has shown initiative by recognizing the portfolio
lending business model. The small creditor QM creates a
framework that supports retention of mortgages in portfolio by
community banks. This right-sizing of regulation appropriately
accounts for differences in community bank business model.
Congress and Federal regulators should use the small creditor
QM as an example for developing laws and regulations.
The treatment of balloon loans is one case where a one-
size-fits-all approach falls short. Under the Dodd-Frank Act,
balloon loans would only qualify for QM status if they
originated in a rural or underserved area. When used
responsibly, balloon loans are a useful source of credit for
borrowers in all areas. This provision effectively limits a
bank's flexibility to tailor products to the credit needs of
the community. As a regulator, the banks under my purview and
the consumers they serve benefit from having more products at
their disposal. The CFPB has extended the timeframe before the
balloon loan restriction takes place, potentially offering
Congress the opportunity to act on this issue.
Congress should amend the statute to grant QM status to all
mortgage loans held in portfolio by community banks. This is a
portfolio lending issue, not a rule or underserved issue.
As a more immediate solution, and absent a legislative
change, CSBS recommends a petition process to address
inconsistencies for rule designations. The CFPB has the
challenging task of providing an appropriate definition of
rule. Unfortunately, the CFPB's approach has some illogical
results. This is inevitable when local communities are defined
by a formula developed in Washington, D.C. Therefore, the CFPB
should adopt a petition process for interested parties to seek
rural status for counties, a step that is within the CFPB's
current authorities.
State regulators stand ready to work with Members of
Congress and our Federal counterparts to develop and implement
a supervisory framework that recognizes the importance of our
unique dual banking system.
Thank you for the opportunity to testify today on this
important topic.
[The prepared statement of Commissioner Vice can be found
on page 109 of the appendix.]
Chairwoman Capito. Thank you, Commissioner.
Next, I would like to recognize my fellow West Virginian,
Mr. James C. Gardill, who is chairman of the board of WesBanco,
Incorporated. He is testifying on behalf of the American
Bankers Association. He has a distinguished career as a banker
and an attorney in the northern panhandle of West Virginia.
He and I have the distinction of being from Glen Dale, West
Virginia, which we share that distinction with being the
birthplace of Brad Paisley and the home of Lady Gaga's
grandparents.
With that, I would like to thank Jim for coming today, and
I look forward to his 5-minute presentation. Thank you.
STATEMENT OF JAMES GARDILL, CHAIRMAN OF THE BOARD, WESBANCO, ON
BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA)
Mr. Gardill. Chairwoman Capito, Ranking Member Meeks, my
name is James Gardill, and I am chairman of the board of
WesBanco, a $6.1 billion bank holding company headquartered in
Wheeling, West Virginia. We are active mortgage lenders with a
$1.3 billion mortgage portfolio. I appreciate the opportunity
to be here to represent the ABA regarding the new ability-to-
repay and Qualified Mortgage rules.
The mortgage market generates a substantial portion of the
GDP and touches the lives of nearly every American household.
The new ability-to-repay and Qualified Mortgage rules represent
a fundamental change in this market. As such, it is critical
that these rules make sense and do not end up hurting
creditworthy Americans who strive to own a home.
Unfortunately, the ability-to-repay and QM rule, however
well-intentioned, will restrict mortgage credit, making it more
difficult to serve a diverse and creditworthy population.
Under the ability-to-repay rule, underwriters must consider
a borrower's ability-to-repay a mortgage loan. Qualified
mortgages are designed to offer a safe harbor within which
loans are assumed to meet the ability-to-repay requirement.
However, the QM rules create a narrowly defined box that
consumers must fit in to qualify for a QM-covered loan. Banks
are not likely to venture outside the bounds of the QM safe
harbors because of the heightened penalties and liabilities
applicable under the ability-to-repay rule.
Since banks will make few, if any, loans outside of QM
standards, many American families who are creditworthy but do
not fit inside the QM box will be denied access to credit. In
the short run, this could undermine the housing recovery.
More fundamentally, this also likely means that less
affluent communities may not be given the support they need to
thrive. These rules may leave many communities largely
underserved in the mortgage space.
In particular, I am concerned that our bank will be unable
to continue several loan programs targeting low- and moderate-
income borrowers and neighborhoods. Our CRA Freedom Series
forums and a charitable plan we administer designed to promote
home ownership for families, our Laughlin plan, provides
financial aid to families who would otherwise not be able to
own a home, in the form of interest-free loans and insurance.
These loans would likely not qualify for QM status, with some
failing to meet the ability-to-repay requirements, meaning we
would not be able to make them at all.
Even if banks choose to make only loans that fit within QM,
they still face a number of risks. Higher-interest-rate loans
still carry both higher credit risk and liability risk under
QM's rebuttable presumption. This means banks will be hesitant
to offer them, instead serving only the best qualified
borrowers. The end result of this will be less credit available
to some individuals and communities, creating conflict with
fair lending rules and the goals of the Community Reinvestment
Act.
The rulemaking has left banks little time to comply with
the QM regulations, despite the wide-ranging market
implications and the tremendous amount of work which banks must
undertake to comply with these rules. Currently, these and five
other mortgage rules are scheduled to go into effect in January
of 2014. Between now and then, banks must fully review all of
the final rules, implement new systems, processes and forms,
train staff, adapt vendor systems, and test these changes for
quality assurance before bringing them online.
Some institutions may simply stop all mortgage lending for
some time because the consequences are too great if the
implementation is not done correctly. I recently learned of a
vendor that will not have the majority of its updates out until
November 22nd, leaving its customers 7 weeks to customize,
update, and train staff.
These rules must be revised so that they help the economy
and at the same time ensure that the largest number of
creditworthy borrowers have access to safe, quality loan
products. In order to do this, we need to extend the existing
deadlines, as well as address these outstanding issues.
Thank you very much. I am happy to answer any questions
that you may have.
[The prepared statement of Mr. Gardill can be found on page
63 of the appendix.]
Chairwoman Capito. Our next witness is Mr. Jerry Reed,
chief lending officer, Alaska USA Federal Credit Union, on
behalf of the Credit Union National Association. Welcome.
STATEMENT OF JERRY REED, CHIEF LENDING OFFICER, ALASKA USA
FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT UNION NATIONAL
ASSOCIATION (CUNA)
Mr. Reed. Chairwoman Capito, Ranking Member Meeks, thank
you for the opportunity to testify at today's hearing. I am
Jerry Reed, chief lending officer of Alaska USA Federal Credit
Union, which is based in Anchorage, Alaska. I am here today
representing the Credit Union National Association. We greatly
appreciate the attention this subcommittee has given to the
Qualified Mortgage regulation issued by the CFPB. We also
appreciate the consideration the Bureau has given credit unions
in the rulemaking process. However, we have significant
concerns with how the rule may be implemented.
My written testimony describes our concerns in detail, and
I want to discuss a few of them with you today: first, I want
to explain why all credit unions should be fully exempted from
the QM rule; second, I want to discuss the impact the rule will
have on the secondary market; third, I want to discuss how our
regulators may view non-QM loans that credit unions may wish to
add to their portfolios in the future; and fourth, I want to
discuss our concern that QM may result in unintended disparate
impact on the ability of otherwise creditworthy borrowers to
achieve the American dream.
Recent revisions provide QM status to loans originated by
institutions of $2 billion or less in assets that originate 500
or fewer first lien mortgages. We believe this is a good start,
but unfortunately it only covers about a quarter of credit
union lending. Since loan losses are so minimal across all
sizes of credit unions, it is clear the cooperative structure
and purpose of credit unions, not their size, leads to quality
loan decisions for the borrower and their ability and
willingness to repay.
Since the onset of the financial crisis, annual losses on
the credit union first mortgages have averaged only 0.29
percent, compared to 1.13 percent at banks.
The structure of credit unions merits the exemption,
because we are operationally conservative and already have been
applying ability-to-repay standards for years in the normal
course of business to minimize loan losses. Moreover, the
Bureau has clear statutory authority to go further in exempting
credit unions and deeming all credit union mortgages as QM
loans.
Given the recent announcement by the FHFA that Fannie Mae
and Freddie Mac will not be able to purchase certain non-QM
loans, credit unions are concerned about the long-term effect
this rule and its application will have on the secondary market
and what that means for credit unions and their members.
We ask the committee to ensure that credit unions have a
functioning secondary market to sell loans, even if they do not
meet the QM definition, if they otherwise meet secondary market
standards. Being unable to sell non-QM loans to the secondary
market will make the management of assets at a credit union
difficult.
Prudent interest rate risk management requires being able
to sell long-term fixed rate loans into an efficiently
functioning secondary market. It is paramount that Congress and
the Bureau work closely with prudential regulators to ensure
that this instrument of consumer protection does not become an
instrument of prudential regulation.
Likewise, we have significant concerns that examiners will
severely restrict the ability of credit unions to keep non-QM
loans in their portfolio after the rule goes into effect. As
well, the possibility exists that examiners will determine that
non-QM mortgages are a safety and soundness concern, resulting
in a downgrade in credit unions and their associate camel
ratings.
As the economy recovers, the credit union model continues
to serve credit union members well, but the QM rule has the
potential to fundamentally alter that relationship. In fact,
had this rule been in effect during the crisis, it is very
likely that as the economy worsened, NCUA examiners would have
increasingly frowned on non-QM loans, making it that much more
difficult for credit unions to continue to lend when other
providers did not.
Director Cordray has indicated his support of non-QM loans
made by credit unions. It is essential that Congress direct
other regulators to follow the lead of the Bureau in this
matter so that non-QM loans and the availability of loans to
creditworthy borrowers should be encouraged and not viewed
negatively by examiners.
As I have pointed out, the QM rule forces individuals into
a one-size-fits-all box. Equally, this could result in the
unintended consequence of disparate impact in residential
mortgage lending. It would restrict the ability to sell those
mortgages to the secondary market and hold them in portfolio.
This would ultimately exclude borrowers with perfectly good
abilities to repay, but who do not meet the specifics of the QM
rule. This would make it more difficult for credit unions to
fulfill their purpose of providing credit to all who could
benefit from it and are able to repay it.
Thank you again for the opportunity to testify at today's
very important hearing.
[The prepared statement of Mr. Reed can be found on page 75
of the appendix.]
Chairwoman Capito. Thank you, Mr. Reed. And, boy, you have
really brought them to their feet out there.
Our next witness is Ms. Debra Still, no stranger to the
committee. Welcome back.
Ms. Still. Thank you.
Chairwoman Capito. She is the chairwoman of the Mortgage
Bankers Association.
Welcome.
STATEMENT OF DEBRA W. STILL, CMB, CHAIRMAN, MORTGAGE BANKERS
ASSOCIATION (MBA)
Ms. Still. Thank you very much, Chairwoman Capito and
Ranking Member Meeks.
Since I last testified before your committee, the CFPB has
finalized the ability-to-repay rule, including the definition
of a Qualified Mortgage. Lenders are now fully focused on
understanding and implementing this new rule by its effective
date of January of next year. Of all of the Dodd-Frank rules,
QM will have the single-most significant impact on consumer
access to credit and a vibrant competitive marketplace.
The industry applauds the CFPB for getting a lot right,
using a deliberative and inclusive approach. Most notably, the
CFPB established a safe harbor for most QM loans and a
temporary QM, both critical provisions for borrowers. But there
is still serious concern that certain aspects of the rule will
be prohibitive to otherwise qualified consumers.
QM takes effect at a time when credit is already overly
tight and underwriting standards are well above industry norms.
In the current form, this rule could cause unintentional harm
to the very consumers it was designed to protect and make
lenders even more cautious than they are today.
In the foreseeable future, MBA believes that lending will
be substantially limited to loans that meet the definition of a
Qualified Mortgage with a safe harbor provision. QM loans with
a rebuttable presumption and non-QM loans will have little
market liquidity and, if available at all, will be more costly
for borrowers.
The element with the greatest potential for unintended
consequences is the 3 percent cap on points and fees. The
points and fees test is a threshold requirement for all QM
loans. The calculation is highly complex and is based on
criteria unrelated to credit quality, and penalizes both
affiliate and wholesale lenders.
This inconsistent treatment impairs a consumer's ability to
shop and their choice in settlement service providers. Any
negative impact will be on smaller loan amounts and fall most
heavily on low- to moderate-income and first-time home buyers.
I want to thank Congressman Huizenga for introducing H.R.
1077, the Consumer Mortgage Choice Act, and also the many
members of this subcommittee who have given this legislation
the broad bipartisan support it currently enjoys. The ability-
to-repay rule must be centered on consistent consumer
protection regardless of business model. H.R. 1077 will fix the
points and fees calculation, leveling the playing field. By
passing the bill before January 2014, Congress will ensure a
vibrant, competitive marketplace for consumers.
For the same reason, we also suggest that an additional way
to reduce QM's impact would be to raise the small loan limit to
$200,000, and increase the points and fees limit to 4 percent,
and up to 8 percent for very small balance loans.
The QM rule is so vital it is imperative that it be aligned
with other Federal regulations. Lenders are seeking clear
guidance on reconciling QM with other compliance obligations.
Specifically, HUD's disparate impact rule makes lenders liable
under the Fair Housing Act for mortgage lending practices if
they have a disproportionate effect on protected classes of
individuals, even if the practice is neutral and
nondiscriminatory. If a lender limits its listing to QM loans
only, the lender may face exposure under the disparate impact
rule. Lenders must have more certainty that their decisions
with respect to QM will not place them in jeopardy.
Of equal significance is the need for clear alignment
between QM and the definition of a Qualified Residential
Mortgage within the pending risk retention rule. MBA believes
that it is essential that QRM equals QM, particularly as it
relates to the elimination of prohibitive downpayment
requirements in QRM. Any variation between these two rules will
increase the cost of credit, discourage private capital, and
add to the complexity of mortgage finance for industry
participants and consumers alike.
Chairwoman Capito, I want to thank you and your colleagues
for your continued focus on this highly complex QM rule. We all
share the same goal: to strike the right balance between
consumer protection and access to credit. If not appropriately
modified, this well-intentioned rule may fail consumers in the
most fundamental way.
Access to safe and affordable credit is vital to the future
growth of home ownership in America. In the months ahead, we
urge you to encourage the CFPB to exercise its authority to
make change and we ask for your support for speedy passage of
H.R. 1077.
Thank you.
[The prepared statement of Ms. Still can be found on page
87 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Mr. Gary Thomas, president of the
National Association of REALTORS. Welcome.
STATEMENT OF GARY THOMAS, PRESIDENT, NATIONAL ASSOCIATION OF
REALTORS (NAR)
Mr. Thomas. Thank you. Madam Chairwoman, Ranking Member
Meeks, and members of the subcommittee, on behalf of the 1
million members of the National Association of REALTORS, whose
members practice in all areas of residential and commercial
real estate, thank you for the opportunity to participate in
this hearing.
I am Gary Thomas, president of the National Association of
REALTORS, from Orange County, California, and I have more than
35 years experience in the real estate business. I am the
broker-owner of Evergreen Realty in Villa Park, California.
The Dodd-Frank Wall Street Reform Act established the
Qualified Mortgage, or QM, as a primary means for mortgage
lenders to satisfy its ability-to-repay requirements. However,
Dodd-Frank also provides that a QM may not have points and fees
in excess of 3 percent of the loan amount.
As currently defined by Dodd-Frank and the Consumer
Financial Protection Bureau's final regulation to implement the
ability-to-repay requirements, points and fees include fees
paid to affiliated title companies, amounts of homeowners
insurance held in escrow, loan level price adjustments, and
payments by lenders in wholesale transactions. Because of this
problematic definition, many loans made by affiliates,
particularly those made to low- and moderate-income borrowers,
would not qualify as QMs. Consequently, these loans would be
unlikely to be made or would only be available at higher rates
due to the heightened liability risk. Consumers would lose the
ability to choose to take advantage of convenience in market
efficiencies offered by one-stop shopping.
To correct unfairness in the fees and points calculation,
the National Association of REALTORS supports H.R. 1077, the
Consumer Mortgage Choice Act. The bill has been introduced by
Representatives Huizenga, Bachus, Royce, Stivers, Scott, Meeks,
Clay, and Peters. Similar legislation has been introduced by
Senators Manchin and Johanns in the Senate.
The legislation solves a problematic definition of points
and fees in several distinct ways. First, it removes affiliated
title insurance charges from the calculation of fees and
points. The title industry is regulated at the State level and
is competitive. It does not make sense to discriminate against
affiliates on the basis of these fees. To do so only reduces
competition and choice in providers of title services, to the
detriment of consumers.
Furthermore, owners of affiliated businesses can earn no
more than a proportionate return on their investment under the
Real Estate Settlement Procedures Act (RESPA). RESPA also
prohibits referral fees or any compensation at all for the
referral of settlement services. As a result, there is no
steering incentive possible for individual settlement service
providers such as mortgage brokers, loan officers, or real
estate professionals.
Consumers repeatedly have said that they want the
convenience of one-stop shopping since buying a home is
complicated, and for most buyers, they will only do it a couple
of times in their lifetime. This legislation will continue to
allow ease and accessibility offered through one-stop shopping.
NAR believes legislative language is necessary to ensure that
efficient business models are not unfairly discriminated
against in the calculation of fees and points.
Second, the legislation removes the calculation of fees and
points Fannie Mae and Freddie Mac loan level price adjustments.
This money is not retained by the lender. These adjustments are
essentially risk-based pricing established by the GSEs and can
sometimes exceed 3 points in and of themselves. Including these
loan level price adjustments would limit access to affordable
mortgage credit to many borrowers or force borrowers into more
costly FHA or non-QM loans unnecessarily.
Finally, the bill removes from the calculation of fees and
points escrows held for taxes and insurance. The tax portion is
a clarification of imprecise language in Dodd-Frank. In the
case of insurance, these escrows are held to pay homeowners
insurance and can be a large amount. They are not retained and
cannot be retained by the lender since RESPA requires excess
escrows to be refunded.
Once again, NAR supports a legislative fix because it is
the most certain way to avoid future confusion and legal risk.
In conclusion, NAR believes H.R. 1077 is essential to
maintain competition and consumer choice in mortgage
origination. Without this legislation, research shows that up
to one-half of the loans currently being originated would
likely not be eligible for the QM safe harbor and would likely
not be made by affiliated lenders. Instead, if loans are made
at all, they would be concentrated among the largest retail
lenders, whose business models are protected from the points
and fees definition discrimination.
It is for these reasons that NAR urges Congress to pass
H.R. 1077 well before the ability-to-repay provisions take
effect in January 2014, since lenders are likely to begin
adjusting their systems in the fall of 2013.
Thank you for the opportunity to share our thoughts. We
look forward to working with Congress and the Administration on
efforts to address the challenges still facing the Nation's
housing markets.
[The prepared statement of Mr. Thomas can be found on page
104 of the appendix.]
Chairwoman Capito. Thank you.
Our final witness is Mr. Michael D. Calhoun, president of
the Center for Responsible Lending.
Welcome.
STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR
RESPONSIBLE LENDING (CRL)
Mr. Calhoun. Thank you, Chairwoman Capito, Ranking Member
Meeks, and members of the subcommittee for this opportunity to
testify today.
It is important to remember that unsustainable mortgages
were at the heart of the financial crisis. Large fees were paid
for originating unnecessarily risky mortgages. For example, a
no-doc loan or an exploding ARM loan would pay twice as much in
fees as a 30-year fixed-rate loan to the exact same borrower,
and thus it is no surprise that those exotic products came to
dominate the market. The response of the ability-to-repay
provisions requires that lenders make loans based on the
borrower's capacity to repay, and we are all better off for
that.
In my testimony, I am going to emphasize three points.
First, excluding broker fees made by creditors from the points
and fees tests would reinstate these incentives for risky
lending. Second, lenders should not be rewarded with a
competitive advantage by encouraging and steering borrowers to
use their own service providers. And finally, existing
exceptions to the QM points and fee tests already provide ample
space for broad lending.
On the first issue, one of Dodd-Frank's central mortgage
reforms was including payments made by creditors to brokers in
the points and fees. This followed the practice that had been
tried successfully in a number of States around the country for
many years. It is based on common sense and reflects the
experience of the financial crisis.
First, broker payments are generally included, and should
be included in points and fees. The broker is supposed to be
providing origination services that reduce the lender's costs
that they would otherwise charge for. Brokers can be paid
directly by the borrower. Everyone agrees those fees can be
included. As an alternative, brokers can be paid by the
creditor, and those are intended to be a direct substitute for
the borrower fee and should likewise be included.
Most important, these are essential to prevent steering. A
broker could provide only high-priced loans with very high
broker fees, and those would not violate the other anti-
steering provisions of Dodd-Frank. They would, though, provide
a powerful incentive to steer borrowers to those loans. That
steering is bad for all home buyers, and is particularly bad
for families of color. The National Council of La Raza, NAACP,
the Leadership Conference on Civil Rights, and other civil
rights groups oppose H.R. 1077, which would bring back this
tool of discrimination.
On the second issue, affiliated services have been counted
in points and fees under Federal law for nearly 2 decades, and
it is especially important for title insurance. Title insurance
is negotiated between the title insurer and a third-party
agent, even though it is the consumer paying the fee. Not
surprisingly, out of every dollar of title insurance, which can
be $1,000 to $2,000 on a mid-sized loan, only 10 cents goes to
actually paying claims; 75 cents of that dollar gets paid out
as commissions. When affiliated title services are used, the
lender captures part of the title charge, increasing its
revenue on the loan. This should not be a competitive advantage
and windfall for that lender, but rather should be reflected in
lower fees elsewhere in the loan.
Third, the points and fees test, and this is very
important, has many provisions that already permit loans fees
meet its test. First, third-party fees are not included. Legal
fees, filing fees, insurance fees, and other items are
explicitly excluded. Second, on top of the fee amounts, an
additional 2 discount points can be charged and not counted in
the points and fees test. Third, for smaller loans, they have
higher fee thresholds, for example 5 points for a $60,000 loan
and even 8 points for very small loans. Finally, lenders can
recoup their costs by including them in the interest rate
instead of charging upfront fees. This is what lenders have
historically done.
Fannie and Freddie report today, as of last week, that
average lender fees are less than 1 point--1 point--and this
aligns the interest of the borrower and the lender with both
profiting from performance of the loan rather than from large
feels at closing.
In summary, H.R. 1077 as it is currently drafted would
produce steering, higher fees for borrowers, and more
concentration in the mortgage market as larger lenders are most
able to take advantage of its provisions.
Thank you again for the opportunity to testify, and I look
forward to your questions.
[The prepared statement of Mr. Calhoun can be found on page
44 of the appendix.]
Chairwoman Capito. Thank you.
That concludes the testimony of our panel, and I will begin
with questioning for 5 minutes. I want to thank you all before
I begin that.
Mr. Gardill, we have talked about the Laughlin program,
which is the charitable program. Do you know approximately how
many families have been assisted by that program in the life--I
believe it began in 1951?
Mr. Gardill. Several hundred, Chairwoman Capito. We
currently have 100, roughly 100 active borrowers, but several
hundred over the last several decades.
Chairwoman Capito. Right.
Mr. Gardill. Probably over 1,000 at this point.
Chairwoman Capito. Right. You don't believe that you can
continue this charitable program that really is the only way
for these families to get into a home under your guidance. It
has been very successful, I understand. You obviously have some
underwriting standards that you put into effect that don't fit
into the QM box. Is that the gist?
Mr. Gardill. That is correct. We look at the individual
credit, so we have flexibility in designing that opportunity
for that customer. It applies to heads of households and single
parents with two or more children. We don't fit in the box that
they have designed.
Chairwoman Capito. So you would discontinue writing those
loans, then?
Mr. Gardill. We would have to severely reduce it, maybe
even have to discontinue it entirely.
Chairwoman Capito. Okay. There has been a study looking at
the mortgages of 2010 that only 52 percent of those mortgages
that were made in 2010 would actually fit into the definition
for the safest loans under the QM rule.
As a banker in West Virginia, what happens to the other 48
percent of those mortgages, in your opinion, once this rule
goes into effect.
Mr. Gardill. They probably won't be made.
Chairwoman Capito. Will they be made at all by any other
sort of institutions or any online lenders or--
Mr. Gardill. I think the market is going to have to settle
in. The problem is that period is going to create a severe
restriction in lending. And it is going to hurt the most
vulnerable the worst, and that will be the low to moderate
income in the rural areas. We are in both large metropolitan
areas and in rural areas and we see that impacting.
Last year, about 38 percent of our loans were sold in the
secondary market. So we originated the rest of those in
portfolio. As a community-based lender, we lend to our
communities and support our communities. We can't fit everybody
within the box that has been created.
Chairwoman Capito. Great. Thank you.
Commissioner Vice, you mentioned in your testimony--or it
was mentioned actually by several folks--that if somebody does
write a non-QM loan, what effect as a regulator will that have
on your evaluation of that institution's safety and soundness?
I think you mentioned a little bit in your statement. How are
you going to be able to evaluate those loans, if in fact they
are actually written, which is dubious at this point?
Mr. Vice. That is one thing the regulatory entities would
have to determine, how to treat these going forward. First,
there would probably have to be some kind of identification
piece to it, some kind of monitoring piece to it.
The one thing I would hope is that it would not be an
automatic detraction for an examiner going in and looking at a
portfolio. Again, it should be on an individualized lending
basis and the loan should be looked at and graded on its credit
quality. And I would hope that all the Federal regulators and
my fellow State regulators would not see a non-QM loan to be a
negative or to hold that against the bank. Again, it needs to
be looked at on an individual basis, and the credit quality of
that individual loan has to be assessed.
Chairwoman Capito. Do you think there should be an
exception from the ability-to-repay standards for loans that
are held on portfolio?
Mr. Vice. Yes, yes. If a small community bank does
originate a loan and hold it in their portfolio, we believe
that that should receive QM status in and of itself, simply
because it is being held in portfolio.
Chairwoman Capito. All right.
Mr. Reed, your State is very rural and much like our State,
but you are probably a billion times bigger in land mass, and
you rely on relationships to be able to help your constituents.
With the new definitions of ``rural,'' and some of the one-
size-fits-all definitions and ability-to-repay, what impact is
that going to have on a State such as yours?
Mr. Reed. Yes, the majority of our State is rural. You can
fit three sizes of the State of Texas and the State of Alaska.
So that kind of gives you an idea. A lot of that population is
dispersed throughout that State in what we call the bush. And
it is absolutely going to impact us.
I have to agree with Mr. Vice, that is one of the reasons
that we are seeking an exemption. It is going to impact us
significantly and our membership.
Chairwoman Capito. Thank you.
Mr. Meeks?
Mr. Meeks. Thank you, Madam Chairwoman.
Let me go to Mr. Calhoun first. Clearly, no-doc loans, when
you do no-doc loans you are saying that you are not looking at
a person's ability to pay, whether they are creditworthy, et
cetera, and just passing it on. And it seems to me that one of
the biggest issues that we were confronted with in this crisis
is that there was no risk retention by many of the banks; they
would just no-doc, bundle them, sell them, get rid of them.
Some would steer people, but steer people basically, as Mr.
Ellison indicated, some by race, et cetera, not treating people
equitably who would go to a subprime loan and who would get a
prime loan, et cetera. So no one agrees with steering, et
cetera.
But are we talking about creating a situation where
individuals who have less than perfect credit--and that is what
I am concerned about--individuals now who have less than
perfect credit, should they not have the opportunity to own a
home? And what opportunity will be, what doors will be closed
to them? Because I can tell you that, at least in the community
that I was raised in, there were a lot of individuals, if you
document their employment and you document their income, that
they paid their mortgage, but they did pay some other bills
late, so they didn't have perfect credit.
And so, I am concerned about those individuals getting
locked out of this market and trying to figure out how they can
be included so that they can enjoy what has been--because I
still believe home ownership is the American dream, it is still
the largest investment that most Americans will make in their
lifetime, and it improves family and quality of life.
Let me just ask this. For example--and one of the reasons I
look at H.R. 1077, is it does call for loan-level price
adjustments, so that individuals can qualify for a QM if they
put up some upfront fees so that they will qualify, then they
can go on. Now, they understand they made a mistake with some
of their credit levels, so therefore they have to put these
upfront fees. Had they not, then they wouldn't have had to. So
tell me how can we make sure that those individuals are
included so they can still have the opportunity to purchase and
own a home?
Mr. Calhoun. The Center for Responsible Lending strongly
supports broad lending activities. Our parent organization,
that has been its mission for the last 35 years, is how do you
expand the boundaries of home ownership opportunities.
I think a really important distinction, and I think there
has been confusion on this today, is the QM rule--and there has
been reference to the CoreLogic report, which included a
provision that any loan eligible for insurance or purchase by
any of the government agencies--FHA, VA, Rural Housing, the
GSEs--is a QM loan. And as the CoreLogic report notes, when
that is done, 95 percent of those loans qualify with no
restructuring at all.
So first, I want to clear up--and we have supported making
that provision permanent. They have made it, I think, for the
next 7 years. We think the CFPB should make that permanent. But
at least for that time period, the box is much bigger than has
been talked about here. So, for example, for FHA, GSEs, that is
credit scores in the 500s, that is DTI, debt to income, up to
50 percent, that is 50 percent of gross income before your
taxes are paid, not a lot of left money there. Most people are
criticizing FHA as being too loose with lending, not too tight.
So we support a broad box, but I think when you look hard
at the particulars of this rule, it created a broad box.
Mr. Meeks. Let me just ask Ms. Still to respond to that.
Ms. Still. Yes, I think certainly the temporary QM that the
CFPB provided for will be helpful in the short run. But you
can't just look at the credit quality. You have to look at the
fees and points test, which will have a disparate impact on
smaller loan amounts, which will hurt middle-class home buyers,
first-time home buyers, and protected classes. So I think that
is something that H.R. 1077 would address and fix.
You also have to look at the notion of an APOR comparison
and what that will do to certain consumers, and it will also
disproportionately impact the first-time home buyer. And so
with those two tests, you are going to not be able to take
otherwise qualified borrowers and make a loan for them. You
will either end up with a non-QM loan, in which there will be
little liquidity for that product, or you will make a
rebuttable presumption loan, which if there is a secondary
market for that, it will be much smaller and it will be more
costly.
Chairwoman Capito. The gentlemen's time has expired.
Mr. Duffy?
Mr. Duffy. Thank you, Madam Chairwoman.
I think we find ourselves in another unique situation where
bureaucrats in Washington know far better how to run our
community banks and our credit unions than our community banks
and our credit unions do. And it concerns a lot of us up here,
especially those of us, again, from small communities who have
lower-income and more moderate-income individuals. And when I
look at the ability-to-repay rule, and the QM standard, if you
are wealthy and have great credit this works fantastic for you.
But if you are from a lot of our districts, this is tough.
As Mr. Meeks said, the American dream oftentimes is buying
your own house. Home ownership is associated with the American
dream, and so many more Americans aren't going to be able to
access that dream because of these rules.
Mr. Gardill, you indicated that through your analysis, 50
percent of the loans that were written would not meet the QM
standard. Is that correct?
Mr. Gardill. It might be a little bit higher than that,
Congressman Duffy.
Mr. Duffy. So in regard to the 50 percent that don't meet
the QM standard in your analysis, those folks who don't fall
under QM, are they still creditworthy?
Mr. Gardill. They are. We make loans to them every day. One
of our problems, which I think Congressman Meeks spoke to, is
that those with less than perfect credit, we have designed
programs to meet their needs in our communities. This applies
to banks regardless of size. And our hands are being tied, we
are going to be restricted in what we can do. Our freedom
series is designed for just that purpose. We would loan up to
97 percent loan to value, but we structured the loans to meet
their opportunities. We are not going to be able to do that
under these rules.
Mr. Duffy. And how well did those loans perform, Mr.
Gardill?
And, Ms. Still, if you want to answer that as well?
Mr. Gardill. The flexibility that we have to design those,
they have worked very well. We actually received the FDIC
Chairman's Award in 2011 for that program.
Mr. Duffy. Ms. Still?
Ms. Still. I would like to make one observation. Whether my
colleagues point out the problems with rural communities or
community banks or credit unions or portfolio lenders, the MBA
represents all business models, all constituents of real estate
finance, and our concern is that this rule--we have to get this
rule right and it has to be centered on consumers. And any
consumer with the same interest rate, points, and fees should
be treated equally.
So while the problems that we are talking about and the
request for exemption are relevant because the rules are not
right yet, we need to get the rule right for every business
model--and so that is just one thing I wanted to point out--
rather than a very complex rule where a borrower can't shop
anymore because they don't know which business model will treat
them more favorably under access.
To answer your question, though, one of our concerns is now
that the FHFA has chosen not to allow Fannie and Fannie to buy
a non-QM loan, a loan that we would sell today based on
acceptable credit quality to the GSEs, if it did not meet 3
point rule would now not be eligible to be sold. And so, we
have mitigated the secondary market for otherwise qualified
borrowers and that is a concern.
Mr. Duffy. Banks and credit unions are pretty good at
pricing risk. And is it fair to say there is a new risk with
the ability-to-pay rule in that you have new liability, and
with that new liability is new risk, and isn't it fair to say
that we are going to have increased prices to accommodate that
risk?
Ms. Still. There will be a base price for a QM with a safe
harbor, then we will have a price for a QM with a rebuttable
presumption. We may have a price for a QM with using Appendix
Q, and then we will definitely have an escalated price for a
non-QM. So, we now have four classifications of risk-based
pricing.
Mr. Duffy. Mr. Calhoun, you had talked about a lot of these
outrageous products that were offered. And I agree with you,
they were outrageous, people weren't treated fairly, and it was
part of the cause of the crisis. We are on the same page. But
weren't a lot of those no-doc loans, weren't they all floated?
Those loans weren't actually kept on the books of the
originators, were they?
Mr. Calhoun. It was a combination. And let me be clear, I
think people do share similar goals here in getting this rule,
it is important and hard. But many of those loans we are
working right now with a loan program done by a community bank
in New York that did thousands of loans and they are having
about a 50 percent default rate. They kept them on portfolio,
but they are lending to people who have substantial home
equity. And so they come out okay, they collect a high interest
rate as long as the loan performs.
And so we have to be very careful. What we saw in the
crisis is--and to follow up on Deb's point there--what we saw
in the crisis is, if you carve out--when you carve out
exceptions--and we have strongly supported the provisions for
the community banks in our filings with the CFPB and we work
closely, particularly with the ICBA--but if you carve out
blankets, the bad actors go to those places and try and use
them.
And it has to be a balance. We won't create a perfect rule
that stops all predatory lending. That can't be the goal
because it will cut down too much credit. But we need to
realize the bad guys know how to exploit those exception
provisions, and they have done it and are doing it today.
Mr. Duffy. But if the bad actors retain that risk; I think
you have a whole different scenario.
Chairwoman Capito. The gentlemen's time has expired.
Mr. Duffy. I yield back.
Chairwoman Capito. Ms. Waters for 5 minutes.
Ms. Waters. Thank you very much, Madam Chairwoman.
Mr. Calhoun, the Consumer Financial Protection Bureau has
been working very, very hard to make sure that they produce the
regs, the rules to implement Dodd-Frank. On May 29th, the CFPB
announced several amendments to the original ATR rule.
The first amendment clarified that compensation paid from a
mortgage originator that is a bank or brokerage firm to one of
its employees would not be counted toward the 3 percent points
fees cap.
The second amendment exempted State housing finance
agencies, nonprofits, and other community development groups
from the QM rule if they make fewer than 200 loans per year and
those loans are to moderate- or low-income consumers.
The third amendment makes it easier for community banks and
credit unions with less than $2 billion in assets to make QM
loans. If they make fewer than 500 first lien loans per year,
and hold those loans in portfolio, they are not required to
comply with the 43 percent debt-to-income ratio under the rule.
These same lenders have also been granted a 2-year reprieve on
the ban of balloon loans while the CFPB studies the issue
further. And I guess that would refer to the rules.
Would you say that these amendments are an example of how
hard the CFPB is working to make sure that we make good sense
out of all of this? Do you think this is reasonable?
Mr. Calhoun. Yes, we supported those. And I think what is
important is those are a continuation of what they have done
throughout this rulemaking process. Industry asked for a broad
QM and some folks opposed that. The CFPB gave a broad QM
definition. Industry asked for bright line rules. And I think
this is important when you talk about what is going on with
access to credit. If you look at surveys, even of the members
here, the number one thing holding back credit, home credit, is
buy-back claims, not borrower claims on ability-to-repay. Buy-
backs are when investors, whether they be the GSEs or private
investors, force lenders to buy back the loans.
And this is the real key. Under the law, they are entitled
to force those buy-backs if there is any variation in the
loans. They don't have to show that is the reason the loan went
into default. There have literally been tens of billions of
dollars of buy-back claims paid, not just brought. And that is
really what is pushing. I know the FHA has announced that they
are going to start rulemaking to reduce the buy-backs and to
clarify that. The GSEs have done some work, but really need do
a lot more, because that is the real steam right now that is
pushing in credit so much. The QM rule isn't even in effect yet
and hasn't been over the last year and a half.
Ms. Waters. Thank you. One moment, Mr. Calhoun. I want to
get to Mr. Gardill.
Mr. Gardill, do you agree with these amendments that have
been made by the Consumer Financial Protection Bureau?
Mr. Gardill. I don't think the amendments cure the problem
that we have.
Ms. Waters. Would you like to go back to the way we were
prior to the subprime meltdown and just leave you guys alone
and not have a Qualified Mortgage rule at all? Is that what you
want?
Mr. Gardill. I am not asking for that.
Ms. Waters. What were you asking for?
Mr. Gardill. I think what we are asking for is that we be
given the opportunity to provide flexible lending products to
meet the needs of our customers as a community bank, and these
rules don't give us that flexibility.
Ms. Waters. You had that flexibility before the subprime
meltdown and you almost brought this country to its knees--
Mr. Gardill. No, I don't--
Ms. Waters. --with a depression almost.
The question becomes, with the Consumer Financial
Protection Bureau working very hard, coming up with amendments,
trying to make sure that they address your concerns, the
question really is specifically what more do you want?
Mr. Gardill. I think we need to look at the forest. To
equate it to a forest, if we have a couple of bad trees, we
don't want to burn the forest down to correct that.
Ms. Waters. I don't want to talk about the forest and the
trees, I want specificity.
Mr. Gardill. And that is what we are trying to do. We are
trying to provide some input here today in good faith to assist
in the process. And I think the fact that we are having this
meeting and this hearing indicates that there is so much
uncertainty that we are going to affect, adversely affect the
housing recovery, that we need to step back and give ourselves
more time to evaluate the impact of the rule and work with the
CFPB to come up with better rules that retain the flexibility--
Ms. Waters. Let me submit to you, Mr. Gardill, that the
Bureau is working very, very hard. And it appears that there
are too many who are willing to go around the regulators and
come here and try and convince Members of Congress that somehow
our attempt to address those concerns that this country all
faced with the subprime meltdown, somehow you want to not deal
with that, you simply want no rules, no rules to deal with the
problem. And you still have not been specific about what it
is--
Chairwoman Capito. The gentlewoman's time--
Ms. Waters. --given these amendments, that you want to do.
I yield back.
Chairwoman Capito. Mr. McHenry?
Mr. McHenry. I thank the chairwoman.
Mr. Calhoun, in your previous question they asked about,
you said you wanted a permanent Federal exemption for the GSEs
under QM. Is that right.
Mr. Calhoun. We believe that we--
Mr. McHenry. Yes?
Mr. Calhoun. We have supported lending above 43 percent--
Mr. McHenry. No, no, no, but you said you wanted a
permanent extension for GSEs. So then, a separate question just
to get this on the record, do you support the permanent
existence of Fannie and Freddie?
Mr. Calhoun. When we say for GSEs, I mean for them or
their, the various bills that are out that have some sort of--
Mr. McHenry. Oh, okay, I just wanted to make sure we had
that on the record just to understand, because some of us have
concerns about keeping Fannie and Freddie around as they
currently exist.
Mr. Calhoun. Many of us do.
Mr. McHenry. Thank you for answering that.
But, Mr. Gardill, in your written testimony, to follow on
to Chairwoman Capito's question, you mentioned that financial
institutions are being encouraged to go into the non-QM space,
right? And there are some concerns about liability. You
reference that it would run counter, if you are held to the QM
box as an institution, that would limit your ability to meet
the Community Reinvestment Act obligations on institutions. Is
that correct?
Mr. Gardill. That is correct, Congressman.
Mr. McHenry. So out of that there is some fear that
examiners would have some problems with that and some
difficulty reconciling the two. Can you explain?
Mr. Gardill. As I mentioned, some of our CRA-related
programs will not qualify under the QM rule. We add liability
under the ability-to-repay rule, now we have a serious issue
whether we can do those loans.
I am also concerned about the regulatory impact of that,
how are the regulators going to look at non-QM loans when you
have liability? Do you have to establish reserves for those
liabilities? So it creates a whole world of uncertainty.
What we retain those portfolio loans, which we do on our
CRA loans that we have in our communities, and we have targeted
programs for low- to moderate-income borrowers, but also low-
to moderate-income neighborhoods where we are trying to
maintain housing quality, and that goes to income borrowers of
all sizes. We are going to have an issue whether we can make
those loans at all. Then we will have an issue as to whether or
not we can meet the Community Reinvestment Act requirements. If
we can't do the CRA loans, how will we meet those requirements?
So it is a Catch-22 from a regulatory perspective for banks in
compliance.
And our purpose is to support our communities, that is what
community banks do. Many banks provide community support. This
straitjacket that we are being put in will limit our ability to
design the programs necessary to meet the needs of our
customers.
Mr. McHenry. So the Federal Reserve, in their ability-to-
repay rule, didn't consider debt-to-income ratios as a very
important predictor of the success of a consumer's ability-to-
repay, right?
Mr. Gardill. That is correct. And it very clearly is not
set out--
Mr. McHenry. So what is the strongest metric for success in
ensuring that a borrower can repay their mortgage?
Mr. Gardill. It takes not only the ability-to-repay, but
adequate collateral to support the loan; it is a two-sided
equation. So there has to be value and there has to be the
ability-to-repay, but we can't create a straitjacket in how to
measure that ability-to-repay by arbitrary rules that narrow
what you can consider. Banks do a balanced approach in
measuring credit, and that is what we want to retain. The rules
don't do that for us.
Mr. McHenry. So, Mr. Reed, to that point, you mentioned in
your testimony that you have credit unions that will lend with
debt-to-income ratios of 45, 50, percent and their loan losses
or mortgage losses remain very low. Why is that?
Mr. Reed. Credit unions are very unique, as I mentioned
earlier, in our structure and our purpose. But I would like to
address that in a broader perspective.
Mr. McHenry. I have 20 seconds for you.
Mr. Reed. Yes, okay. So let me just say, I have
underwritten loans, mortgage loans for 25 years. Let me tell
you something fundamentally. The difference here is, we are
focusing when we say, hey, we don't like this, because you are
focusing on product features--no-doc loans, loans that weren't
violating previous regulations that were already set by
agencies which were underwriting guidelines.
As already mentioned today, the FHA has a lot of leniency
to address a lot of disparate impact issues and has been doing
that very successfully for years. The people who were
defaulting were the people being put into products that should
have never been put into those products. That is the
fundamental fee here.
I think the CFPB has done an excellent job in eliminating
those products that are not correct. But I don't think the CFPB
is doing any of us or the country any good by restricting the
underwriting criteria that put people who are creditworthy, for
example, who want two or three jobs and can do it.
Chairwoman Capito. I am going to have to stop you here. The
gentleman's time has expired.
Mrs. Maloney?
Mrs. Maloney. I agree wholeheartedly with the point that
many of you are making that we shouldn't have one-size-fits-all
and every borrower should not fit into one box. But I can
recall during the hearings the commonsense belief by many of us
is that you shouldn't put someone into a loan they can't
afford. It is going to hurt the banks, it is going to hurt the
economy, and it is certainly going to hurt the homeowner. And I
feel that is what the CFPB tried to do, is to really come up
with some standard where people don't buy something they can't
afford. And it would include all of the income that you
mentioned. You can be working three or four jobs; many of my
constituents work two jobs.
But I do think that they tried to be flexible; they came up
with three exceptions. The exception for compensation for
mortgage originator is not included in the 3 percent points and
fee cap, it exempted nonprofits from the QM rule if they have
fewer than 200 loans, and lenders with less than $2 billion in
assets may make the QM loans that do not meet the 43 percent
debt-to-income ratio.
And so, those are several of the exceptions that they have
made. They may have made more. What other specific exception do
you think should be made, Mr. Thomas and Ms. Still?
Mr. Thomas. I am going to yield to Ms. Still because she is
better prepared.
Mrs. Maloney. Okay. Ms. Still?
Ms. Still. Thank you. Yes, so in terms of underwriting, I
think the CFPB has done a fine job providing for the temporary
QM. I think, though, when you look at the 3 point rule and you
look at some of the inclusions still in the 3 point rule that
have nothing to do with the consumer's ability-to-repay, that
is where it becomes prohibited, particularly to the smaller
loan amounts. So affiliate fees should not be included in the 3
point rule, nor should compensation paid to brokers.
Again, for any consumer who is getting the same rate,
points and fees, the business channel should not matter. And
so, the exemption should be on behalf of the consumer and a
level playing field for all lenders serving finance in the
United States.
Mrs. Maloney. In the terms of that, just taking for one
example the title insurance that you mentioned, and I believe
Mr. Thomas mentioned, and Mr. Calhoun, and if I recall, you
said it was regulated by the States and very competitive, and I
believe you testified that the title insurance would be more
expensive under the CFPB rule. And I would like to ask Mr.
Thomas and Ms. Still why it would be more expensive, because I
don't quite understand why?
And also, Mr. Calhoun, you talked about the affiliated
title insurance and taking the position that it should be
included in the points and fees, if I recall. So if all three
of you could answer that on the title insurance, which is one
example you all mentioned. Thank you.
Ms. Still. As you did mention, title insurance is either
regulated or promulgated by the State, therefore it is a very
competitive environment in any given State. By eliminating or
combining the affiliate fees, you eliminate the potential for
competition, which is why the remainder of the market might get
actually more expensive. There have been studies in the past, I
believe there was one in Kansas about 6, 7 years ago that
Kansas had tried to implement an affiliate fee, and the
remaining competition actually raised prices.
Mrs. Maloney. Okay. Mr. Calhoun, could you respond?
Mr. Calhoun. This committee, just a few years ago, raised
the issue of the problems in the title insurance industry and
asked for a report that was put out in 2007 by the GAO finding
it is a deeply troubled industry. As I indicated, whenever you
have a situation where two parties are cutting the deal and the
third party is paying the price, that third party, in this case
the consumer, often comes out on the short end of things. And
as I said, it works out well for the parties at the table.
There is a big commission. Seventy-five cents out of every
dollar is what the GAO found out goes to pay this commission,
while only 10 cents goes to claims. In most insurance, that is
80 to 90 percent. So this is just taking a broken system that
needs reform and making it worse.
Mr. Thomas. If I could, the problem is this is a State-
regulated institution, that being the title insurance, and it
is very well-regulated, I can tell you, in California. At one
time, there was a lot of money that was paid back to people as
kickbacks and so on. Today, I can't even get a pen from a title
company. It is so well-regulated that they have clamped down on
everything. And if you open it up--or if you clamp down even
more and say, okay, only the large title companies can do
anything and you cannot have affiliated title companies, you
are only going to open it up so that they can do whatever they
want to do.
Ms. Still. And I would argue that--
Chairwoman Capito. Excuse me, the gentlelady's time has
expired.
We will go to Mr. Luetkemeyer.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
One of the things that is kind of concerning to me is the
very nature of a QM, because it seems like it is perverting the
very thing you are trying to do, from a standpoint that we are
trying to provide a save harbor here for lenders who if they go
with a certain criteria are limited from the amount of
liability they could incur if they are doing things right.
You would infer then that if those loans don't qualify for
QM, suddenly now they would have more liability exposure, and
if you have 50 percent of your loans that don't qualify for QM,
now you have 50 percent of the loans on your books with
problems.
Mr. Vice, you are a supervisor, how do you look at that?
Mr. Vice. That is a concern to us. We don't know exactly
how that is going to be treated on examinations going forward.
And that is one thing that the industry is kind of watching
with bated breath to see. Once my first examination happens, if
I have a non-QM on the books, how will regulators treat that?
Again, as I stated before, it is my hope that we don't
treat that adversely, that we look at that and look at it on an
individual credit basis. And again, our whole hope and our
whole desire here is to make sure that we have a diverse
marketplace where several lenders have the opportunity to meet
the legitimate credit needs of the individuals who are there
and we have to have that flexibility. And that is why we are
seeking and applaud this small creditor qualification to QM.
Mr. Luetkemeyer. I think that we are looking also for an
exemption for community banks and folks like that who work with
small numbers of loans.
Mr. Gardill, it would seem to me that if something doesn't
qualify, it would really restrict the low- and moderate-income
folks from the standpoint that they are the ones who are going
to have probably the lowest credit ratings and have the most
difficulty trying to prove that they can get into the QM box.
It would logically seem to me that we are really restricting
low- and moderate-income folks by doing this. What is your
opinion on this?
Mr. Gardill. Yes, I agree 100 percent. By extending
liability to those under the ability-to-repay rule, it is going
to greatly restrict our opportunity to do them at all. If the
safe harbor applied to the ability-to-repay rule, it would be
an improvement in the structure, because then you could safely
make those loans. But the QM rule has a very narrow save
harbor; it is not available under the ability-to-repay. And we
are permitting borrowers to assert, back to your point about
the QM, even challenge the QM qualification as to whether or
not proper verification of debt to income was created. So, we
create potential liability claim even under the QM rule.
Mr. Luetkemeyer. It would seem to me that we are actually
causing more risk here from the standpoint that the loans that
are most risky, that have the poorer scores or have less
ability to make--their income are less flexible, they are more
on the edge, those are the ones that can't qualify for QM, yet
those are the ones that, if you make the loan, you are going to
have to hold them in your portfolio. It would seem to me to be
a real problem.
Mr. Gardill. And that is our principal concern, is serving
our customers, and I am not sure these rules permit us to do
that. That is really the issue, and that is why I think it
deserves some time and study for us to evaluate this more
carefully before we affect those most vulnerable in the
communities that we serve.
Mr. Luetkemeyer. I have about a minute and a half left. I
live in a very rural area. I know that the chairwoman made a
comment a while ago about the rural designation here. One of
you made the comment a while ago, I think it was Mr. Vice, with
regards to petitioning, have a petition process available so
that we could get this rural designation fixed. I think each
one of you in your testimony, most of you anyway, as I have
gone through the testimony, seem to have pointed out inequities
in the rural designation. Can you describe your petition
process suggestion a little bit further, Mr. Vice?
Mr. Vice. I think one of the concerns from my perspective
that occurred so far with this rural designation is that it is
applying a formula developed in Washington. As the commissioner
for the Department of Financial--
Mr. Luetkemeyer. That never works anywhere on anything,
does it?
Mr. Vice. --at the Department of Financial Institutions in
Kentucky, I have not been asked what is a rural county in
Kentucky. Same thing with the commissioner in West Virginia;
they haven't been asked, either. So our petition process--and
again this is the short-term fix, we think this actually
requires a statutory fix to address this problem--but a short-
term fix would be to let the CFPB establish a process where
local authorities could give input on what is a rural
designation. Let the local authorities give various
stakeholders the ability to have input in that process before
we take it to the CFPB. And then also, as a third follow-up
piece to that, have a review process to make sure we got it
right at some future point in time.
Mr. Luetkemeyer. Very good. I thank you for your testimony
today.
And I yield back. Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you.
Mr. Hinojosa?
Mr. Hinojosa. Thank you, Chairwoman Capito and Ranking
Member Meeks. And thank you to our witnesses today for sharing
your valued testimony.
As the Consumer Financial Protection Bureau has continued
in the process of crafting the Qualified Mortgage rule,
industry advocates have raised valid concerns and the Bureau
has listened. For example, industry questioned why certain
payments were double counted towards the points and fees cap,
and the Bureau altered the rule accordingly. Additionally,
manufactured home industry advocates found issue with the 3
percent cap and it was modified as well.
My first question is for Mr. Calhoun and Ms. Still. I would
like to ask you about the lack of mortgage credit for rural
areas. As chairman of the Rural Housing Caucus, I am very
concerned that housing in rural America is becoming
progressively more neglected. The USDA rural housing programs
are critical to ensuring a quality housing stock in areas with
high need, such as my district in deep south Texas. The Bureau
recently wrote a rule granting exemptions for rural areas from
the balloon payment prohibition. However, the definition
excludes all of Hidalgo County, with a population of 850,000
people, which is in my district and is home to more than 700
Colonias, which is higher than any county in United States.
Colonias, for those who don't know the word, are communities
which lack basic infrastructure and often suffer from
deplorable housing conditions.
So, Mr. Calhoun and Ms. Still, do you feel that this rural
definition is adequate, and does the Bureau need to do more to
accommodate rural area lenders?
Ms. Still. Yes. We would agree with you that the Bureau has
been a good listener of the industry and has responded to
feedback. I believe the Bureau just in the last couple of weeks
has suggested that it needs to continue to study the definition
of rural, very appropriately so, and the MBA looks forward to
working with the Bureau on helping with that definition.
In the meantime we certainly need clarity around that, and
I would suggest that when you look at the challenges for rural,
it centers largely on smaller loan amounts, it centers largely
on the community lending that possibly small community lenders
and brokers do. And so, we need to look at all of the issues
that are making up the problems for rural housing and address
that in the entire rule for every consumer.
Mr. Hinojosa. Mr. Calhoun, would you answer that, also?
Mr. Calhoun. Yes. We agree that the CFPB has been a good
listener, it has responded and even used its exception
authority for a number of those rules that you mentioned to
expand it. We have supported a very broad rural definition and
are glad to see that they are going to look at that further,
and we are pretty optimistic and the indications are they know
they need to do better on that.
If I can quickly add, I think one point that has been lost
here--people are acting as if we are going into this strange
land and have no experience about what life would be like under
these rules. We have a lot of experience. These rules are very
similar to rules that have been in effect with similar fee
limits at States for decades, and loans, including small loans,
were made. As we sit here today--
Mr. Hinojosa. Let me remind all of you that the farm bill
has been debated here in the House, it is before us now in the
House of Representatives, and they are not answering the
question about the definition of the rule so as to help rural
America appropriately. And you all need to step it up and help
us get that definition to where it does address it.
Mr. Calhoun. We agree.
Mr. Hinojosa. My next question is for Gary Thomas and for
Debra Still. My question is, in your testimony you note that
title insurance is a competitive market, and that by putting
affiliated title companies at a disadvantage, prices might
increase for consumers. However, you also state that title
insurance pricing is well-regulated by the individual States.
If that is the case, why do you think title insurance would be
more expensive under the current CFPB rule?
Mr. Thomas. Once you eliminate competition, you come down
to just a handful of players in any specific area. They can
start going to the States and asking for higher rates and
probably proving those up in the way they want to. And so, you
have really restricted the number of players in the entire
spectrum, you are going to have higher rights.
Mr. Hinojosa. Ms. Still?
Ms. Still. I would agree with that answer fully, this is
the ability-to-pay rule, this is about a consumer's ability to
repay. So when we talk about the title insurance business, this
should not have anything to do with that industry. This should
have to do with a level playing field for affiliates and the
fact that consumers have lost their ability to shop if the
affiliates are treated in a disparate fashion.
Mr. Hinojosa. That answer justifies why REALTORS are so
concerned, and I think we need to address that question.
Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you.
Mr. Pittenger for 5 minutes.
Mr. Pittenger. Thank you, Madam Chairwoman.
In light of the concerns that have been expressed today
regarding the ability-to-repay, the QM rule, as relates to the
mortgage credit crisis that could evolve, what changes do you
think should be made to the Dodd-Frank Act on the ability-to-
repay QM provisions that this committee should be considering?
I will start with Mr. Gardill, but any if others want to
respond, I would welcome that.
Mr. Gardill. I think principally, we are looking for some
flexibility of the verification rules. We want to work with the
CFPB to get this right so that we don't adversely impact our
customers or the recovery in the housing market that we are
experiencing. I think we have to revisit the liability rule.
The liability rule under the ability-to-repay is onerous.
Permitting oral testimony after the fact, an unlimited statute
of limitations, those things will restrict lending, they will
restrict our ability to do that, they will affect our
regulatory compliance. So that is for a start, I think.
Ms. Still. I might suggest that the spirit of the bill is
fundamentally sound. The fact that we should verify that the
borrower has the ability-to-repay, fully doc loans, taking away
some of the extraordinary loan programs of the past. But H.R.
1077 fixes such an enormous amount of the problems with the
ability-to-pay rule, and that would go such a long way.
I also think we need to look at the hard stop 43 back ratio
on jumbo loans, we need to look at the APOR index and the
problems with that. And I think we need to look to Mr.
Gardill's comments earlier on industry readiness, and if the
industry isn't ready, will consumer lending stop or real estate
finance stop in the short run and derail our housing recovery?
Mr. Reed. I just would like to add, too, that I think,
based on all of my colleagues' statements today, that we should
make permanent and not be temporary the saleability of those
loans to the GSEs. This is a huge issue and it is creating a
tremendous amount of instability in the market presently
because of this temporary period.
Those regulations and those guidelines that were already
established for years in the other agencies have served us well
and it hasn't been the underwriting criteria per se as much as
the product features where we were not documenting loans and we
were not asking for assets, we were not verifying income.
The CFPB has addressed those issues. And I agree with Ms.
Still that the spirit of the bill is where it needs to be, but
we need to tweak it in those areas and set up those guidelines
or those metric points so that we can retain our flexibilities.
And that is, I think, what we are really asking here, is we
need to be able to retain the flexibilities we have enjoyed
previously.
Mr. Pittenger. Anyone else?
Mr. Thomas. Yes, I would like to comment, too. What we are
facing if we don't get this right is pretty much what we are
facing right now, and that is the instability in the
marketplace. As a street REALTOR, what we are facing right now
is 30 to 40 percent of the purchases are all cash. Where is
that all cash coming from? It is coming from investors and it
is coming from offshore. If we don't get this right, you are
shutting out the first-time home buyer and the underserved
homeowners who want to get back into home ownership.
And so, we are really talking about a severe sea change if
we don't get this right. We are going to have more and more
investors investing in the marketplace, turning what used to be
homeowner properties into rentals, and you are going have a big
change in the whole socioeconomic makeup of this country. So we
have to get it right.
Mr. Pittenger. Mr. Calhoun?
Mr. Calhoun. If I may add, I would agree with Ms. Still
that the basic statutory framework provides the necessary
mechanisms and tools. We have a regulator who is data-based and
who is listening.
I think these oversight hearings are not just appropriate,
but necessary as part of that process to raise concerns and to
have the agency answer as to how they are addressing them.
I would point out that those houses that are being bought
today are houses that were foreclosed upon because there
weren't protections in place, and that is how we ended up in
this mess.
Mr. Pittenger. I have 15 seconds. Mr. Vice, do you want to
say something?
Mr. Vice. The main thing I was going to say is if you are
looking for a bright line of how do we change Dodd-Frank, I
would make sure that it aligns with the business models. It is
a completely different business model to originate a portfolio
and sell it, and it is a completely lending aspect if you
originate a loan and you are going to keep it in your portfolio
because then the interest aligned between the borrower and the
creditor. And there is a much different lending atmosphere. In
Mr. Reed's written testimony, you will see that there is a lot
less credit risk associated with loans that are held in
portfolio.
Mr. Pittenger. Thank you. I yield back my time.
Chairwoman Capito. Thank you.
Mr. Scott?
Mr. Scott. Thank you very much, Mr. Chairman.
Mr. Calhoun earlier made a statement that I totally
disagree with, and that is on his issue of the need for H.R.
1077.
Let me assure you, Mr. Calhoun, we desperately need H.R.
1077. Some of the very people you were talking about, some of
the lower-income African Americans, and not just them, but
everybody--dealing with a home purchase in real estate is the
most complex, most difficult transaction that 90 percent of the
American people will ever go through. And you know what they
need the most? Information. Information makes them powerful; it
helps with the problems. That is why we have so much predatory
lending.
House Resolution 1077 does some essential things. First of
all, it strengthens the Truth in Lending Act. It will require
for the first time that customers and potential homeowners will
receive information dealing with points, not maybe, not if, but
they must be told information about points, about fees, about
all of the loan modifications available to them.
I represent Georgia and the suburbs of Georgia, at one time
the leading part of this country with home foreclosures, and
the number one problem they had was, ``I didn't know.'' Well
now, under H.R. 1077, they will know. This is vital
information. This is an important bill.
Mr. Thomas, I would like for to you address that, and Ms.
Still, as to why House Resolution 1077 is very important.
Mr. Thomas. What it does is it levels the playing field. It
makes it more open to more players in the marketplace. If my
constituents, meaning other brokers, want to have a title
company affiliation, if they want to have a mortgage
affiliation, let me tell you, first of all, that the REALTORS
in that firm don't necessarily flock to that title company or
lender that the broker owns, because they are going to hold
them to a higher standard. They want to make sure that their
customer is best-served. And whether it is the in-house lender
or it is somebody else, they want to make sure that their
consumer is handled properly because they want to have future
business that is a referral from them.
And so, we want to make sure that we have as many players
in the marketplace in a level playing field rather than just
bringing it down to a few, which is what we would have if we
don't pass H.R. 1077.
Ms. Still. Competition is good for consumers and we need as
much competition as possible. We also need consumers to be able
to have a choice of their settlement service provider. And we
also need transparency in shopping, to your point. It has to be
a level playing field or the consumer is not going to know how
to shop. The bill is critical to level the playing field, and
thank you for cosponsoring it.
Mr. Scott. Thank you very much.
Chairwoman Capito. Thank you.
Mr. Barr for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman.
Mr. Gardill, this is a question for you. You included in
your written testimony the following statement, ``The QM box
ironically may conflict with fair lending rules and goals of
the Community Reinvestment Act. And it is quite the Catch-22
when a bank attempts to limit its regulatory litigation and
reputational risk by staying within government prescribed rules
only to be subject to possible regulatory litigation and
reputational risks for not straying outside those rules.''
Do you think it is possible for financial institutions to
meet their CRA obligations while issuing only QM loans?
Mr. Gardill. No, I think it would be extremely difficult to
do so.
Mr. Barr. Would you view the QM rule as it is currently
structured to be basically, in effect, a partial repeal of CRA?
Mr. Gardill. It is going to impact the bank's ability to
comply. The CRA is still there, we still have to meet that
regulatory burden. Just for example, last year we did 203
loans, CRA eligible, about $17 million, and not one of them
would meet the QM rule.
Mr. Barr. Ms. Still, a follow-up question for you on the
same topic: What do you believe is the implication of QM on the
disparate impact analysis?
Ms. Still. The industry desperately needs clarification on
how to comply with two rules that seemingly might bump up
against each other. And so of course, the industry deplores
discrimination in any fashion; it is very committed to
complying with the disparate impact rule. But if the lender
chooses only to lend on QM loans, it could be in violation of
HUD's disparate impact rule. So we need the regulators to work
together and help the industry understand how to negotiate that
situation with which we are faced.
Mr. Barr. I appreciate the testimony of both of you in
highlighting what appears to be a dramatic contradictory
mandate coming from the regulators, that you have a CRA
obligation on the one hand, but, Mr. Gardill, as you pointed
out, it is a Catch-22 for the lender in this situation when you
all are obligated to originate QMs to obtain the safe harbor
and then also expected to somehow satisfy this disparate impact
analysis.
I want to move now to Commissioner Vice and your testimony.
And if staff could put up on the screen a picture of the
Commonwealth of Kentucky?
[slide]
Mr. Barr. And this is kind of a follow-up to Mr.
Luetkemeyer's question about the CFPB's rural designation. If
you take a look at this screen, you can see a county-by-county
map of Kentucky. And the counties in yellow, Commissioner Vice,
are the counties that the CFPB recognizes as nonrural and the
counties in blue are counties which the CFPB has classified as
rural.
This is obviously relevant to our hearing today because the
CFPB has established a category of QMs with balloon payments
that are originated by small creditors in rural or underserved
areas.
You will notice--and you are from Clark County, sir, so you
are familiar with this geography--Bath County, which is just
two counties over from you to the east. Can you share with the
committee and with your colleagues on the panel, Bath County,
and is it a proper designation to categorize Bath County as
nonrural?
Mr. Vice. I have actually had the distinct pleasure of
being the examiner in charge of a couple of banks that are
headquartered in Bath County. Everything about Bath County is
rural and it should be considered rural. Even if you look at
the population disbursement amongst the area, it should be
considered a rural county.
The community itself, there is a lot of ag-based businesses
there. There is not a whole lot of industry in Bath County as
well. So Bath County, out of any county in Kentucky, should be
considered rural.
Mr. Barr. So I think, Commissioner, this is exhibit A for
your position that there needs to be some kind of petition
process to fix the rural designation.
A quick follow-up for you, Commissioner. Does the CFPB, in
your judgment, have the statutory authority to do this or does
Congress need to intervene here and give the CFPB the authority
to implement this petition process you propose?
Mr. Vice. It is our opinion that the CFPB currently does
have the ability to do the petition process.
Mr. Barr. If they continue to rely on the various
government definitions of rural, would you recommend to this
committee and to this Congress to statutorily implement a
petition process?
Mr. Vice. We would either like to see a statutory
implementation of it or the Dodd-Frank Act be amended to move
the reference to rural in the balloon loan category.
Mr. Barr. Okay. And then I guess one final question, as my
time is expiring. As a bank supervisor, Commissioner, could you
just briefly amplify your testimony that Congress should create
a general statutory small creditor QM and apply it to all loans
held in portfolio?
Mr. Vice. Yes. We think this is very important in that
small community banks'--and again, their interests align when
they are originating a loan--primary focus is to create, for
lack of a better term, to borrow something from Steve Covey, a
``win-win situation.'' What are the borrower's credit needs and
how can we meet those to create a loan to meet those needs.
Mr. Barr. Thank you
Chairwoman Capito. Mr. Capuano?
Mr. Capuano. Thank you, Madam Chairwoman.
I want to thank the panel members for being here today.
I just have a question for everybody. And, again, we are
talking a lot of details here, and that is fine, but to me the
generalities of how we get here is also important.
Does anyone on the panel disagree with the statement that
prior to 2008, there were a fair number of mortgages given in
this country that should not have been given out? Does anyone
disagree with that statement?
I didn't think so. So, everybody agrees that prior to 2008
there were a fair amount of mortgages that should not have been
given. Fine.
Mr. Gardill, on page 11, you make a statement that I agree
with, but I wonder what it means. It says, ``These rules will
restrict, rather than facilitate, credit to mortgage borrowers,
particularly borrowers on the margins.''
Isn't that the whole point, that borrowers on the margins
are the ones who got those loans in 2006 and 2007 and 2008 that
we should not have been giving, and therefore the borrowers on
the margins are the ones who should not get mortgages in the
future? Should we not be restricting some of those, or should
all borrowers on the margins be given mortgages at all times?
Mr. Gardill. I think we have to be careful how we
generalize and preclude from our homeowner system in this
country, otherwise qualified borrowers--
Mr. Capuano. I understand--
Mr. Gardill. --with the flexibility that they could own a
home and we can successfully provide credit.
Mr. Capuano. I fully understand that. As a matter of fact,
the other side criticized people like me for pushing that for
years, actually for generations, that I thought more people
should be qualified, but now, in light of 2008, I realize there
is a line somewhere. I am not sure exactly where that line is.
But do you agree that there is a line that at some point a
borrower should not get a mortgage?
Mr. Gardill. And that is the reason I think we need some
time; we are looking for an extra year here in order to make
sure that we get it right.
Mr. Capuano. I don't disagree. I want to get it right, too.
I actually think that the comments that were made earlier on
competition and choice and level playing field and coordination
of regulators are all 100 percent correct. I am not looking for
one mortgage originator, I am not looking for no choice, I am
not looking for that one person to do it all. That would be
wrong, and it wouldn't help anybody. So, I totally agree with
those comments.
I guess what I am trying get at is that we all seem to
agree that there should be some restrictions. The question is,
where should those lines be and exactly how does it all work?
And we are all working on presumptions as to what they should
be.
I guess the question that I really have is, when everything
is said and done, based on what you know--and I assume every
one of you was active in this area before 2008--if there was
100 percent of the people, 100 percent of the people who got
mortgages in 2008, what percentage do you think should not get
mortgages? Where should that line be? Should it be 100 percent?
Should it be 110 percent? Should it be 70 percent? And I ask
you because there is a study out there that suggests that the
CFPB's proposal will cut out something like 48 percent of the
mortgages, which I think anybody would agree that, if that is
correct, it is too high.
I guess I am asking, what would your goal be? And we may as
well just start with you, Mr. Vice. What would your goal be,
starting in 2008, if that is equal to 100, what would it be?
Should it be 95 percent? Should it be 75? And, again, general,
and I am not going to hold it to you. I am just trying to get a
general idea.
Mr. Vice. I would be hesitant to look at it that way, and
the reason I would be is in 2008, let's take your example, 100
percent of the population who got more mortgages, some of those
people may have been able to afford a mortgage, just a lower
amount, but they were given the ability through a product
offering to get a mortgage that they couldn't afford, because
it was too high.
So I don't think we should be looking at this or asking the
question, you don't deserve a mortgage, you shouldn't get one,
and this percentage should not have gotten one. I think the
question should be more of, how do we make sure we are aligning
the interests between the borrower and the creditor to make
sure that the correct credit decision is made for that
borrower?
Mr. Capuano. The only thing I am interested in is having no
more taxpayer bailouts for people who give out mortgages.
Mr. Vice. I agree.
Mr. Capuano. That is my main category. And achieving the
highest percentage of homeowners as possible with that as the
knowledge. But you are telling me that everyone who got a
mortgage in 2008, somehow, somewhere, could have been and
should be qualified to get a mortgage today?
Mr. Vice. No. I think--
Mr. Capuano. So that there should be some percentage who
shouldn't. And I understand you may not have a number.
Mr. Gardill, how about you? Do you have a general idea, a
range?
Mr. Gardill. I think we have to look at the issues. I don't
think you can arbitrarily set a bright standard or a bright
line.
Mr. Capuano. I am not asking for a bright line.
Mr. Gardill. We had a rapid acceleration in value and a
rapid deceleration in value, and what we are trying to do is
avoid that--
Mr. Capuano. So I guess I am not going to get an answer.
Does anybody want to jump in with a number? I didn't think you
would, but I figured I would ask anyway.
And the reason I ask is because that is what we are here
for; no one wants 48 percent of the mortgages to not get access
to credit. That is not good for anybody. But there are some
people who should not get a mortgage. And I guess for me the
question is, what is that goal? Because what I am hearing in
the general testimony is that these proposals will shut off
credit to too many people. Fine. That scares me, as it should.
How many will it shut off credit to? Go ahead.
Ms. Still. But I think we need to be careful with context,
because when you talk about the margins in 2006, 2007, and
2008, it was a very different margin than in today's overly
tight credit conditions. So when we talk about deserving
borrowers in 2013 who may not get mortgages, it truly is a
deserving borrower.
I believe that the law, by prohibiting exotic loan
programs, by mandating that lenders fully document income and
assets, no more stated income loans, go an enormous way to
helping the consumer make a good, well-informed decision with
good counseling from a lender. So I just think we need to be
very careful that it is not the same margin. Thank you.
Mr. Capuano. I totally agree that we need to be careful,
and that is what we are doing here.
Madam Chairwoman, I know I am over my time. I apologize,
and I appreciate your indulgence.
Chairwoman Capito. Thank you.
Mr. Miller?
Mr. Miller. Thank you, Madam Chairwoman.
I respect my good friend's concerns on making loans that
are not predatory. In fact, in 2001 I started introducing
amendments to bills and said, let's define subprime versus
predatory. I think it got to the Senate 5 times, as you recall,
and they never took it up, or we might not have had some of the
problems we had.
I guess the definition of margins would be when you apply
them to. And I think if you go back to 2006, 2007, and 2008,
the margins were not margins, they were just, could you sign
your name, you are qualified. There were no underwriting
standards.
But my biggest concern is the CoreLogic study in 2010,
because those loans were not being made in 2010. In fact, the
CoreLogic study shows that the loans made in 2010 were very
good loans. My good friend, the ranking member, Maxine Waters,
brought up a concern she had that people were going to be
limited from the marketplace. And I think, Mr. Calhoun, you
said that based on the flexibility that is allowed through QM,
the GSE would still provide the loan. So 95 percent of the
loans that they said wouldn't be made would be made.
The problem I have with that, and I am not impugning you,
is that Secretary DeMarco came right before this committee, as
all of you recall, and said that GSEs will not be allowed to go
outside of a strict QM definition. So your response to defining
the study that was given to us by CoreLogic would not be
applicable based on his definitive comment to us, and that is
where my concern comes from.
If they are going to go strictly by the guidelines of QM
and not be allowed flexibility, which he said without a doubt
they are going to be required to do, half of those loans made
in 2010 that are performing very well would not be allowed to
be made today. That is what the debate is on today, not whether
we made bad loans in 2006, 2007, and 2008, because we did. The
underwriting standards then were just, especially through
Countrywide, can you sign your name, you met the underwriting
standards. That is how bad they were.
But, Ms. Still and Mr. Gardill, what impact would this have
on housing today, this strict requirement, especially by
DeMarco and the GSEs, that they are going to have stay within
QM? How much impact is it going to have on the market today?
Ms. Still. I don't know an exact number for you.
Mr. Miller. Does it drive more buyers to FHA, which we are
trying to eliminate buyers from FHA, I guess is the other
guideline.
Ms. Still. Yes. Any borrower, because the points and fees
test is a test that will determine QM or non-QM, any borrower
who cannot meet the points and fees test will no longer now be
eligible to be sold to a GSE.
Mr. Miller. And they are going to go over to FHA, which is
increasing the burden on FHA, which we are trying to decrease
the burden on FHA? We are creating a--
Ms. Still. The FHA program will be mandated to meet the
points and fees test as well. So the points and fees tests have
to be met regardless of the investor. It will be private
capital that would choose to do that non-QM loan, and we don't
think there will be a lot of private capital at all. And if
there is, it will be only for the highest quality borrowers,
not for the broad middle-class America.
Mr. Miller. Whether you support GSEs or not, if they are
out of the marketplace in this market, it could be devastating.
And the ability-to-repay rule purpose, it is very clear to
me, and it sets guidelines to approve a borrower's ability-to-
repay, but I don't know where the 3 percent cap on points and
fees falls in that at all. The 3 percent cap in fee has nothing
to do with the borrower's ability-to-repay. And I look at what
is included in the caps, how does escrow insurance relate to
the person's ability-to-repay? Some title insurance is
included, but other title insurance is excluded depending on
who pays for the policy. Mortgage origination fees are included
when a mortgage broker is used, but not when a loan is
originated at the bank or credit union. Nonprofit creditors are
exempt from all the caps completely.
So if there are so many exclusions and the exclusions are
based on who you are, what does this do to the underlying issue
of trying to create a safe and sound loan? I guess, Ms. Still,
I would go back to you again to let you answer that if you can.
Ms. Still. We would agree that the points and fees cap and
some of the fees that are included in have nothing to do with
the ability-to-repay. It has to do with a business channel. And
we believe all of that should be a level playing field, which
is why it is so important to pass H.R. 1077.
Mr. Miller. It is beyond that. You are discriminating
against certain groups. For an example, if you are a non-profit
creditor, you are exempt completely. If you are a mortgage
originator, you are included when a mortgage broker is used. So
if you are a mortgage broker, you are going to be inclined not
to use a mortgage broker, because I am penalized if I do. But
when a loan is originated by a bank or credit union, well, I
don't have to comply.
So I am really bothered by anything we do that
discriminates against anybody or any group or organization or
it picks winners and losers. So you can say, really I can save
myself some money and not be--not save money, but I could be
exempt from all this if I just use a nonprofit; or if I don't
use a mortgage broker, the loan can be through a bank or credit
union, then I have no fees or caps.
If you just look at that alone, you have to say something
is seriously wrong with the structure when we pick winners and
losers and we discriminate against some and not others. So I
think that is something that we seriously need to look at.
And I yield back the balance of my time.
Chairwoman Capito. The gentleman yields back.
I would like to ask for unanimous consent to insert into
the record written statements from the Consumer Mortgage
Coalition, the National Association of Federal Credit Unions,
the Independent Community Bankers of America, the Community
Associations Institute, and the American Land Title
Association. Without objection, it is so ordered.
Mr. Ellison?
Mr. Ellison. Thank you, Madam Chairwoman. And thanks to the
ranking member and all of the witnesses today. It is an
important issue, and you all have helped us understand it
better.
Ms. Still, I wanted to ask you a question. I believe you
recommended allowing higher fees for loans up to $200,000. What
percentage of home sales and refinances for mortgages below
$200,000? If we were to follow your idea, who will we be
affecting?
Ms. Still. I believe the right way to fix the points and
fees problem is H.R. 1077, but another alternative way would be
to raise the tolerance of the definition of a small loan from
$100,000 to $200,000.
And as I look at all of the loans that I made last year,
which was to about 12,000 customers, I would tell you that the
points and fees start tripping at about the $160,000 to
$180,000. If we were to go to $200,000, we would probably solve
about 90 percent of the problem, based on the data that I have
looked at in my company. So it is another way to raise the
definition of a small loan and more borrowers would be included
in the QM definition.
Mr. Ellison. Do you want to respond to that, Mr. Calhoun?
Mr. Calhoun. Yes. First of all, I think it is important
that people have asked, what do fees have to do with this? The
Financial Crisis Commission found that high fee loans
contributed to the crisis, because lenders are collecting their
revenue at closing, not through the performance of the loan. It
misaligns the borrower and the lender incentives there. The
lender wins by charging the high fees at closing. This bill
would far more than double the fees that could be charged and
still be a QM loan.
Mr. Ellison. Excuse me. When you say, ``this bill,'' you
are referring to H.R. 1077?
Mr. Calhoun. H.R. 1077.
The other point is people are acting as if an ability-to-
repay rule is something new. All loans that have over 150 basis
points of interest rate over APOR, which is significant ones,
are currently subject and have been for the last several years
to an ability-to-repay rule under the Federal Reserve rules
with no safe harbor for any of the loans, and the sky didn't
fall. I asked people, tell me of these lawsuits. No one can
point to a single one, much less a flood of them.
So Congress based this ability-to-repay rule off of what
the Federal Reserve had done before Dodd-Frank was passed. We
have experience under that. It worked. This rule has a lot more
industry protections than the Federal Reserve rule did. It has
a safe harbor for most of the loans. The Federal Reserve rule
did not have a safe harbor for any of the loans.
Mr. Ellison. Okay. Anybody else want to weigh in on that
question I asked? You don't have to.
Ms. Still. The only thing I was going to mention is my MBA
colleagues behind me tell me that the average loan amount in
America is $220,000, which is why the $200,000 is a relevant
number.
Mr. Ellison. All right. Thank you.
Mr. Calhoun, I have a question for you. How would a
consumer comparison shop for title insurance? How many title
insurance firms are there nationwide? If you wanted to go for
the lower price, could you do it, given current standards?
Mr. Calhoun. As the GAO study found, there is virtually no
shopping for title insurance. And I find that is true even when
I ask financial and mortgage professionals did they shop for
title insurance. They don't market to consumers; they market to
other industry professionals, because those are the ones who
select the service. And, in fact, there is little or no price
competition. Everybody tries to charge the maximum rate.
And lenders who are larger--Ms. Still's operation can have
125 people who focus just on title insurance. That gives them
an edge over those who can't do that. We already have five
lenders who control more than half of all mortgages in this
country. Now you want to hand the title insurance to them also
and encourage that? That doesn't seem like it makes a more
competitive market.
Mr. Ellison. Do home buyers know that they are paying a
commission?
Mr. Calhoun. My experience has been virtually none do, much
less that the commission is 75 percent of the premium. For a
$500,000 loan here in the District, the insurance premium for
just the bare-bones coverage is about $3,000. The commission
part of that in the District is about $2,200 going to the
person who picks the policy even though they charge you
separately for the other title work.
Those are the kinds of facts that led the GAO to raise
grave concerns about the title insurance market. And as I said,
instead of fixing it, this makes it worse.
Chairwoman Capito. The gentleman's time has expired.
I thank all of the witnesses, and I would like to thank the
ranking member, as well, for his attention to this very
important issue.
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.
This hearing is now adjourned. I would like to thank the
witnesses for their testimony and for their responses to the
questions. Thank you.
[Whereupon, at 12:18 p.m., the hearing was adjourned.]
A P P E N D I X
June 18, 2013
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