[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
HOW PROSPECTIVE AND CURRENT HOMEOWNERS
WILL BE HARMED BY THE CFPB'S
QUALIFIED MORTGAGE RULE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 14, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-58
______
U.S. GOVERNMENT PRINTING OFFICE
88-520 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:
January 14, 2014............................................. 1
Appendix:
January 14, 2014............................................. 53
WITNESSES
Tuesday, January 14, 2014
Calhoun, Michael D., President, Center for Responsible Lending... 16
Emerson, Bill, Chief Executive Officer, Quicken Loans, Inc., on
behalf of the Mortgage Bankers Association (MBA)............... 10
Hartings, Jack, President and Chief Executive Officer, the
Peoples Bank Co., on behalf of the Independent Community
Bankers of America (ICBA)...................................... 9
Spencer, Frank, President and Chief Executive Officer, Habitat
for Humanity of Charlotte, NC.................................. 14
Weickenand, Daniel, Chief Executive Officer, Orion Federal Credit
Union, on behalf of the National Association of Federal Credit
Unions (NAFCU)................................................. 12
APPENDIX
Prepared statements:
Calhoun, Michael D........................................... 54
Emerson, Bill................................................ 74
Hartings, Jack............................................... 85
Spencer, Frank............................................... 93
Weickenand, Daniel........................................... 98
Additional Material Submitted for the Record
Capito, Hon. Shelley Moore:
Written statement of the American Land Title Association..... 115
Written statement of the Credit Union National Association... 118
Written statement of the Manufactured Housing Institute...... 134
Written statement of the National Association of REALTORS... 138
Ellison, Hon. Keith:
Written statement of the Consumer Federation of America
before the New York State Department of Financial Services,
dated December 10, 2013.................................... 145
Written statement of the National Association of Independent
Land Title Agents.......................................... 167
Written responses to questions submitted to Michael D.
Calhoun.................................................... 174
Written responses to questions submitted to Bill Emerson..... 180
Written responses to questions submitted to Daniel Weickenand 183
Luetkemeyer, Hon. Blaine:
Letter from the Consumer Financial Protection Bureau, dated
December 20, 2013.......................................... 185
Letter to the Consumer Financial Protection Bureau, dated
December 10, 2013.......................................... 187
Rothfus, Hon. Keith:
Statements from participants in the Pittsburgh Roundtable
held on November 12, 2013.................................. 189
HOW PROSPECTIVE AND CURRENT
HOMEOWNERS WILL BE HARMED BY
THE CFPB'S QUALIFIED MORTGAGE RULE
----------
Tuesday, January 14, 2014
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 10:06 a.m., in
room 2128, Rayburn House Office Building, Hon. Shelley Moore
Capito [chairwoman of the subcommittee] presiding.
Members present: Representatives Capito, Duffy, Bachus,
McHenry, Campbell, Pearce, Posey, Westmoreland, Luetkemeyer,
Stutzman, Pittenger, Barr, Cotton, Rothfus; Meeks, Maloney,
Hinojosa, Scott, Green, Ellison, Lynch, Capuano, Murphy, and
Heck.
Ex officio present: Representatives Hensarling and Waters.
Also present: Representatives Fincher, Garrett, Huizenga;
and Kildee.
Chairwoman Capito. The subcommittee will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
I am now going to recognize myself for the purpose of
making an opening statement. Last January, the Consumer
Financial Protection Bureau (CFPB) issued a series of rules
that will fundamentally change the mortgage market in the
United States. Over the last year, we have had numerous
hearings in the Financial Institutions and Consumer Credit
Subcommittee to learn more about the effects these rules will
have on the availability of credit.
Last November, I had the pleasure of joining Mr. Rothfus in
Pittsburgh for a roundtable discussion with the community
development organizations in the greater Pittsburgh area about
the effect these rules will have on their ability to serve
their consumers.
Two things emerged from these committee hearings: one, that
the new mortgage rules impair the ability of lenders to work
with borrowers on an individual basis; and two, that low- to
moderate-income borrowers stand to lose the most if lenders
cannot write loans outside the qualified mortgage (QM)
definition.
This morning, we have a panel of witnesses who will further
educate members of the subcommittee on how their constituents
will be affected by this rule. We have three lenders who will
discuss the difficulties in working with borrowers with credit
profiles that fall outside the qualified mortgage definition.
In most cases, lenders will sit down with riskier
borrowers--that is what we do in West Virginia--and craft a
mortgage that is highly tailored to the borrower's needs and
risk profile. This type of relation is especially crucial in
the rural areas, such as my district in West Virginia. No two
borrowers have the same credit profile, and I fear that the
one-size-fits-all approach to the CFPB mortgage rule will
severely hamper the ability of community lenders to tailor
products to their borrowers.
I also fear that the very population that this rule seeks
to protect, the low- to moderate-income borrower, is the
population that will be most affected by these rules. This
morning, we will learn about the difficulties that Habitat for
Humanity will face in complying with this rule.
The ability of charitable programs like Habitat and other
entities who provide mortgages to underserved populations is
critical to helping these borrowers realize their dreams of
homeownership. This is another example of the consequences of
removing underwriting discretion from the hands of lenders and
borrowers and placing it in the hands of the bureaucracies in
Washington.
It is my hope that we can work together to find common-
sense solutions, and to provide consumers with the transparency
they deserve, without limiting the ability of lenders to work
with borrowers on a case-by-case basis.
I now yield time to the ranking member of the subcommittee,
Mr. Meeks, for the purpose of making an opening statement.
Mr. Meeks. Thank you, Madam Chairwoman. And I certainly
agree with you that today we hold a very important hearing,
given that the QM rules were finally--became effective last
Friday. I also think that we can all agree that this is one of
the most important new financial reforms that have been passed
in recent years. And I just wanted to also say thank you for
being here today, this morning, knowing the serious issues that
your constituents face in West Virginia dealing with their
drinking water.
I am pleased that the discussion has progressed from
possibly delaying the QM rule to finally discussing their
implementation and impacts. But I think that we also need to
issue some words of caution that the rules just became
effective a few days ago. And although we are here to talk
about their impacts, we really don't have the data yet to
definitively argue what the effects of the new QM rules will
be.
In fact, it may take a few years to have the conclusive
data. But I think that it is important to have these
discussions, and to have them now, because this is very
important to me. I probably would not be sitting here today if
it wasn't for the fact that my parents had the opportunity to
own a home. We moved from public housing to buying a home,
which was the American dream, at which time my parents were
able to actually afford to provide me and my sisters with an
education as a result of owning that home.
And so, this is significant, and it is somewhat personal
for me. And I personally have no doubt that there are impacts,
significant impacts on prospective home buyers. After all, it
was our intent to have new rules that fundamentally changed the
old practices of the mortgage industry. And what I have to try
to weigh, and I think what we all have to try to weigh, is to
make sure that we don't eliminate the possibility of
individuals like my parents owning a home, because that is how
we move the American dream, and people have an opportunity to
progress.
At the same time, we cannot have a short memory, because we
know from January 2007 to December 2011, 4 million American
households lost their homes through completed foreclosures, and
another 4.2 million were appended. And by 2010, U.S. home
values dropped by an average of 30 percent from their 2006
peak, more than the 26 percent drop that occurred between 1928
and 1933 during the Great Depression. And the fact that we lost
a record 9 million jobs between 2008 and 2009, roughly 6
percent of the workforce.
This was devastating. And I look at a district like mine,
still recovering, actually, from this devastation. They were
the devastating consequences of an economic system that failed
because of widespread predatory and fraudulent mortgage
practices. And in the midst of all this, African Americans and
Hispanics were disproportionately steered to these predatory
loans.
Studies by The Wall Street Journal and Fannie Mae both
concluded that about 50 percent of African Americans and
Hispanics were steered to subprime loans, even though they
could qualify for prime loans. These groups were targeted by
subprime lenders and brokers who received incentives for
jacking up the interest rates.
Wells Fargo, Bank of America, Citi, and Countrywide are
among a list of large lenders that were sued for the lending
practices that discriminated against minorities by steering
them into high-interest subprime loans they eventually could
not pay for. No other recent economic crisis better illustrates
the saying that when America catches a cold, African Americans
and Hispanics will get pneumonia. Today, the wealth gap between
Blacks or Hispanics and Whites is the worst it has been since
we started tracking these figures 3 decades ago.
So let me make it really clear. This is one of the most
fundamental pieces of legislation that was long overdue in this
country, and its effective implementation is an important
milestone that we can be proud of. And I look forward to
working in a bipartisan manner, because this affects all
Americans. I talk specifically in regard to how it
disproportionately affected African Americans and Hispanics,
but it affects every American, every poor American.
In urban America, in rural America, this is something that
we need to come together and work collectively on to resolve
it, because, really, this is where the future of our country
lies, and if we don't give individuals the opportunity to have
a better life by investing in the American dream and owning a
home, then shame on all of us.
I have been working very closely with my colleagues and the
Chair, and I look forward to continuing to do so in a
bipartisan manner so that we can make sure that we do the best
things for America's people.
I yield back.
Chairwoman Capito. I thank the gentleman. I would like to,
without objection, enter into the record the flyer many of the
folks in the audience have been passing out in the hall today.
Without objection, it is so ordered.
[applause]
I would now like to recognize Mr. Duffy for 2 minutes for
an opening statement.
Mr. Duffy. Thank you, Madam Chairwoman.
And I appreciate you holding this very important hearing.
I understand the push, after the financial crisis, to have
some form of a qualified mortgage rule when we are selling
mortgages into the secondary market. That makes some sense.
My concern, though, with this rule, is the way it has been
written. A lot of small banks in Wisconsin, and a lot of credit
unions in Wisconsin, who may not have any interest in selling
these loans into the secondary market--these actually are loans
they want to keep on the books, but those loans don't fit
within the qualified mortgage rule--aren't going to make these
loans. And the people who are left behind by this rule are
minorities, are low-income, or moderate-income individuals,
people who might not have a traditional income stream of a 9:00
to 5:00 job. They may be a small business owner who may have a
cyclical income with that small business.
It is these people who aren't going to be able to live the
American dream, which is part of buying a home.
And so, I am interested in hearing from the panel today
about how you are analyzing the QM rule, and how it is going to
affect your lending practices. Because as I look back to my
district--really work in our communities where our bankers are
able to look at individuals in a number of different factors,
and they take risk on them. And they give them loans. And
oftentimes, those loans perform really well.
But now we see big government making rules, bureaucrats in
Washington making rules that are going to prohibit that young
individual, who is just coming out of college, just starting a
family, from actually buying a home.
I would agree with Mr. Meeks that the pendulum was too far
over before the 2008 crisis. But this rule swings the pendulum
too far to the other side. We have to have a common-sense
approach that is going to work for the American people no
matter what kind of income stream you have. This just can't
work for high-income Americans. And this rule is tailored
toward high-income earners. We have to make sure we are looking
out for all Americans.
I yield back.
Chairwoman Capito. Thank you. I would like to recognize
Mrs. Maloney for 2 minutes for the purpose of an opening
statement.
Mrs. Maloney. I thank the chairlady and the ranking member
for holding this important hearing. The qualified mortgage rule
is one of the centerpieces that came out of the financial
crisis. And it is supposed to ensure that borrowers are
protected from the predatory lending practices that did so much
damage to Americans.
We have to remember, this country lost $16 trillion.
Thousands of people lost their homes, and their jobs. We are
still recovering from the longest recession in my lifetime,
which most economists attribute to the mortgage crisis, and the
predatory, risky loans that were pushed out to consumers.
Now, what does this rule do?
It merely says that you cannot have risky features which
can hurt consumers and the overall economy, such as saying
interest-only payments, that is not a good thing to do. And it
also says that negative amortization, where the total debt
rises every month, that you can't do that. And it says that the
payments should not exceed 43 percent of a borrower's monthly
income. Most economists say it shouldn't be more than a third,
and there are even exceptions to that. The rule came out on
Friday, and the CFPB has already given a 2-year grace period to
small lenders, community banks, and credit unions to see how
they can monitor it, and see what the effect is.
They have also said--and I am very pleased to hear this--
that based on their data, they are open to making adjustments
and changes. I think we all agree that we don't want another
financial crisis. And if we don't learn from the one we already
went through, then we probably will have another financial
crisis.
This rule is put in place to protect consumers, protect
lenders, protect borrowers, protect banks, and protect our
overall economy. And so, I look forward to monitoring it,
seeing its impact, and making sure that it is fair to consumers
and our overall economy.
I yield back.
Chairwoman Capito. Thank you.
I recognize Mr. Bachus for 2 minutes.
Mr. Bachus. I thank the chairwoman.
I got my Kiplinger letter about 4 days ago, and it predicts
10 things for 2014. It was very similar to an article in The
Economist that came out right after Christmas, and also in
Bloomberg Business. They all predict the very same thing.
Here is what it says: You will pay a higher rate for a
mortgage, and mortgages will be harder to obtain because of
tighter lending restrictions from the Consumer Financial
Protection Bureau (CFPB). It also says something else, as a
result, slower growth for housing, and housing is about an
eighth of our economy.
We are talking about home ownership, and Mr. Meeks told a
story that really is an American story. I think the American
dream is a job, not so much a home. Because if you don't have a
job, it is hard to have home ownership. But that is what every
person in this country aspires to do is get a job, and then for
themselves or their family, find a home. And leading up to
2008, we may have gone too far because we wanted everyone to
have a home, because we found that if you own your own home,
communities are safer, children do better in school, people buy
in to the community, and it benefits society as a whole.
I don't know of anything more beneficial to a community
than high rates of home ownership. And, yes, we had very lax
underwriting standards. No one wants a repeat of 2008.
But we don't want to overregulate. We don't want to go too
far. We don't want to--as physicians say, first, do no harm.
And this rule does harm. It is going to deny people like Mr.
Meeks or myself--I can remember when we--
Chairwoman Capito. The gentleman's time has expired.
Mr. Bachus. --moved into our first home. It was a great
day. And I don't want to deny that to any American.
Thank you.
Chairwoman Capito. Thank you.
Mr. Green for 2 minutes.
Mr. Green. Thank you, Madam Chairwoman.
I would like to associate myself with the comments of the
ranking member. And I would like to add a bit to it. Because,
in Congress, I have a piece of legislation for alternative
credit scoring.
I have a history of trying to make sure those persons who
don't have opportunities, acquire opportunities. This piece of
legislation would consider light bill, gas bill, water bill,
utilities, and other forms of credit that are not traditionally
scored. And this will help a lot of people.
I would also like to reflect for just a moment on what
happened to cause us to get into this crisis. A lot of the
people that we have been trying to help were given loans that
were beyond what they qualified for. They qualified for a loan
at 8 percent, with a yield spread premium, they got a loan of
10 percent, 12 percent. Or if they qualified for 5 percent,
they got a loan for 10 percent.
And they didn't know. They did not know that they qualified
for a 5 percent loan.
Because there was a system in place that allowed the person
who was qualifying you to get a bonus, a kickback, if he could
qualify you for a loan at a lower rate, and then push you into
a higher-rate loan. That is dastardly. That is what this deal
deals with.
We have to deal with the things that have caused African
Americans to lose a generation of wealth. We don't want that.
Dr. King was right. He said life is an inescapable network
of mutuality tied to a single garment of destiny. What impacts
one directly impacts all indirectly.
That crisis that hit the African-American community, the
minority communities, impacted the entire economy. It wasn't
just some people who were taken advantage of in the final
analyses.
So we have a duty to do all that we can to prevent this
from happening again.
I want to see the balance. I support these community banks.
But I don't want to see people taken advantage of. I yield
back.
Chairwoman Capito. The gentleman's time has expired.
[applause]
If I could remind the audience, I am happy--and Mr. Green
is hard to resist because he is very enthusiastic. But if I
could ask you to respect the rules of the House, and refrain
from expressing approval and disapproval, we will move the
hearing on, I think quicker. And I thank you for your
cooperation. Thank you.
I would like to recognize Mr. Pittenger for 1\1/2\ minutes,
please.
Mr. Pittenger. Thank you, Madam Chairwoman, for yielding me
the time for this important issue.
As I travel throughout my 9th District in North Carolina, I
meet with community bank leaders who tell me time and again of
the struggles that they have with regulations pouring out of
Washington, D.C., and their inability to address the real
financial needs of their community.
Every so often, we have seen that the government has become
its own worst enemy. We saw that clearly from what happened
with the inception of this entire housing demise, where the
government forced institutions to do certain things and now the
government is saying, well, now we are requiring you to do
certain things.
The government seems to be the one who wants to dictate and
micromanage to communities throughout the country.
While regulators here in D.C. say that there won't be a
problem with this new rule, that is referred to as the
qualified mortgage, we have found that may not be the case. We
were also told that you can keep your health care if you would
like to.
We are finding that the community banks back in our
districts are not going to lend outside of the QM rule, because
of fear of litigation by the Feds.
Diane Katz of the Heritage Foundation said that young
adults and minorities will be the hardest hit by these rules.
As first-time homeowners, they will be limited, with limited
income and college debt, they will be pushing their debt-to-
income ratio above qualified status.
So, Madam Chairwoman, I thank you. I believe that we need
to give this important consideration.
Chairwoman Capito. Thank you.
Mr. Lynch, for 2 minutes, for the purpose of an opening
statement.
Mr. Lynch. Thank you, Madam Chairwoman.
Despite the controversy that seems to be percolating here,
today's hearing deals with a very basic rule that is obviously
necessary after the last crisis, and should be uncontroversial.
And that rule simply states that to stop the predatory
lending that fed the housing bubble, the Wall Street reform law
states very simply that before a lender offers a mortgage to a
consumer, they should first come to a reasonable and good faith
determination that consumer has the ability to pay the loan.
And that is it. That is what this hearing is about.
The law also authorizes the CFPB to define the contours of
a qualified mortgage or one that bears the hallmark of safe,
responsible lending practices.
Now, I understand there are some concerns from the banking
and the mortgage lending industries about constricting access
to credit. But the bottom line here is that the CFPB's rule is
supported by a lot of groups who were hurt very badly by that
last crisis, a lot you may have heard from already, especially
in minority neighborhoods in my district.
Those people who had the most difficult time with the
recent crisis are in support of this rule. And that includes
the NAACP, the National Council of La Raza, the National Fair
Housing Alliance, the Neighborhood Assistance Corporation of
America (NACA), and the Center for Responsible Lending.
They are all here with us today. And these groups support
this rule that was put in to protect the people that they
represent.
The qualified mortgage definition may need some tweaking,
no doubt about that, going forward. And if it does, I hope we
can work in a way that the CFPB also supports.
But I think the folks on this committee would do well to
tone down the doomsday talk and rhetoric about the rule that is
going to do enormous good for home buyers and will allow a lot
of people to own a home.
I yield back.
Chairwoman Capito. The gentleman yields back.
Mr. Huizenga for 1 minute.
Mr. Huizenga. Thank you, Madam Chairwoman. I appreciate you
holding this hearing along with my good friend Mr. Meeks.
As someone who has worked in the housing industry as a
REALTOR, this is very important to me, and more importantly to
all of our constituents.
We are here today to further discuss the impact of the
qualified mortgage rule. Unfortunately, this is a flawed rule.
I disagree with my colleague over there.
And I, along with my friend, Ranking Member Meeks,
introduced bipartisan legislation which would clarify the rule
to ensure access to affordable mortgage credit for low- and
moderate-income families and first-time home buyers.
Today, I am especially pleased to introduce one of the
witnesses who hails from the great State of Michigan, Mr. Bill
Emerson. He is the CEO of Quicken Loans, based in Detroit.
You may be familiar with the work being done in the private
sector by companies like Quicken, and people like Bill and Dan
Gilbert, to revitalize Detroit. And we all applaud that.
Quicken Loans is the largest online and nonbanking mortgage
lender in the Nation, employing 10,000 people. It has been
voted one of the best companies to work for and has earned J.D.
Power's customer satisfaction awards for 4 years in a row.
It is this kind of company and this kind of attitude that
we need to help this--change this rule.
So thank you very much. I yield back.
Chairwoman Capito. Thank you.
And with the remaining 30 seconds, I yield to Mr. Pearce.
Mr. Pearce. Thank you, Madam Chairwoman.
I represent the southern district of New Mexico, which is
one of the poorest directs in America, and I can tell you we
are hurt by the QM rule.
Fifty percent of the homes in my district are trailer
houses, and QM automatically declares those high-cost loans and
prohibits them, so that poor people have no access.
So while we are told this rule needs to be there to protect
the poor, it is hurting the poor in my district. We must solve
this problem. I appreciate your having the panel here today.
I yield back.
Chairwoman Capito. Thank you.
That concludes our opening statements.
We now welcome our panel of distinguished witnesses. Each
of you will be recognized for 5 minutes to give an oral
presentation of your written statement. And without objection,
each of your written statements will be made a part of the
record.
Our first witness, Mr. Jack Hartings, is the president and
chief executive officer of The People's Bank of Ohio, and he is
testifying today on behalf of the Independent Community Bankers
of America.
Welcome.
STATEMENT OF JACK HARTINGS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE PEOPLES BANK CO., ON BEHALF OF THE INDEPENDENT
COMMUNITY BANKERS OF AMERICA (ICBA)
Mr. Hartings. Chairwoman Capito, Ranking Member Meeks, and
members of the subcommittee, I am Jack Hartings, president and
CEO of The People's Bank Company, and vice chairman of the
Independent Community Bankers of America.
The People's Bank Company is a $400 million asset bank in
Coldwater, Ohio. And I am also a member of the CFPB's Community
Bank Advisory Council.
I am pleased to represent the ICBA and the nearly 7,000
community banks at this important hearing.
The CFPB's new qualified mortgage (QM) rule has the
potential to drive many community banks with fewer resources
out of the mortgage market, curtail access to mortgage credit,
and hamper the housing recovery. The QM rule, by providing a
safe harbor for harsh liability, including a private right of
action under the ability-to-repay rule, effectively draws a
tight box around the types of loans that will be made by
community banks. Banks like mine simply will not incur the risk
of making non-QM loans. I will note a few examples.
A start-up small business owner or farmer may have
business-related debt on their credit report which will
disqualify them under the QM's 43 percent debt-to-income (DTI)
limitation. Business formation should be encouraged, not
punished, by unrealistic DTI limitation. Minority borrowers are
more likely to exceed the DTI limitation, according to the
recent Fed study of 2010 lending. While many of these
underserved borrowers use Federal loan programs, the QM status
for these programs is only temporary.
The highly compensated individual may exceed the DTI
limitation perhaps due to a second home or other types of debt
and still have a high disposable income for mortgage payments.
These individuals are critical to the housing market recovery.
As a small creditor under the CFPB's definition, my bank is
not subject to DTI limitations. And I could serve these
customers, but many other community banks do not have small
creditor status. And I am very close to the 500 annual
origination thresholds that would disqualify me as a small
creditor.
We believe that loans sold in the secondary market should
not apply to the threshold, and request this committee's
support for that simple change. Even as a small creditor, I am
significantly limited by QM here, and I may not be able to make
some of the non-QM loans as a small creditor.
Low-dollar loans are common in many parts of the country
for purchase or refinance, but the QM closing fee cap is often
a challenge in making these loans. Balloon loans, which are
used to manage interest rate risk on loans that can't be sold
in the secondary market, are non-QM unless they are made by
lenders in predominantly rural areas under the CFPB's very
narrow definition of ``rule'' beginning in 2016.
Loans that exceed the price trigger may still be QM, but
carry weaker liability protections even when those loans align
with the lender's cost of funds, risk, and other factors. There
are additional examples of safe, legitimate loans that will
fail the QM test even under the broader term available to small
creditors.
ICBA's solution to the threat of QM, which is included in
our Plan for Prosperity, is simple, easy to apply, and will
preserve community bank lending. Safe harbor QM status should
be granted to all community bank loans held in portfolio. A
portfolio lender holds 100 percent of the credit risk and has
every incentive to thoroughly assess the borrower's financial
condition, ensure the loan is affordable, and work with
troubled borrowers.
Withholding safe harbor status for loans held in portfolio
and exposing the lender to excessive litigation risk will not
make loans safer, nor will it make underwriting more
conservative. It will merely deter community bank lending.
I would like to thank the members of this committee who
have introduced bills that would provide QM status for
community bank loans. These bills include the PATH Act, the
CLEAR Relief Act, and the Portfolio Lending and Mortgage Access
Act.
I want to thank you again for the opportunity to testify.
Thank you.
[The prepared statement of Mr. Hartings can be found on
page 85 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness has been introduced by Mr. Huizenga. I
would like to add my voice of support. I hear what is going on
in Detroit, and I thank you for your company's active
participation. Mr. Bill Emerson is the chief executive officer
of Quicken Loans, Incorporated. And he is testifying today on
behalf of the Mortgage Bankers Association. Welcome.
STATEMENT OF BILL EMERSON, CHIEF EXECUTIVE OFFICER, QUICKEN
LOANS, INC., ON BEHALF OF THE MORTGAGE BANKERS ASSOCIATION
(MBA)
Mr. Emerson. Thank you, Chairwoman Capito, Ranking Member
Meeks, and Chairman Hensarling. This hearing could not be more
timely. While most people rang in the new year 2 weeks ago, for
those of us in the mortgage industry, the new year began last
Friday.
That is when a host of Dodd-Frank rules finally came
online. None are more consequential, with the power to
completely reshape the mortgage industry, than the ability-to-
repay rule and its qualified mortgage standards. As the CEO of
Quicken Loans, the Nation's largest online and non-bank
mortgage lender, it has been my responsible to chart our
company's course into the new regulatory regime.
The Mortgage Bankers Association, of which I am honored to
serve as the vice chair, has devoted enormous resources over
the past year to helping companies like ours come into
compliance. A common question we have received, and one I want
to answer at the outset, is whether we plan to write non-QM
loans. I can tell you categorically that Quicken Loans, like
the overwhelming majority of lenders, will not lend outside the
boundaries of QM. In fact, even if we wanted to, we wouldn't be
able to make non-QM loans because there is no discernible
secondary market for them. The only place these loans can be
kept is on a bank's balance sheet.
Beyond that, the liability for originating non-QM is simply
too great. Claimants can sue for actual and statutory damages,
as well as a refund of their finance charges and attorneys'
fees, and there is no statute of limitations in foreclosure
claims. By MBA's calculations, protracted litigation for an
average loan can exceed the cost of the loan itself.
Given this uncertainty, at least for the foreseeable
future, non-QM lending is likely to be limited to three narrow
categories. First, there will be loans where there were
unintended mistakes. That is, because of the complexity of the
calculations, lenders will make loans they think to be QM only
to find out they fail the test. MBA believes the CFPB should
provide lenders with the ability to cure mistakes that cause a
loan to fail to meet the QM test, just like exists under HOEPA.
A second group will be higher-balance and nontraditional
loans to wealthier borrowers. Because of their income and
assets, default rates on jumbo loans are relatively low and
some lenders, particularly the large depository institutions,
will have the resources to keep those loans in their portfolio.
And finally, a few lenders will be willing to make loans to
riskier borrowers, but at significantly higher rates. Rate
sheets we have seen suggest borrowers could pay an interest
rate around 9 or 10 percent for non-QM loans. The bottom line
is that non-QM will be very limited and very expensive for all
but the wealthiest borrowers.
That is why it remains so important to continue to make
adjustments to the QM rule. The CFPB deserves enormous credit
for working with all stakeholders, lenders and consumer groups
alike, in fashioning a rule we think is a substantial
improvement over Dodd-Frank. We are also grateful that the
Bureau is open to making additional revisions in the near
future. Further amendments are essential to ensure that the QM
rule promotes, rather than hinders, our tepid housing recovery.
The key eligibility for QM is the 3 percent cap on points
and fees. A major problem with the 3 percent cap will be its
impact on borrowers who take out smaller loans, particularly in
the $100,000 to $150,000 range. Because so many origination
costs are fixed, a lot of these loans will trip the 3 percent
cap and fall outside of the QM definition.
That means consumers, particularly first-time homebuyers
and families living in rural and underserved areas, will be
priced out of the market. The Bureau has wide latitude to
correct this problem and we urge it to do so.
Additionally, the final rule picks winners and losers
between affiliated and unaffiliated settlement service
providers, even though their fees are subject to identical
regulation. Having been in this industry for more than 20
years, I can tell you that rules that pick winners and losers
ultimately harm consumers.
At Quicken Loans, we have chosen to affiliate with title
and other service providers to ensure our customers have the
best loan experience and that there are no surprises at the
closing table. As Congressman Huizenga noted, one of the
reasons consumers awarded us the prestigious J.D. Power Award 4
years running is because our affiliated arrangements have led
to a smooth closing process.
MBA urges the House to promptly pass H.R. 3211, the
Mortgage Choice Act of 2013. I want to thank Congressman
Huizenga, Ranking Member Meeks and so many other members of
this subcommittee from both sides of the aisle who have
introduced and pushed this important legislation. I also want
to thank Chairman Hensarling for including these changes in his
more comprehensive regulatory relief package.
Madam Chairwoman, I think you will find that the MBA
continues to be a willing partner in developing practical fixes
to the QM rule. We truly want it to work for everyone: for
lenders; for the consumers we serve; and for our economy.
Thank you again for holding this important hearing. I look
forward to your questions.
[The prepared statement of Mr. Emerson can be found on page
74 of the appendix.]
Chairwoman Capito. I would like to recognize Mr. Fincher
for the purpose of introducing our next witness.
Mr. Fincher. Thank you, Madam Chairwoman.
I appreciate the opportunity to introduce Mr. Daniel J.
Weickenand to the committee this morning. Since 2010, Mr.
Weickenand has served as the president and chief executive
officer of Orion Federal Credit Union in Memphis, Tennessee.
Orion is the largest credit union in west Tennessee.
I was pleased to host Mr. Weickenand at a credit union
roundtable discussion back in November, which included the
qualified mortgage rule. Today, Mr. Weickenand is here
representing the National Association of Federal Credit Unions,
where he serves as a boardmember.
Madam Chairwoman, it is a pleasure to have Mr. Weickenand
appear on this panel today, and I appreciate him taking the
time to express his views about the qualified mortgage before
the committee.
Thank you.
And I yield back.
Chairwoman Capito. Thank you.
Mr. Weickenand, you are recognized for 5 minutes.
STATEMENT OF DANIEL WEICKENAND, CHIEF EXECUTIVE OFFICER, ORION
FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF
FEDERAL CREDIT UNIONS (NAFCU)
Mr. Weickenand. Thank you.
Good morning, Chairwoman Capito, Ranking Member Meeks, and
members of the subcommittee. My name is Daniel Weickenand, and
I am testifying this morning on behalf of NAFCU. I serve as CEO
of Orion Federal Credit Union headquartered in Memphis,
Tennessee. NAFCU and the entire credit union community
appreciate the opportunity to discuss the CFPB's ability-to-
repay rule and the impact the qualified mortgage standard will
have on credit union lending.
Credit unions did not cause the financial crisis and
shouldn't be subject to the regulations aimed at those entities
that did. Unfortunately, that has not been the case thus far.
As we are hearing from many of our credit union members, enough
is enough when it comes to the tidal wave of new regulations.
NAFCU supports efforts to ensure that consumers are not
placed into mortgages they cannot afford. This was a long-
standing practice of credit unions before the financial crisis,
and it continues to be the case post-crisis.
Credit unions have a history of making loans for their
members who have the ability to repay. This was demonstrated by
the quality of their loans during the financial crisis. While
credit union loans generally do not have a problem meeting the
ability-to-repay underwriting criteria, meeting the additional
criteria to obtain a QM status and avoid the additional
liability is not certain.
Under the rule, the least risk to credit unions is to
originate only QM loans. Limiting loans to solely QMs would
reduce a legal risk and help ensure the loans are eligible for
sale in the secondary market. The ability to sell loans will
help credit unions manage interest rate and concentration risk.
At Orion, we made a conscious decision at the onset of the
financial crisis to double down on our efforts to return as
much as possible to our members in the community in which we
live. While some institutions may start charging a premium on
their loans to account for the additional risk associated with
non-QMs, we do not feel this is in the best interest of our
credit union, our members, and our community. Consequently, due
to the liability and liquidity concerns, we have decided to
cease to offer non-QM loans at this time. I cannot tell you how
difficult a decision this has been. Orion takes great care in
placing our members with the right mortgage product, and the QM
standard will inevitably force us to turn away many credit-
worthy borrowers.
For example, in 2010 we started a special Orion Home Run
Program that allows qualifying participants to rent an unsold
foreclosed home for a set period of time. During that rental
period, the participant is expected to make timely payments,
keep the home in good condition, and have a positive impact on
their neighborhood.
When the rental period lapses, the home can then be
purchased outright for 70 percent of the tax value, with the
previous rental payments applied as a downpayment, and
guaranteed financing by us. Despite demonstrating the ability
to repay, the program participants would not fit the QM
standard, and therefore would not have the opportunity to
become homeowners through Orion at this time.
I have talked with many of my fellow credit union CEOs
about the issue. Some may be cautiously going forward with non-
QM loans, but they have indicated that they will be more
stringent in making them. For Orion, approximately 11 percent
of all of our mortgage loans in the past few years have been
classified as non-QM.
There are several changes to the QM standard that NAFCU is
seeking. These areas are outlined in my written testimony, but
include a fix to the points and fees issue, modifications to
the small creditor exemption, consideration of 40-year loans to
be QM, changes to the 43 percent debt-to-income ratio, and
deeming all loans sold to the GSEs to be safe harbor loans.
NAFCU appreciates the CFPB looking for a good faith effort
of compliance months after the rules take effect, however this
will create ambiguity, and the CFPB must work closely with the
NCUA to further clarify.
In conclusion, credit unions have historically put their
members into affordable mortgages and continue to do so today.
The unique relationship between credit unions and their members
allows credit unions to provide flexibility to give their
members products that work for them on an individual basis.
The restrictions of the new QM mortgage standards have
eliminated this ability in many cases. Given the new liability
and the additional costs that come with doing non-QM loans,
many credit unions like mine have ceased or severely cut back
on non-QM lending.
Congressional action to provide relief on some of the QM
standards would help further more congressional action on
regulatory leave would help ease the growing burdens associated
with new compliance standards. I thank you for the opportunity
to appear today, and I welcome any questions you may have.
[The prepared statement of Mr. Weickenand can be found on
page 98 of the appendix.]
Chairwoman Capito. Thank you. Our next witness is Mr. Frank
Spencer, the president and CEO of Habitat for Humanity in
Charlotte, North Carolina.
Welcome, Mr. Spencer.
STATEMENT OF FRANK SPENCER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, HABITAT FOR HUMANITY OF CHARLOTTE, NC
Mr. Spencer. Good morning, Madam Chairwoman, and Ranking
Member Meeks.
I am Frank Spencer, president and CEO of Habitat for
Humanity of Charlotte. I am here today in support of
legislation to address several unintended consequences of
mortgage regulation reform that threaten the continuing work of
many habitat affiliates.
I have submitted my full written testimony for the record,
and I appreciate the opportunity to share a brief overview of a
few challenges being faced by our affiliate, and other habitat
affiliates, in our collective efforts to comply with new
mortgage regulations.
Habitat Charlotte builds new houses, rehabilitates vacant
properties, repairs houses, operates a $4 million retail
outlet, recycles 1,200 tons of steel per year, and currently
services approximately 780 non-interest-bearing mortgages for
its partner families. Habitat Charlotte has served 1,200
families in its 30 years, and is supported by 85 employees, and
over 5,000 volunteers annually.
Habitat greatly appreciates the commitment Congress has
made to stable and productive housing markets as the Nation
continues to recover from the foreclosure crisis, and economic
recession. The success of the Habitat ownership model is, in
fact, predicated on market stability, and the long-term
appreciation of real estate values.
Habitat understands and fully supports efforts to protect
consumers and the American taxpayer from predatory lending
schemes that undermine the stability of U.S. housing markets.
Habitat opposes neither the qualified mortgage standard
specifically, nor the Dodd-Frank law more generally.
Habitat is seeking legislative relief only after having
exhausted all other options.
The cost of compliance with the new mortgage regulations
has been significant. As the largest affiliate in North
Carolina, we are the only one to employ a licensed mortgage
originator in the State. She has spent most of the last year
becoming trained on the new standards, auditing our processes
to ensure compliance, and organizing our staff to prepare for
implementation this January.
Jill further works to guide other Habitat affiliates
through seminars and meetings and has devoted well over 1,000
hours to this process. This is only on the origination side of
the process. We have expended equal, if not greater, effort
preparing for the requirements of the servicing component of
these new regulations.
I can assure you that the compliance costs for most
affiliates has been high, and every dollar spent on compliance
is one that is not spent meeting local housing needs.
Habitat affiliates have worked hard to comply with the
thousands of regulatory changes, but there are a few
regulations that endanger an affiliate's capacity to serve
partner families without providing our homeowners or the
taxpayer any protection.
Habitat greatly appreciates Representative Meadows
introducing legislation, H.R. 3529, the Protecting Habitat
Homeownership Act, to provide relief from these regulations.
These few provisions focus on monthly documentation of fees and
interest, rarely relevant in a Habitat context, ability-to-
repay requirements that fail to recognize the long history of
success of the Habitat model, which provides home ownership
opportunities to individuals who do not qualify for traditional
mortgage products, and appraisal regulations that could
threaten Habitat affiliates' ability to continue to accept
donated appraisals.
With critical housing needs continuing to increase, Habitat
resources can be better spent on serving families than on
complying with regulations that ultimately provide protection
neither to our partner families nor to the taxpayer.
I would like to say a few words about the ability-to-repay
standards in particular. As drafted, these regulations have the
unintended consequence of discouraging Habitat affiliates from
working together to improve mortgage products. We in Charlotte
used to service mortgages for other affiliates, but the loan
limitation numbers prevent us from assuring compliance.
In conclusion, Habitat for Humanity of Charlotte is in
compliance with the law. However, knowing the human and
financial investment we have made, it is equally clear to me
that many of our affiliates cannot adequately make the same
investment. Over half of the housing built in North Carolina
comes from small and rural affiliates. Habitat offers a hand
up, not a handout. And we hope that we can eliminate any
inadvertent impediments to that approach.
[The prepared statement of Mr. Spencer can be found on page
93 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
Mr. Calhoun. Thank you, Chairwoman Capito, and Ranking
Member Meeks. It is an honor to testify before this
subcommittee, and an honor to be on this panel, particularly
with Mr. Spencer from Habitat for Humanity.
I have served more than a decade as a member of the Finance
Committee for my local Habitat in North Carolina. My brother is
a 25-year veteran of Habitat and currently serves as a project
director in Florida for the Habitat affiliate on the East Coast
there.
It is also very appropriate that Habitat is here today,
because it really brings us full circle. A lot of these
mortgage provisions--as people know, North Carolina was the
first State that adopted provisions to stop predatory
mortgages. And Habitat played a key role in that.
In the late 1990s, our affiliate, Self-Help Credit Union,
which has provided over $6 billion in financing for first-time
home buyers, found that borrowers we had been putting into home
loans were coming back to us on the brink of foreclosure. We
looked at the loans that they were getting, and they had
extraordinarily high interest rates and extraordinarily high
fees, and we knew these borrowers' credit histories and they
were far beyond that for which these borrowers qualified.
So, we undertook research to find out were they just
targeting our borrowers? Was this a limited phenomenon?
We searched deeds in the record books across the State, and
one of the things we found was that among the lenders being
targeted by these predatory lenders were Habitat for Humanity
borrowers. And indeed, 15 percent to 20 percent of Habitat
borrowers had been refinanced out of their zero interest rate
mortgages into subprime mortgages that were taking them--
stripping their home equity with high fees and leading them to
foreclosure.
As a response--and you will hear more of this perhaps in
the question and answer--Habitat adopted a protection by
putting on soft second mortgages that would protect that home
equity from these people who were targeted. And this wasn't
isolated. As a lender, we had companies offer to sell us target
sheets of borrowers in our geographic area who were having
financial difficulties, but had a lot of financial equity in
their home.
So that is how we ended up these 15 years later, with a lot
of pain in between, with a QM standard. And for those who doubt
that predatory lending is still out there, this is an e-mail
that came across my desk recently from a subprime lender today.
The subject line reads, ``This is the return of subprime
lending.'' The text goes on to say, ``This program is right
there next to the old subprime of our memories.'' They promise
to take the program nationwide by the end of last year.
So, subprime is back and ready there again.
A second reason we need the QM rule more broadly is that
the mortgage market is inherently a boom-and-bust market. And I
apologize for the small size of this, but if you look at the
real price of homes over the years, it is not steady. It goes
consistently up to high peaks and bottoms, and the problem is
that on those roads up to the peak, lending standards erode
badly.
And if you are a lender, it is hard for you to say, I am
not going to join in with the others, because you see all of
your business go elsewhere. So, that is why a rule was needed.
And to the CFPB's credit, they chose to adopt a rule that was
broad, bright-lined, and limited liability at the bequest of
industry, which we support, and they further have adopted
important measures to make it a two-tier model with key
protections for smaller lenders.
For example, they can charge an extra 2 full percentage
points of rate, which we supported, and still be a qualified
mortgage with a safe harbor.
To be clear, though, how broad this box is, any loan that
qualifies for FHA, that is a 43 percent baseline debt to
income. And remember that is before tax 43 percent. And with
compensating factors, it can go up to 50 percent. You can have
a loan that takes two-thirds of a borrowers' income and still
meets the ablility-to-repay standard.
And we believe at this state in the market, that is the
right approach.
On fees, the three-point limit does not include a lot of
standard fees. The average fees charged on loans--according to
Freddie Mac as of last week--was seven-tenths of one point for
origination points and discount points. So, we are talking more
than 3 times that.
We are glad you are holding this hearing. We look forward
to your questions, and as many members have said, we look
forward to places where this rule needs massaging, it should
be. But this is a broad rule that comes really close to what we
need.
[The prepared statement of Mr. Calhoun can be found on page
54 of the appendix.]
Chairwoman Capito. Thank you. I thank the witnesses.
And I will recognize myself for 5 minutes to begin the
question-and-answer period.
I would like to say at the onset how I view this hearing in
the context of where we are. I think the ranking member pointed
out, as many others have, that the rules have only been in
effect since Friday.
But I see this as being like when you go to the doctor and
you get a baseline on your blood levels and your mammogram and
other things that show you where to go, so that when we have
this hearing in another 6 months, we will be able to see where
our baseline was and to see what effect this rule is really
having.
So I think this is a setting for the base to see from where
the statistics can begin to grow.
That is where I am on that.
I would like to start with Mr. Emerson. At Quicken Loans,
if you could just quickly tell me--and you and I have had this
discussion. I don't think there is a full appreciation of how
broad and large your business is. So how many mortgages would
you say you write in a year and what does your average customer
look like in your average loan?
Mr. Emerson. Our average customer spans the scope of the
country. We serve all 50 States. We serve every area. We serve
anybody out there who has the ability to qualify and the
ablility to repay a mortgage.
Chairwoman Capito. Right.
Mr. Emerson. In the calendar year of 2013, we originated
$80 billion worth of loans. Call that roughly 400,000 clients
that we served in the year 2013.
Chairwoman Capito. Have you quantified and looked at how
many of those loans would fall beyond the QM standard? Have you
looked at that yet in your portfolio from 2013?
Mr. Emerson. Yes, we looked at it. We looked at it from
2010, 2011, and 2012, which arguably are some of the best
performing loans ever written. And depending upon when we first
looked at this and when the rules were initially put out, there
was upwards of 30 percent to 40 percent of folks who wouldn't
qualify. And, as the CFPB continued to work and tweak, we think
ultimately somewhere around 90 percent to 93 percent of the
market will be served with the current rule in place, absent of
course the affiliate fee issue that we are dealing with a 3
percent cap.
But again, you have to realize that doesn't include the
patches put in place for Fannie Mae and Freddie Mac and for
loans that run through those GSEs, which exist for 7 years or
until they come out of conservatorship. When that happens, or
when that shifts, now you have a different market and fewer
people will qualify at that point as well.
Chairwoman Capito. Right. Okay.
Mr. Hartings, in your community bank, you mentioned to me
when we first met, that you have a lot of agriculture.
Certainly, I think, the agriculture community has one of those
boom-and-bust cycles that Mr. Duffy was talking about. Some
years are better than others. How do you see the QM rule
influencing your ability to lend to those agricultural
households?
Mr. Hartings. It is obviously going to make it very
difficult, Madam Chairwoman, especially in those bust years.
When we look at our customers, they are long-term
relationships. So we are looking at the last maybe 10, 15 years
of their income often in the agriculture community, commodity
prices or we have a disaster.
So those individuals will probably be shut out of our
lending, because we do not plan to do non-QM loans. And the
other thing about those individuals who are farmers, they are
young people who come up through the farms. A lot of times they
carry a lot of debt because they are trying to help the family
farm. They live at home, and don't have much credit, but have
shown the ability to save their downpayment on their own. We
can look at their savings account. But in the secondary market,
a lot of times they are looking for four trade lines. And they
won't come up with those four trade lines. So their only choice
is a portfolio loan, something we can offer them.
Chairwoman Capito. Thank you.
Mr. Weickenand, we have a bank in West Virginia that has a
very similar program, or some similarities with your Orion Home
Run Program. And this kind of bleeds into Habitat for Humanity.
You are really serving a population that, were it not for
either the special provisions that you have or that Habitat has
or that our bank in West Virginia has a trust that was set up
to help people with downpayments who--and interest who would
never, ever be able to have a home--they are not going to be
able to--they don't feel comfortable with the way the QM is
written that they are going to be able to fall into these QM
with these charitable kind of programs to get home ownership to
those who couldn't enjoy it.
So, will you be able to move forward with your program, or
are you going to have to put a halt to it?
Mr. Weickenand. It has been put on halt anyway, just
because of the market itself. Foreclosures slowed down. And my
first responsibility is to sell the home out in the open
market. If I can't, then the home rolls into this program.
But the non-QM loans, just from a point is a--it is more of
a balance sheet kind of thing that we have to manage, because
between the concentration risk, interest risk, my ALM, I can
only hold so much--
Chairwoman Capito. Right.
Mr. Weickenand. --mortgage paper. So taking that ability to
resell these non-QMs to a secondary market is really indirectly
going to affect, obviously, 10 percent over the last several
years of our membership.
Chairwoman Capito. All right.
Mr. Meeks?
Mr. Meeks. Thank you, Madam Chairwoman.
In my estimation, there are a number of issues that are
concerning to me.
First, we have gone from--historically from red lining,
where African Americans, particularly, were denied loans,
period, to the point where they were given loans that were no-
doc loans or these adjustable rate loans, which was devastating
in the financial crisis, because when I observed some, they
were able to pay their mortgages for that first year. But after
that first year, when the rates went up, they no longer could
pay their mortgages.
And the fact that some who qualified for prime loans were
steered away from them and into another loan that was much more
expensive. What happens, unfortunately, in this society
sometimes is that individuals who are the poorest and need that
helping hand are the ones who are taken advantage of.
And it seems as though--not seems, it was a fact--that is
what took place in the financial crisis from which we are
recovering.
Now, on the other hand, we have individuals, as you heard
me talk about earlier, like my parents, who struggled to own a
home. It was their dream.
I don't know today--I couldn't tell you whether or not
under these rules, they would have qualified for a loan. I know
that they struggled. They had to take out extra money to make
the downpayment. And it was something that was open with the
banks, and the banks allowed it to happen.
And I also know that if it wasn't for a community bank that
knew them and looked at their overall history to judge whether
or not they would be able to pay that mortgage, they probably
would have been turned down. But they looked at their entire
history of how they paid their bills and what their income was.
And so, it wasn't a no-doc loan. They did the kind of
investigation that was necessary to make sure that there was in
fact income, and looked at their history to see how they
prioritized, how they spent their money.
So the question that presents itself now is whether or not
we are creating, or have a system that can try to resolve, both
of those issues, and that is why I think that this is
difficult.
So I guess I will throw my first question out to Mr.
Calhoun.
Because there are various reports which say that Blacks and
Hispanics will have a harder time obtaining credit, or will
mostly be given the higher-priced non-QM loans, now that the QM
rules are effective, can you just clarify what would be the
lending options or what lending options would still be
available to low-income Americans who may not be able to meet
the 43 percent debt-to-income limit?
Mr. Calhoun. Thank you.
First of all, as noted, under the current rules that a loan
can go beyond the 43 percent if it meets--any loan that would
qualify for FHA insurance is per se a QM loan. And we urged,
along with industry, that the CFPB allow for that extra
capacity. We also, for smaller lenders, urged for exceptions.
So, for example, your mortgage rates are about 4.5 percent
today. For community banks, they can charge up to 8 percent
interest today on loans. And that loan would still meet the
qualified mortgage safe harbor level. That allows for a lot of
extra features, risks to accommodate.
And we think the CFPB should do that and that it has made a
good faith effort. There may be places where they need to tweak
it.
For nonprofit programs, to be clear, the CFPB did set up a
program, an exception for nonprofit programs. A concern has
been whether these soft second mortgages count, because that
could be a problem. I know the CFPB has talked with Habitat and
tried to resolve that.
Mr. Meeks. Mr. Spencer, would you respond to that? What is
your--
Mr. Spencer. Yes. We are already pushing up against that
limit in terms of the number of mortgages that can be provided
and have the exemption available to us.
So our interest here is certainly narrow, in that we are
looking for the exemptions provided in H.R. 3529 so that they
become statutory as opposed to interpretive by the regulatory
agencies.
Our issue around this is that we are only doing qualified
mortgages at Habitat Charlotte.
So, the rule may have become effective January 10th, but we
have been working on this for a full year. And the reason we do
that, like many other Habitats, is that there are--I don't want
to use the term secondary market. We work with banks and other
lending institutions to provide balanced sheet capital. We are
concerned that they won't take those loans as collateral if
they are not qualified.
And so, we now are only doing qualified mortgages, which
potentially takes certain borrowers out of our pipeline.
Chairwoman Capito. The gentleman's time has expired.
Mr. Duffy?
Mr. Duffy. Thank you, Madam Chairwoman.
There is no doubt that before the 2008 crisis, there were
loans that were written which probably shouldn't have been
written, and given to people who probably shouldn't have
qualified, no doubt.
And I think today there are people who should qualify,
after the QM rule, who now won't be able to get a loan. The
pendulum has swung, I think, too far over.
We have heard a lot about predatory lending, and that did
go on, no doubt.
But to Mr. Meeks' commentary and questions, you had a
situation where his family--I don't know if they would qualify
for the QM rule or not--were able to go to a community bank or
a credit union and work with them in a way that treated them
fairly, and they were able to actually buy a home.
And I am fearful that the way this rule is written, low-
income and moderate-income minorities who had an opportunity
previously to work with a community banker to get a mortgage to
buy a house are the ones who are going to be left out.
And I think that is what happens when you have big
government come in and say, ``We are going to set the rules. We
are going to set the standards. We know what is best in small
town, rural America.
``You, the small town community banker and your clients
can't figure out what is best for the both of you, even though
you are going to hold that loan on your books.''
I don't think this rule serves our community well. It
doesn't serve low- and moderate-income individuals well, or
minorities well.
I guess--and maybe to that point, would--and maybe to our
three bankers, would you say that those mortgages you hold on
your books, those loans you hold on your books, and focusing on
those who are low- to moderate-income borrowers, there are more
lower- and moderate-income borrowers who would not meet the QM
rule? Is that fair to say?
Mr. Hartings?
Mr. Hartings. That would be a fair statement.
Mr. Duffy. Mr. Emerson?
Mr. Emerson. Yes, I think when you evaluate the 3 percent
test, and when you take a look at lower loan amounts, again,
specifically in the ranges of $100,000 to $150,000, fixed costs
are part of the origination process. And there are going to be
folks who fall into that bucket, who will fall outside of the 3
percent test, therefore falling outside of the QM rule.
Mr. Duffy. Mr. Weickenand?
Mr. Weickenand. Being from Memphis, I serve a community
that is over 60 percent African American. And a lot of loans,
like you said, 11 percent, affects a major part of these
individuals.
Now, my examiner procedures, based on this new rule, state
prices on--our prices on QM mortgages adequately to address the
additional risk, meaning, I don't want to--it is just not going
to serve my community if I have to charge somebody for
basically a mortgage I would have given them last year
differently because now there is this rule in place.
Mr. Duffy. And you are leading into my next question. So,
if you find a lower-income borrower who doesn't meet the QM
standard, are you going to make the loan and hold it on your
books? Are you going to charge them a higher interest rate and
higher fees?
Mr. Weickenand. I would not charge them anything higher.
The problem is on my balance sheet, I can only hold so much. So
if I do say, ``Okay, we are going to go full-bore into
nonqualified mortgages,'' there is a limited time I can do
this. So, there are only a limited amount of individuals I can
serve due to me managing my balance sheet risk.
Mr. Duffy. And I know it is a hard question, but you
actually assess risk, right? And you have to charge for risk.
And if you are not in a safe harbor, so you find someone who
doesn't qualify for--under QM, that is a greater risk to the
bank. So you are going to have to charge more for that risk,
right? I know you don't want to say that, but I have to imagine
you are going to charge more for the risk.
Mr. Weickenand. It would probably be the interest rate risk
during today's interest rate environment, because of the
interest rate you are going to provide them on the mortgage,
knowing full well that within the next few years, rates are
going to rise.
Mr. Duffy. And so, previously we were able to have--there
was predatory lending and we now frown upon that, right? It was
wrong. It was inappropriate. It was abusive. But now, under the
QM rule, in essence we are saying, ``Listen, it is okay; we
know you are going to charge minorities, low-income and
moderate-income people more because they are not going to meet
the QM standard.'' So, again, if you are wealthy, or you are
middle-class, you are fine.
That is why I have a hard time seeing how people can
support this rule when the people who can work with the
community bank and afford a home--who can work together and
afford a mortgage, are going to be charged more for it now with
this new rule. Am I wrong on this, Mr. Hartings?
Mr. Hartings. No, I don't think you are wrong at all.
Although our bank is making a decision not to make non-QM. If I
made a non-QM, I would have to look at things like the
litigation risk. I would have to look at risk to my bond
insurance, because my bond insurance is out there to protect me
against lawsuits. And that is going to probably go up.
I would look at things like my examinations. When examiners
come in and look at my bank for safety and soundness, they are
looking at loans that have lower credit scores. They are
obviously going to look at non-QM loans, so I may be under
higher scrutiny on the examination side of it.
So, there is a cost. There is a much higher cost to making
non-QM loans going forward.
Mr. Duffy. I appreciate everyone's testimony. I yield back.
Chairwoman Capito. Thank you. The gentleman's time has
expired.
I would like to recognize the ranking member of the full
Financial Services Committee, Ms. Waters, for 5 minutes.
Ms. Waters. Thank you very much, Madam Chairwoman. I would
like to thank you and our ranking member for holding this very
important hearing.
This has been an issue that we have all spent a lot of time
on for good reasons. We have experienced a subprime meltdown
that caused a recession in this country. And it has been very
painful for a lot of our constituents. And of course, it goes
without saying that we want our constituents to be able to get
mortgages. We absolutely support that.
However, we don't like the fact that too many constituents
were taken advantage of in too many ways. They were sold
mortgages that they could not afford. They didn't know about
the exotic products. Oftentimes, they didn't know what they
were getting into. They didn't know what was going to happen
when the devil came due on some of these loans. Mr. Meeks has
referred to some of these exotic products, whether they are no-
doc loans or no-interest loans, whatever.
And so now we are at the point where we have to figure out
how to make sure that our constituents have access to credit,
and the community banks that we are all working to give support
to have the ability to make these loans without having too much
interference, too much involvement, as you would term it, by
government, that you are able to make loans that work.
So we want to help the community banks, but we certainly
are going to protect our constituents and not allow our
communities to be devastated again by foreclosures in the way
that we have experienced. Now, having said that, we worked very
hard with the CFPB in order to make sure that there was a
difference between the community banks and the too-big-to-fail
banks. And we had very special things that we did. I want to
know why what we have done to differentiate between community
banks and the too-big-to-fail banks is not enough.
And I think I will start by asking this question of Mr.
Bill Emerson, chief executive officer of Quicken Loans,
Incorporated, on behalf of the Mortgage Bankers Association.
And before I get into the question, I would just like you to
know I love your commercials. They are so cute.
[laughter]
Mr. Emerson. Thank you very much.
Ms. Waters. And before you answer, I want you to know I am
going to ask you this question if it is not the right answer:
Who do you think I am, Quicken Loans?
[laughter]
Mr. Emerson. Quicken Loans is an independent mortgage bank,
so we are not in the typical community bank lending scenario.
And back to Representative Duffy's comments around the lending
that goes along with that.
As an independent mortgage bank, we don't have a balance
sheet. So at the end of the day, the loans that we are going to
originate and the consumers that we are going to serve, we need
to have a viable secondary market to be able to put that loan
into. And without that viable secondary market for a non-QM
loan, then independent mortgage bankers are not part of the
process and therefore competition, frankly, falls a little bit
by the wayside because you have lenders that can't participate.
So, I would have to defer on this one, Representative
Waters, to the community bankers sitting at the table here to
answer whether we should or shouldn't go further. I can tell
you from the MBA's perspective, the way that we think about
this, we clearly want to make sure that we are helping as many
people as we can. But we also don't know that we should be
setting up necessarily separate rules because we want some
consistency for the consumer to know exactly who they are
working with and with whom they are dealing.
Ms. Waters. We differentiated because we wanted to make
sure that the community banks did not have the kind of
regulations that you thought would be harmful to you. And what
are you telling us? We didn't do enough?
Who are you saying that you want to answer the question?
Yes, go right ahead.
Mr. Hartings. I am a community banker. And I think what you
realize under the QM rule is that we are trying to regulate the
integrity of the product and not regulate the integrity of the
institution. And I think the CFPB took a step in the right
direction trying to create a tier. The issue is, I am a $400
million bank. And their tier is this: It says if you are less
than $2 billion, and you originate less than 500 loans, you
have the small creditor exception.
In 2012, I generated 493 loans. So, I would like to grow. I
would like to continue to serve my customer, but I am right at
the edge of losing my status. So, really, the issue is a much
broader exception. I think tiered regulatory modeling makes a
lot of sense. I like to say--I had this quote in The Wall
Street the other day, ``Community banks weren't the problem,
but QM is the fix--it affects us anyhow, with everybody else,
and we are kind of thrown under that blanket.''
So it is really the amount of that exception that we see
needs to be expanded to really be effective. Because at the end
of the day, we want to see more consumers get loans, rather
than less. And if this rule has the--actually contracts the
lending instead of expanding it, then it is not doing its job.
Chairwoman Capito. The gentlelady's time has expired.
Ms. Waters. Thank you.
Chairwoman Capito. Mr. Bachus?
Mr. Bachus. Thank you.
Mr. Emerson, I am going to ask you this question. As you
know, the current QM rule includes affiliated title insurance
in the 3 percent points and fee trigger, but unaffiliated title
insurance is not included. Since title insurance rates are
filed by underwriters and have to be approved at the State
level, or the State determines the title insurance rate for
both types, is there any reason to differentiate between
affiliated versus unaffiliated title insurance? And is there
any benefit to the consumer if the title insurance is purchased
by an unaffiliated title agent?
Mr. Emerson. The simple answer to that question is no,
there is no reason to differentiate between those two on that
basic piece of information around title insurance. If you look
at the rule, unaffiliated title companies, all charges for the
title company are excluded from the 3 percent fees.
All of the fees for an affiliate are included. And what the
industry has been looking at from an affiliated perspective is
saying, take the title insurance, that one regulated piece
which is the same as that filed by an underwriter at the State
level--and a title agent must use that filed rate; they can't
take it higher, they can't take it lower--and exclude that from
the 3 percent piece for affiliates, because by not doing so you
are putting a different playing field together for an
affiliated versus a non-affiliated title company.
And when you think about a non-affiliated title company,
they are working with the same lenders and the same people
every day. They are getting business on a regular basis from
those folks. And so, there is an advantage for them doing that.
From an affiliated perspective, actually with--now with the
CFPB, and the fact that you have to manage your venders, you
have very tight controls over that. And so, I think, putting
that in place, it makes zero sense at all to differentiate on
title insurance and the affiliated-unaffiliated piece.
Mr. Bachus. Right, and of course, the rule does, which I
agree doesn't make any sense.
Mr. Scott, back on May 21st said, ``I mean to do so,'' in
other words, putting affiliated under the fee trigger reduces
competition in the choice of title servicers and insurance
providers. So, it just reduces choices. And I don't see any
reason why we ought to discriminate. I think that is one thing
we ought to address.
What effect does putting affiliated title insurance under
the 3 percent points and fee trigger how--what effect does that
have on consumers? Particularly low-income consumers or--
Mr. Emerson. Sure. I think it affects them in two ways. The
reason that we got involved with an affiliated title provider
was to provide service to our client, to provide a seamless
end-to-end solution. It had nothing to do with the ability for
us to make more money on the transaction. Frankly, when you
think about it, our title company actually works with other
lenders. So, our title company has proven that they are
competitive and they do a great job.
The benefit to the consumer is an end-to-end seamless
process. Where it hurts the consumer is that if you are working
with a lender that has an affiliated title company and you
include those fees into that, you are not going to qualify to
deal with a lender that has an affiliated title company where
you would qualify to deal with a lender that doesn't have an
affiliated title company. And as a result of that--again and
that bucket was particularly between $100,000 and $150,000,
less competition and less opportunity for folks to be able to
get mortgages, because they are working with a lender that has
an affiliated title company.
Mr. Bachus. I fail to see why they made that distinction.
Mr. Calhoun, I agree with you. The problem is that
sometimes it is high fees and high interest rates. Those are
the two big problems and this doesn't have any impact on that.
In fact, it could lessen the fee. There are not a lot of HOEPA
loans made, because of legal uncertainty.
So my next question to Mr. Emerson or any of you is, aren't
we going to have the same problem with non-QM loans? There is
no secondary market--no liquidity for HOEPA loans. We are going
to find the same thing happening with these non-QM loans, and
what impact will that have on low- and middle-income borrowers?
Mr. Calhoun. If I may answer with that, there have been a
number of articles recently that have quoted lenders saying
that they intend to do non-QM loans, and that over time they
expect the secondary market to develop. The liability on a
HOEPA loan is orders of magnitude higher than it is for a non-
QM loan. The liability is actually very limited.
Mr. Bachus. Do we know that? Because we are dealing with a
blank slate. We don't know what people are going to rule. But,
I can understand at some point you say it is clarified. It is
only clarified after those loans are made. And they are going
to charge higher interest rates if there is legal uncertainly.
Chairwoman Capito. The gentleman's time has expired. Mrs.
Maloney?
Mrs. Maloney. Thank you. I appreciate all of your testimony
today.
And I understand your legitimate concerns of wanting to get
borrowing and loans out to credit-worthy Americans.
But we have to start somewhere. And this CFPB rule is a
beginning point. And I might add, I think it is a long time in
coming. It came out last Friday, and it has been almost 5 years
since the financial crisis. The purpose of this rule is to
prevent another financial crisis from happening.
So I would like to ask every panelist for just a yes-or-no
answer. Do you believe that the financial crisis merited
serious reform of the mortgage industry, or should we have just
left the industry just like it was with its no-doc loans?
Do you think it merited reform? Yes or no?
Starting with Mr. Hartings?
Mr. Hartings. It would be a qualified yes. I would like to
expand on that a little bit.
Mrs. Maloney. Okay, if you would like to put it in writing.
Yes or no? Qualified, yes.
Mr. Emerson. Yes, qualified.
Mr. Weickenand. Yes.
Mr. Spencer. Yes.
Mrs. Maloney. And we will accept your other answers in
writing, but I want to get to a second question.
If this rule had been in place, flawed as it is, would it
have prevented the financial crisis--in your opinion--from
which we are still suffering?
Qualified yes or no? And put the long part in writing.
Mr. Hartings?
Mr. Hartings. I don't know. I can't answer that.
Mr. Emerson. I can't do that either.
Mr. Weickenand. I am with them.
Mr. Spencer. No.
Mrs. Maloney. You don't believe it would?
Mr. Calhoun. Absolutely. Let me give you one example.
Mrs. Maloney. You will have to put it in writing--
Mr. Calhoun. With ability to repay, Countrywide said 70
percent of their loans would not have qualified.
Mrs. Maloney. Okay, but the answers, if they could come
back in longer form to me, because I really want to get to this
one.
I think that what we are seeing is that there is a very
fine line between what we want to accomplish. We want to
prevent a future financial crisis, but we want hardworking
credit-worthy Americans to have access.
I know wealthy people will always be able to get a loan.
They could be leveraged very highly with all their assets. But
hard working people oftentimes cannot get loans, as my
colleague from New York pointed out so beautifully in his
opening statement.
I think that we share the same goal and principles, that we
want to get this out, but we need to find this fine line. So
what qualifications would you suggest to arrive at this careful
balance, if you believe the balance that has come out from the
CFPB is not the right balance?
We will be able to study it over the future with data and
their research and monitor it, but I would like to ask each of
the panelists if there were other qualifications or another way
that you think would have had the fine line of protecting our
overall economy from abuse, financial crisis, but getting that
loan out to the qualified, hardworking, moderate-income
American?
Mr. Hartings?
Mr. Hartings. Yes, I would like to speak about tiered
regulatory modeling, because as a community banker--I know
Congressman Meeks talked about adjusted rate mortgages, and
there was some really predatory lending made on adjustment rate
mortgages. But we recently had to redo our disclosures due to
the new changes in the mortgage rules. And I went back and 17
years ago I used a different adjustable rate index, and I still
have 20 of those loans on the books.
Now, if that was predatory, those people would probably
have paid me off, but as a community banker, someone who keeps
it on the portfolio, I can't allow that kind of product to be
out there. So, a tiered regulatory model, when you try to be
this prescriptive on what a qualified mortgage is, you can
create something that is very safe and sound, but it is going
to be very exclusive and you really will want to be more
inclusive.
And I think the only way to do that is a tiered regulatory
model for those in portfolio, or the smaller lenders, and I
think that is the best solution.
Mr. Emerson. I would give you four things that should be
done.
Number one is, I think we should expand the QM safe harbor
rule. Right now, it is rebuttable presumption, at 150 basis
points over APOR. I think you should take it to between 200 and
250. I think you should increase the threshold for smaller loan
amounts and have a sliding scale, and the MBA has attached a
chart that would kind of define how that would work, and I
think that would bring more folks into the program.
We have already testified, I think that we have to have the
ability to make fixes to mistakes that take place and the care
that exists and help it today. And then, one of the things--and
I think the CFPB has tried to do a very good job of giving
guidance. But, a lot of that guidance is oral. And the more
written guidance we can get, the more clarity will be out there
and the more certainty for people to understand the rules.
Chairwoman Capito. I think the gentlelady's time has
expired.
I will let the next person go ahead and answer it while we
get the clock reset.
Mr. Weickenand. We have been doing qualified mortgages
since I entered the industry. That is all we do. We do not put
people in situations where they cannot be qualified now. What I
can say is for a qualified mortgage or a qualified auto or
anything like that, I know that market in Memphis, and I can
make those decisions. The rules themselves, based on not being
able to sell to the secondary market, will hinder our ability
to make some of those decisions. And I think that is a real
problem.
Chairwoman Capito. Thank you.
Unfortunately, the two timers that many Members use to
gauge their questions have for some reason ceased working. So I
guess I am going to have to say, trust me, I will give you your
5 minutes. How does that sound?
Our next questioner is Mr. McHenry.
Mr. McHenry. Thank you, Madam Chairwoman. If you don't
mind, I will keep my own time.
[laughter]
Chairwoman Capito. I said, trust me, not you.
Mr. McHenry. Oh. That is a better choice. So, thanks.
Reclaiming my time, both seconds left.
In June of--let me start this way. Is the panel familiar
with the disparate impact regulations put forward by HUD
earlier this year?
Okay. Some of you are familiar with them.
Mr. Calhoun, are you supportive of the regulations as HUD
has promulgated them?
Mr. Calhoun. Yes.
Mr. McHenry. Okay, all right. But in June of this year, a
group of industry trade organizations representing the mortgage
industry sent a letter to Director Cordray of the CFPB and
Treasury Secretary Donovan, highlighting the regulatory
conflicts that would result if CFPB's QM regs, on one hand, and
HUD's disparate impact rules promulgated earlier this year
under the Fair Housing Act.
And the letter states, ``These and other rules implementing
Dodd-Frank, including those governing ability to repay and risk
retention, will tighten credit standards through facially
neutral requirements that may lead to disparate outcomes for
some category of borrowers.''
It goes on to claim that this lack of guidance will create
uncertainty, resulting in higher prices to account for risk and
less available credit for consumers. So, Mr. Calhoun, do you
believe that this regulatory impact could have a negative
impact on consumers? On the one hand, disparate impact
standards, and on the other, QM, and perhaps restrict mortgage
lending unnecessarily and result in lawsuits?
Mr. Calhoun. No, for two reasons. Historically, lenders who
chose not to do subprime lending, obviously that had a
disparate impact since half of all African-American loans were
subprime. There were no actions, private or public, brought
against them for that decision.
And we have already had responses from the regulators
saying that a lender's choice of just doing QM loans will not
be used against them in a disparate impact situation for that
analysis.
Mr. McHenry. Okay. Mr. Emerson, has your industry received
assurances from the government that they are not going to
pursue suits if you follow the box of QM, but disparate impact
suits?
Mr. Emerson. So, to get to that point, obviously I think
our industry and the MBA strongly supports the Fair Housing
Act. But what we have now come in context with is the CFPB and
some regulators have come out and said what Mr. Calhoun
indicated.
But what we haven't heard is we have not heard from HUD and
we have not heard from the DOJ. And HUD is the group that
promulgated that rule and the DOJ enforces it.
And I think when you are thinking about the industry and
where there is a bend in the industry and what has taken place
through repurchase processes, as well as HUD OIG and DOJ
actions, I think there is a lot of nervousness around that by
not hearing from those two groups.
So some guidance from those two groups would be
tremendously helpful for the industry to know exactly where
they stand on the disparate income issue.
Mr. McHenry. Mr. Calhoun, do you agree? I see you nodding.
Mr. Calhoun. I agree that additional guidance would be
helpful.
Mr. McHenry. Okay. Certainly.
And I certainly appreciate your organization, Mr.
Calhoun's, support for dealing with the added pressure of
litigation as a result of QM. Those that follow the strict QM
standards, they will not be pursued. And I certainly appreciate
that.
I know we have disagreements on the final construct and the
impact it will have in the marketplace.
But, Mr. Hartings, in terms of the Community Reinvestment
Act, do you think it is possible for financial institutions, if
they are doing mortgages, to meet their CRA requirements if
they are only doing QM mortgages, or does it make it much more
difficult?
Mr. Hartings. It may be a wait-and-see. It certainly will
make it more difficult--as you get to be a larger lender, you
also have to have an investment test as well as a lending test.
If it reduces your mortgage volume, certainly there are
some safe harbor percentages that if you are below that, you
may have to have more documentation. So I believe it would make
it somewhat more difficult to receive a satisfactory CRA
rating.
Mr. McHenry. Okay. I certainly appreciate the witnesses'
testimony today. We obviously do have deep concerns.
And this is really a deep concern not about the industry,
but about your ability to provide products to my constituents
who desperately need them. Especially those who are in
moderately-priced homes where the question of points and fees
in moderate-income areas, especially in my district, where
because of the moderate income and the moderate price of the
home, the points and fees have such a larger percentage,
disproportionate to the cost of the loan. And we need to make
sure we work through that.
And with that, thank you, Madam Chairwoman.
Chairwoman Capito. The gentleman's time has expired.
Mr. Hinojosa?
Mr. Hinojosa. Thank you, Madam Chairwoman.
I am very interested in hearing from the panelists about
the possible effect of this rule on the continued health of the
housing market, and in particular the continued involvement of
community banks and credit unions in the mortgage business.
Credit unions and community banks in my congressional
district in deep south Texas are essential to the local
economy.
My question to Mr. Calhoun: Not only do they provide
competitively priced and fair mortgages, they contribute to
local economic growth and community cohesion. So do you think
that making banks and credit unions more attentive to
underwriting nontraditional loans will help make the mortgage
lending system healthier and safer?
Mr. Calhoun. Yes. And to be clear, we are very strong
advocates of the community banks. I think in addition to the
mortgage lending they do, they do about half of all small
business lending, and the mortgage lending is needed to both
serve mortgage borrowers and also to support the institutions
for all the other reasons you have there.
We have supported, as I say, the two-tier model with
special provisions for community banks. There are places where
we are on record and are still working to push further.
For example, we think some of those loan caps are too
restrictive both for the community banks and for the
nonprofits. We do have concerns, though, about a complete
portfolio exception. There are some banks where we have
reviewed programs which have had 30 percent and 40 percent
foreclosure rates on portfolio loans under the old model of
lending to people with lots of home equity. And we need to have
some backstops for that.
But community banks need special treatment, and we fully
support that under the QM rule and in general with the
regulatory approach.
Mr. Hinojosa. Under the QM rule, they tell me that many
loans will not be made because they are below the 43 percent
threshold that you spoke about that actually can go beyond 43
percent.
So how do we let both the lenders and the borrowers get
that is possible, up to about, say, 50 percent? How do we do
that?
Mr. Calhoun. I think in two ways. First of all, there is
the so-called patch that allows any loan that qualifies for GSE
insurance, or FHA insurance does not have to be sold or insured
by them. If it is eligible, even if it is kept on portfolio,
that is, per se, a QM loan. It goes up to 50 percent.
We have urged, and we did with a joint comment with
industry that covered most of the mortgage market, that the
CFPB should use their data collection and develop specific
broad criteria that would allow these so-called compensating
factors for responsible lending above 43 percent, particularly
by small lenders.
Mr. Hinojosa. Okay.
Mr. Weickenand, many African-American and Hispanic home
buyers are steered into subprime loans when in fact they
qualify for a prime loan. So can you remind us of the
prevalence of this practice during the subprime crisis? And how
will these new rules change that practice?
Mr. Weickenand. I can't really speak to what others were
doing. I just know that what we do is to provide quality
products at low cost to sort of raise the water a little, if
you will, of our entire community, which makes everybody's boat
rise.
We are very, very sensitive to trying to improve the lives
and the livelihoods of all of our members in our community at
large.
So, we don't touch subprime. That is why we have a
nonqualifying--the balance sheet limitations, plus the taste in
my mouth of having to price these things differently, when last
year I would not have to. So, I don't want to do that to my
members.
Mr. Hinojosa. Mr. Spencer, now that the QM rules are made
effective, can you clarify for us what lending options are
still available for low-income Americans who may not be able to
meet the 43 percent debt-to-income (DTI) limit?
Mr. Spencer. I can't really speak to the broad options
available, but I can speak to what we are having to do. Our
fear is the following: If you look at our borrowers, they would
be subprime except for the fact that we are providing no-
interest loans. And so, they become qualifying mortgages, but
the borrowers themselves could not qualify for a commercial
mortgage under the same terms.
And so, that is why we are asking for the relief in H.R.
3529 because we don't believe this rule is intended to address
the ministry we are pursuing. And we hope that bipartisan
support will allow that rule to be enacted.
Mr. Hinojosa. My time has run out.
Chairwoman Capito. The gentleman's time has expired.
Mr. Hinojosa. I yield back.
Chairwoman Capito. Thank you.
Mr. Westmoreland?
Mr. Westmoreland. Thank you, Madam Chairwoman.
I thank all of you all for being here today. I am a
reformed homebuilder, I guess. And when you have somebody apply
for a loan, if they are turned down for any reason or if the
loan is not--typically, there are some explanations given for
why the loan is turned down.
And Mr. Hartings and Daniel, if you were to turn down
somebody's loan because it was not QM-compliant, what would you
give as the explanation for having denied that loan?
Mr. Hartings. It is a little different when you don't have
a product that is available to them. So what you would tell
them is, we do not offer non-QM-qualified loans, so I can't
help you out. You do not have to file an adverse action if it
is not a product that you are offering.
But it is a shame. I offer what I call an HBA program,
which is homebuyers assistance for those who have less than 20
percent down and I portfolio that loan. But I do it at a higher
interest rate because I don't charge them PMI insurance. And I
have already scaled it back. I used to allow 5 percent down. We
have scaled it back to now only 10 percent, because we were
running into the higher-priced mortgage issue.
That product may go away completely. I have been doing that
for a little over 10 years and I have never had a foreclosure
in that product because we use a lot of compensating factors.
It is not just DTI.
Mr. Westmoreland. Thank you.
Daniel?
Mr. Weickenand. It would be the same response. We wouldn't
offer that product to them at this time, and unfortunately
couldn't serve their needs. And that is--
Mr. Westmoreland. Mr. Spencer, we hear from the other side
of the aisle quite often that we need to pursue policies to
have low- and moderate-income people be able to obtain a loan.
And I certainly agree with that. I was in the business, and I
have seen what a difference owning a home makes in somebody's
life, much as the ranking member shared about moving out of the
housing project into a home. So, I very much want to do that.
Do you feel that the QM is going to hurt that goal?
Mr. Spencer. We believe that not just QM, but that the
specific issues that H.R. 3529 addresses gives us certainty in
being able to pursue serving these customers, these clients,
these partner families. And that certainty is important because
we are dependent upon raising dollars to do that. But we also
finance parts of our balance sheet by having loans that can be
pledged as collateral.
Now, that is not the same as the secondary market that led
to the housing crisis and the financial crisis. But it is an
important aspect of how we assemble capital for affordable
housing. And so, we have to have loans that are recognized and
don't create a liability for us or for a potential financial
partner who might want to partner with us, like the Self-Help
Credit Union has in the past, or community or large banks.
Mr. Westmoreland. Could you describe for the committee who
might be an individual who would be qualified or be somebody
that you would make a loan available to who would now not be
able to get that same loan?
Mr. Spencer. Our target market is people who, as a
household, are between 30 and 60 percent of median income. And
I am now speaking for the Charlotte affiliate, but this is
generally true of Habitat more broadly. And to qualify, our
folks have to have income, but they might have a medical debt
that would throw them out of the QM measure.
In the past, we have been able to work with them through
financial counseling and, over time, help them pay that down.
Whereas now, we are only doing QM loans to obtain the certainty
that we need to be able to continue to move forward with our
housing.
Mr. Westmoreland. Thank you.
And I yield back.
Chairwoman Capito. Mr. Scott?
Mr. Scott. Thank you, Madam Chairwoman.
First, let me go to you, Mr. Calhoun. We have a bill, H.R.
3211, with which you are familiar. It has significant
bipartisan support because it is a compromise. It is a
compromise that was made to address many of your concerns and
the concerns of other consumer groups.
We have worked with Ranking Member Waters. We have worked
with former Congressman Mel Watt for months. We have made
noumerous worthwhile provisions. We have made changes. We have
removed certain things that you objected to because we listened
to you. We respect you. We know your work in the community.
So, we have this new bill that has your input and the input
of others. And what it represents now is the bare minimum that
is needed to do the most crucial thing, which is to level the
playing field enough so consumers can choose one-stop shopping.
Are you happy with this bill now? Can we move forward? We
appreciate your contributions to it. And are you supportive?
Mr. Calhoun. Thank you for those comments and for your work
with us. And I would like to say we have worked closely with
Mr. Emerson in trying to hammer out something that would work
for everything, not everyone's first choice.
We still have concerns on the title insurance for fears
that this bill would actually create an unlevel playing field
and it would harm consumers. And let me start with just one
figure. The latest data on title insurance for 2012 is that
over $11 billion of title insurance premiums were collected.
During that same year, $765 million of claims were incurred,
for a loss ratio of 6.8 percent. And that has been a typical
loss ratio that they have had over the last 10 years.
Mr. Scott. Let us address that. That is a good concern, the
title insurance.
So, Mr. Emerson, let me ask you, you are with Quicken
Loans. You do a lot of work on this. You probably could have
effectively answered some of this. In fact, what effect does
discriminating against affiliate title companies that Mr.
Calhoun is pointing out, have on competition?
Mr. Emerson. Two things to that.
Number one, to Mr. Calhoun's point, we are not debating
what the price of title insurance should or shouldn't be. The
discussion has been, is there an opportunity to have a level
playing field around an affiliated and a nonaffiliated? Because
each one of them will have the same amount of title insurance.
The fee will be the same. And that has been what we are talking
about, because there is no harm to the consumer in that
particular situation.
What it does for an institution like ours, in which client
service is very important to us, is it takes us out of the game
in a lot of cases, because we chose to affiliate with a title
company to provide better client service, and there will be
clients that we cannot help today, that we could have helped
last Thursday.
Mr. Scott. Will discriminating against affiliate title
reduce the cost of the insurance?
Mr. Emerson. No, it won't reduce the cost of the insurance
one bit.
Mr. Scott. Which consumers do you feel will be most
affected by the reduced choices created by the 3 percent cap?
Mr. Emerson. We believe it is the same consumers who will
be affected by the 3 percent cap anyway, and that is going to
be the lower loan amount folks, the folks between $100,000 and
$150,000, the folks who will be first-time home buyers, the
folks who will help this economy come back from a housing
perspective and they are the ones, just add on top of that one
more fee and title insurance.
Mr. Scott. And fine, let me go back to you, Mr. Calhoun.
Title insurance is regulated at the State level, not the
Federal level. I think that is important for us to understand.
So if the title costs and regulations are done at the State
level, shouldn't you be working on legislation and regulation
in the States to address your concerns rather than at the
Federal level?
Mr. Calhoun. The regulation varies among the States. About
10 of them don't regulate the price. Others use very different
procedures.
The concern is the difference between those two numbers I
gave you goes for affiliated insurance largely to the lender,
which gives them an advantage over other lenders because they
are capturing that difference and the effect of that is to push
title insurance rates going up.
Title insurance rates should be going down with automation.
But title insurance has become more expensive over the last
decade for borrowers. There has not been the adjustment in a
functioning market that you would expect. And borrowers are
paying--we are talking about a fee that could be several
thousand dollars on the typical home loan.
This is real money to home buyers, and that is our big
concern. As I said, we continue to work with Mr. Emerson and
see if we can find something that works for lenders like him,
but that don't fuel this increasing cost of title insurance,
which is already too high for homeowners.
Chairwoman Capito. The gentleman's time has expired.
Mr. Luetkemeyer?
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
Recently, I met with a group of Missouri bankers who came
to my office after they had been to visit some CFPB
representatives over at their building. And my bankers were
talking about the things that we are talking about this
morning, the QM rule. And they were told by the CFPB
representative that they were the 41st group to meet with them.
Basically, the gist of the conversation at the end of it
was, ``Thank you for coming. We know more about the effects of
what is going to happen to the borrowers, the lenders, and the
market than you do,'' which is very concerning.
So, as a result of that, myself and a number of my Missouri
delegation members wrote to the Director and he responded back
to us, and Madam Chairwoman, I would ask unanimous consent that
those two letters be made a part of the record.
Chairwoman Capito. Without objection, it is so ordered.
Mr. Luetkemeyer. And, in the letter, the Director
indicates--he says, ``The Bureau shares your concern that
regulation should not place unnecessary burdens on community
banks. We recognize that, with few exceptions, community banks
and credit unions did not engage in the type of risky lending
that led to the mortgage crisis.''
We are glad to hear that the Director and see the Director
believes where the problem was, and hopefully he will be
willing to work with the committee and with the new legislation
that comes out of this as a result of our hearings today,
because it is pretty obvious that there are a lot of negative
effects that are occurring here.
Along that line, I would like to talk with the lenders here
for a moment and sort of get some things clear. Mr. Hartings,
Mr. Weickenand, and Mr. Spencer, I think all three of you have
mentioned this morning that you are not going to be doing non-
QM loans. Is that correct?
Mr. Hartings. That is correct.
Mr. Luetkemeyer. And Mr. Emerson, I didn't hear your--
Mr. Emerson. Yes, that is correct.
Mr. Luetkemeyer. You are not going to be doing that either,
Mr. Weickenand and Mr. Spencer, is that correct?
Mr. Weickenand. Yes.
Mr. Spencer. That is correct.
Mr. Luetkemeyer. Okay. Why not? Give me a really quick
answer, because I have this lady behind me who has a stop watch
on me, and General Ronald Reagan once said, ``Trust, but
verify,'' but since she is a really nice lady, I am not going
to verify. I am going to trust her. But I do need to get done
quickly here.
Mr. Hartings. As a community banker, we like to keep things
simple to be able to afford to do it in our setting. I don't do
higher-priced mortgages today for the same reason, because of
the extra regulatory burden, the real fear of litigation, and
what that means long term.
I know we talked about this as marking it today and we will
know 6 months from now or a year from now how it is really
affected. But, my concern is those consumers who want to buy a
house between the next 6 months or the next year, because they
are going to be harmed if we are not right about this
regulation. And I believe that it will restrict credit.
Mr. Luetkemeyer. Mr. Emerson, please?
Mr. Emerson. I agree with Mr. Hartings. And, I would add to
that, by the very nature of QM and that is the loan that you
should be making and there is a stigma that lending outside of
QM is a loan that is not necessarily a good loan. You think
about reputational risk, you think about re-purchase risk, you
think about the liability associated with that and not to
mention the fact, as I said in the testimony, that there isn't
a secondary market for a non-QM loan.
So even if an independent mortgage bank wanted to originate
that loan, which we don't want to, you couldn't because there
is no place to effectively sell that loan.
Mr. Weickenand. I would agree with the gentleman previously
that, for us, the idea of charging more for a loan that I
wouldn't have charged differently from the previous year is
just something I can't stomach. Plus the fact that balance in
my balance sheet, with the ALM concerns and things of that
nature not being able to offload loans like I am today. It will
impact--and according to my records for the last 3 years if you
just assume it is 11 percent, which may not seem a lot unless
you are part of that 11 percent.
Mr. Luetkemeyer. That is right.
Mr. Spencer?
Mr. Spencer. We need certainty.
We need to know that we are within the bounds and I can say
that I am sitting here representing 278 other affiliates who
signed the letter in support of H.R. 3529, and we hope that we
can get that certainty rather than trying to sort out
uncertainty in the regulations as we have heard earlier.
Mr. Luetkemeyer. Mr. Emerson, I think you hit on the point
I was trying to get to here that is the heart of this matter.
And that is, if it is a non-qualified loan, automatically there
is a perception that there is a problem there or there is
something that doesn't fit into the box. And while before these
rules, the bank had the flexibility to price a loan and look at
the customer and be able to figure out what was best not only
for the customer, but what would work best for the bank. Now
that flexibility has been taken away from them, and if it
doesn't fit in the box, it opens you up to this--the opposite
of what can happen here is that if it doesn't fit in now, all
of a sudden it is a negative.
There is an exposure--there is a risk there.
And my concern is, have any of you talked to your
regulators about the problem that this could have when they
come in and regulate you?
Is this the reason you stepped back? Because if a regulator
comes in and sees you have a lot of non-QM loans, what are they
going to do? They are going to assess that, I assume, against
your capital or do you have an extra fund to sort of go back
against for these funds or have you talked to them at all about
this?
Mr. Hartings. I have reached out to my regulators. It is
kind of a wait and see today. I would like to comment on
something a little different, what Mr. Emerson said, and he
talked about the secondary market and not being able to
portfolio these loans.
That is the advantage of allowing community banks to
portfolio these non-QM loans, and still have safe harbor. We
would put these on our books if we had the safe harbor that
went along with it. It is that litigation risk that is
preventing us from continuing to make non-QM loans.
Chairwoman Capito. We can do quick answers, because the
gentleman's time has expired.
Mr. Emerson. I don't have anything to add to what we
already added on my previous response.
Mr. Luetkemeyer. Okay.
Mr. Weickenand, anything?
Mr. Weickenand. No.
Mr. Luetkemeyer. Thank you, gentlemen.
Chairwoman Capito. Thank you.
Mr. Ellison?
Mr. Ellison. Thank you, Madam Chairwoman, and thank you
Ranking Member Meeks, and I would like to thank all of the
panelists as well for your hard work and the information you
bring to this process.
I would like to ask some questions of Mr. Emerson.
Mr. Emerson, obviously Quicken does a lot of loans. Could
you tell me what percent of the loans that you guys issue, what
percentage of borrowers choose not to use Title Source or other
title insurance firms affiliated with Quicken?
Mr. Emerson. I don't have that at my ready. I would give
you a range probably 5 percent of the time, 5 percent to 10
percent of the time.
Mr. Ellison. Thanks a lot.
I did look at your testimony, and I thank you for providing
it. On page 6 and 7 of your testimony, you stated that, ``The
rationale for excluding title insurance paid to affiliates from
the calculation of points and fees is unclear.'' I respectfully
submit that I would disagree with that. Congress required the
CFPB to exclude affiliated title insurance companies from the
points and fees cap, explicitly. Why? To lower costs for
borrowers and increase transparency in mortgage transactions.
Also, in your testimony you say that, ``Studies have shown
that when affiliates have been excluded from the market, title
insurance charges have risen.'' That is not what my research
shows. I would be happy to be better educated on the subject.
Could you identify which studies you are referring to?
Mr. Emerson. I am not sure exactly what you are referencing
in the testimony. What I can tell you is from a title insurance
perspective, I can appreciate the fact you disagree, but we
just had the dialogue around and the regulation around title
insurance. What we are not debating is any other title fees. We
are not asking for closing fees or anything else associated
with that. I think those are obviously--
Mr. Ellison. Thank you, sir. I do appreciate your answer.
I was just hoping to look at those studies, because in your
testimony you say, ``Studies have shown that when affiliates
have been excluded from the market, title insurance charges
have risen.''
I would like to read those studies, because if they are out
there, I want to know more about the issue.
But, let me also say that there has been--this question has
been looked at. And, I would submit that the studies you are
referring to either don't say that or say something quite
different and any way--
Mr. Emerson. That is so--
Mr. Ellison. Let me finish. I have also looked at a number
of studies, including those by the Urban Institute, the GAO,
and just last month the Consumer Federation of America, and the
National Association of Independent Land Title Agents, calling
for major reform in the title insurance industry.
I actually would like to submit for the record some of the
testimony of Bob Hunter from the Consumer Federation of America
before the New York State Department of Financial Services on
December 10, 2013. And I would also like to submit for the
record the testimony of the National Association of Independent
Land Title Agents before the National Association of Insurance
Commissioners on December 16, 2013.
Chairwoman Capito. Without objection, it is so ordered.
Mr. Ellison. Yes.
And the CFA testimony asserts the title insurance system is
highly concentrated, opaque, and results in reverse competition
and raises cost to consumers. The one-stop shop system that has
been praised in some quarters is in essence a noncompetitive
and already overpriced marketplace, and for each title
insurance payment a consumer makes, what I am curious to know
is what percent of that fee from Title Source, or another
affiliate, is provided back as commission on investment to
Quicken?
Mr. Emerson. There are two things I will address. Quicken
Loans receives nothing back from Title Source. Title Source is
a completely independent company. And so, there is nothing that
will transact back from that. And testifying on behalf of the
MBA, we will be happy to provide you the information and the
studies we looked at to come to those conclusions.
Mr. Ellison. I appreciate that, sir. So annually, I am
curious to know how much Quicken Loans earn in revenue from--
you said none from Title Source, so they should be a zero?
Mr. Emerson. Yes, Title Source is an independent company.
Mr. Ellison. And Quicken doesn't make any money from--
Mr. Emerson. Correct.
Mr. Ellison. Okay.
The Consumer Affairs Web site shows that there are issues
going on about Quicken Loans and also about 88 percent of the
filings give Quicken the lowest satisfaction rating.
For the record, I am troubled by the fact that the title
insurance industry willingly allows referral sources to take
pieces of title agencies as bounty for the referrals. I urge
the chairwoman to invite land title agents to testify before
this subcommittee.
And Mr. Emerson, I want to thank you for your candid
answers. This should be a truth-seeking process. I don't have
all of the answers. I don't claim to. And you guys have some of
them. So I appreciate you responding back, and I look forward
to you sharing the information you have with me.
Chairwoman Capito. The gentleman's time has expired.
Without objection, I would like to submit for the record
statements from the following organizations: the Credit Union
National Association, the National Association of REALTORS,
the American Bankers Association, the Manufactured Housing
Institute, and the American Land Title Association.
Mr. Stutzman?
Mr. Stutzman. Thank you, Madam Chairwoman.
And thank you, gentlemen, for your testimony today and for
your responses to a lot of good questions. I wanted to say
thank you for what you intend to provide for constituents and
for Americans across the country.
I just find it unfortunate that in today's economy, we are
seeing Americans being squeezed harder and harder from every
different direction, whether it is trying to get a home loan to
buy either a new home or upgrade into another home or whether
it is health care, whether it is their job seeing stagnant
wages, this economy is not working for the American people.
And listening to the testimony from you all today,
obviously we hear that your customers and consumers across the
country are in for another surprise. I would like to drill down
into DTI a little bit, if you could give us some of your
thoughts.
I found it interesting that the CFPB sets the threshold for
debt to income at 43 percent, but the Federal Reserve, as they
were drafting ability-to-repay rules, did not require lenders
to consider DTI.
Mr. Hartings, I would like you to comment on it, and then
if we could just move down the line fairly quickly, because I
have another follow-up question to that.
Mr. Hartings. Okay, I think there are two issues with DTI.
First, setting a hard DTI limit, because it is lifestyle
that depends on what you can live on and not 43 percent or 36
percent. So that is going to exclude some borrowers just
because they can afford it with their lifestyle and the kind of
homes they live in. And, the other item with DTI--I can't
remember what I was going to tell you right now, I will just
pass on that one.
Mr. Stutzman. All right, thank you.
Mr. Emerson?
Mr. Emerson. DTI is one calculation to look at. When you
are evaluating the risk of a loan, you should be evaluating
more than just the DTI. And I think as we evaluate DTI, we will
see how that affects home buyers and first-time home buyers and
how they are going to be able to qualify.
Mr. Stutzman. Okay, thank you. And, Mr. Weickenand, if you
could also maybe include a metric that you would use as a
strong performance measure?
Mr. Weickenand. We use DTI to determine what qualifies for
us regardless of the type of loan. And I think it is very
important to be used. However, again, what is being taken out
of my hands is my personal knowledge of the person who is
sitting in front of me applying for that mortgage loan.
Mr. Stutzman. What threshold might be too dangerous for
you?
Mr. Weickenand. I can't really even go there, because there
are always outliers to every circumstance. You want to give
people an opportunity to succeed. The idea of us--we are in the
lending business, and I am here to try to help people improve
their lives. So what may work for somebody may not work for
another.
Mr. Stutzman. Thank you. Mr. Spencer?
Mr. Spencer. As borrowers have lower incomes, those ratios
actually need to go down to be conservative.
And so, we actually work far below those standards. We try
to stay at 30 percent, and so what is critical there is what
else--how much absolute dollars is left to live on. So, we try
to take a very conservative approach on that measure.
Mr. Stutzman. Sure. All right, thank you. Mr. Calhoun,
would you like to comment?
Mr. Calhoun. Yes, if I can add, the original rule did not
have DTI. It had very general standards. It was at industry's
request that a bright-line standard was put in place, because
that is essential to have the certainty needed to get secondary
market capital in, and if you didn't have the bright line,
lenders were going to be very conservative, because they
wouldn't know where the line was.
So I just want to make sure the record is clear. It was
industry who asked for brighter-line standards including the
MBA and that these are historically very high levels. These are
FHA levels and I have not heard a clamor that FHA credit is too
restrictive. I hear concerns people think it is too loose.
Mr. Stutzman. I would like to ask this very quickly of the
bankers.
You said that none of you are going to be offering any non-
QM loans. Have you heard of anybody in the industry that is
going to be?
Mr. Hartings. Most--
Mr. Weickenand. Yes. Navy Federal will be.
Mr. Stutzman. Navy Federal will be offering non-QM?
Mr. Weickenand. Yes.
Mr. Emerson. I think you will find lenders in the
marketplace that will provide non-QM loans to their retail bank
clients or folks who are in their high net worth brackets. Yes,
those loans will take place.
Mr. Hartings. I don't know many other community bankers
that will do non-QM loans.
Mr. Stutzman. Thank you. I yield back.
Mr. Spencer. I think certain Habitat affiliates will do
non-QM loans.
Mr. Stutzman. Okay.
Chairwoman Capito. The gentleman's time has expired.
Mr. Green?
Mr. Green. Thank you, Madam Chairwoman.
I thank the witnesses for appearing, and I regret that I
won't be able to ask questions of all of the witnesses, but I
do want to ask Mr. Hartings, you indicated that you have a $400
million institution, is that correct?
Mr. Hartings. That is correct.
Mr. Green. And how many first-lien loans per year?
Mr. Hartings. It does vary from year to year, but in 2012
we did approximately--we did right at 493. In 2013, we probably
did closer to 400.
Mr. Green. And it is that 493 number that gives you some
degree of consternation?
Mr. Hartings. Yes, because of the small creditor exemption.
Mr. Green. Which has a ceiling of 500?
Mr. Hartings. You have two thresholds. Either you are a $2
billion institution, which would be about 5 times as large as I
am, or 500 first mortgage originations.
Mr. Green. I see. So what you would like to see is the $500
cap lifted. Is that correct?
Mr. Hartings. Yes. There are two ways to do that. Either
raise the cap or currently it includes secondary market loans,
which are already QM-qualified, and if we just looked at
portfolio loans. In my last 2 years, approximately 20 to 30
percent of my loans are portfolio loans. The rest go to the
secondary market, sold to either Freddie Mac or to the Federal
Home Loan Bank.
Mr. Green. Thank you.
I am always interested in trying to find a way to help the
smaller institutions.
Mr. Hartings. Thank you.
Mr. Green. Within your association, you indicated you have
about 7,000 community banks. Is that right?
Mr. Hartings. Our association has approximately 5,000
members, and there are approximately 7,000 community banks
around the United States.
Mr. Green. But you have about 5,000. How large is the
largest in terms of assets?
Mr. Hartings. That is really not my expertise to tell you--
to know that question. But I could get back with you, if you
would like. I could check with our association.
Mr. Green. You are not aware of the size of your largest
bank?
Mr. Hartings. I don't know that off the top of my head,
sir, but I could find out for you.
Mr. Green. Would it be more or less than $50 billion?
Mr. Hartings. Probably less than $50 billion.
Mr. Green. More or less than $40 billion?
Mr. Hartings. It is $17 billion. I just got the answer for
you.
[laughter]
Mr. Green. Okay. Thank you.
Mr. Hartings. That is what we like about community banking.
It just cuts to the chase.
Mr. Green. That is what I like about persistence. It is
amazing how these things happen.
$17 billion--can any size bank become an associate?
Mr. Hartings. Again, you are asking me something about
which I don't know all the details. You certainly have to be a
community bank.
Mr. Green. This is what I am getting to, is the term
``community bank.'' We use it a lot, and I think that when I
hear it, I may hear one thing. And when a colleague hears it,
that colleague may hear an entirely different thing. So, just
for assets alone--there may be other aspects of this--what is a
community bank with reference to assets--the size?
Mr. Hartings. I think to answer that, it is a little bit
like trying to answer what is a qualified mortgage. There are
extenuating circumstances, so I don't know that I could answer
it on assets--
Mr. Green. I understand. If I may just, because my time is
limited, the reason I am asking is because we continually hear
talk about community banks and we have had testimony connoting
that a community bank can be as much as $30 billion to $50
billion. And when I want to help community banks, I am trying
to get a sense of the size bank that I am talking about such
that I can help you.
Mr. Hartings. I can tell you that our average member is
approximately $250 million. Again, our largest member is $17
billion, but I don't have all the numbers in between there for
you, sir.
Mr. Green. All right. Let me quickly move to Mr. Calhoun.
Mr. Calhoun, do you have some help that you can give me
with reference to the size of a community bank?
Mr. Calhoun. I think it is fair to say that over 90 percent
of them are below your $2 billion threshold in the CFPB rule,
and so would be covered by the existing small lender provision.
Mr. Green. So, $2 billion is your threshold?
Mr. Calhoun. I don't think there is a precise definition,
but that is the distribution the vast bulk of so-called
community banks are below that. As you know, Dodd-Frank set the
$10 billion--
Mr. Green. I understand. I have 9 seconds. Yes or no? Above
$30 billion, is that a community bank?
Mr. Calhoun. I don't consider that a community bank.
Mr. Green. If you consider more than $30 billion or a $30
billion level a community bank, raise your hand. Anyone?
Okay. I yield back. Thank you.
Chairwoman Capito. The gentleman yields back.
Mr. Rothfus?
Mr. Rothfus. Thank you, Madam Chairwoman.
Following up on your opening statement, Madam Chairwoman,
with reference to the roundtable we had in Pittsburgh, I would
like to ask unanimous consent to put into the record statements
from participants in that roundtable.
Chairwoman Capito. Without objection, it is so ordered.
Mr. Rothfus. These individuals all expressed concern. This
was November 12th we had the roundtable in Pittsburgh. They all
expressed concern that as currently written, the QM rule will
cause harm to the housing market and make it much more
difficult for working families in western Pennsylvania and
around the Nation to buy homes.
Congressman Westmoreland had asked some questions about who
was going to be impacted. But my question, and I am going to
ask this to Mr. Hartings, is if you don't offer nonqualified
mortgages, where might these working families turn for mortgage
credit?
Mr. Hartings. Certainly to competition that may not be
residents in our areas, that may not know our area as well.
Certainly, probably a higher price cost of that mortgage could
be the result of that. I can't tell you. I don't know exactly
who that will be, but it will surely shrink their
opportunities. And these are people who need all the
opportunities to get themselves qualified.
Mr. Rothfus. Mr. Weickenand, do you have an opinion on
where these individuals might turn for mortgage credit?
Mr. Weickenand. No. I am sure some entrepreneurial type of
individuals who will charge a premium on these things in a lot
of ways will go into that market just trying to make money.
Mr. Rothfus. In a speech on October 29, 2013, Senator
Elizabeth Warren said that, ``The potential liability
associated with writing non-QM loans is relatively small. And
in good times, lenders can compensate for those possible losses
with higher rates or fees.'' She added that, ``We need to
consider strengthening or supplementing the QM rule so that it
provides an adequate check on overly risky lending, even during
housing booms.''
I am going to ask Mr. Emerson this question. Do you agree
with Senator Warren's assessment that the potential liability
is relatively small?
Mr. Emerson. No, we don't agree that the potential
liability is small, unfortunately. We are going into new
territory and I think ultimately time will tell what that is
going to look like. But from a quantification perspective, in
trying to understand the litigation risk associated with that,
there is a distinct possibility that if you take that process
all the way through, that the amount of costs associated with
that loan is going to be greater than the principal balance of
the loan that you lent.
Mr. Rothfus. There has been some press lately about the
shrinking number of financial institutions. The Wall Street
Journal had an article in the last month which mentioned, I
think, that we are now under 7,000.
Mr. Hartings, in your testimony, you stated that community
banks like yours simply do not have the legal resources to
manage the risks that accompany nonqualified mortgages. How
many QM-related lawsuits could a small community bank or credit
union withstand before it is put out of business?
Mr. Hartings. It could be one. As a community banker, most
of our directors are local businessmen and farmers,
agricultural individuals who live in our area. The one thing
they want is they want to serve the community, but they don't
want a fear of litigation. So that fear of litigation to our
reputation, one may be enough. That is a hard number to answer
at this point in time.
Mr. Rothfus. Mr. Weickenand, do you have an opinion on how
many QM-related lawsuits a typical credit union could handle
before it would be put out of business?
Mr. Weickenand. I will give you an example of where we were
part of a class action lawsuit on something we didn't do. It
was a process and a payments, share drafts and things of that
nature. We were accused of manipulating it to drive up fees. We
didn't do that. It cost us between $50,000 and $100,000 to
prove we were innocent.
And so, that is just a case where we actually were allowed
to get out of a case. I can't imagine if we did a nonqualified
mortgage and they had something to hold us to. That would be a
very dangerous situation.
Mr. Rothfus. Mr. Spencer, you mentioned that you had
engaged a consultant to walk through some of the qualified
mortgage rules. I think her name was Jill, and you talked about
1,000 hours that she had done to date.
Mr. Spencer. She is actually on staff.
Mr. Rothfus. She is on staff. Can you quantify in dollars
what it is costing your organization to comply with this rule?
Mr. Spencer. We estimate that we have invested both human
and financial resources of $40,000 to $50,000 over the last 12
months. And to put that in perspective for our operation, we
could let you sponsor a house for $70,000. So, that is one
house we didn't build.
Mr. Rothfus. Thank you.
I yield back.
Chairwoman Capito. The gentleman's time has expired.
Mr. Murphy?
Mr. Murphy. Thank you, Madam Chairwoman.
And thank you all for being here. Thanks for your time.
Mr. Spencer, I just first want to thank you for everything
that you do and everything that your organization does for your
community and really all of our communities.
I also want to take a second just to thank Mrs. Capito and
Ms. Waters and Mr. Meadows for working together on a bipartisan
bill to improve the legislation so you can continue to do what
you do.
Obviously, no legislation out of this place is perfect, so
we have a lot of work to do to improve it. And we will continue
trying to do that.
I wanted you to just take a second to explain to everybody
what makes organizations like yourself, Habitat, different from
others, so provisions like DTI and servicing limits are not
needed to protect consumers.
Mr. Spencer. We were created, Habitat came into being with
the mission of eliminating poverty housing worldwide. It was
bold.
What we do in our individual communities is work with
families. We provide financial counseling. We can't cover costs
out of fees because we don't charge them. We can't cover
expenses out of interest because we don't charge that either.
And so, what we do is we work with our local communities to
assemble resources so that we can provide these deserving
families with non-interest-bearing mortgages.
Because we believe strongly that these families need a hand
up, not a handout, we don't give away houses. And so, we work
very closely to make sure that our families have both the
support and the capacity to repay the mortgages. And
overwhelmingly, they do. We just don't want to be caught up
inadvertently in a bill that was not aimed at this kind of
housing ministry to begin with.
Mr. Murphy. Okay, great. Thank you for that.
Mr. Hartings, Mr. Emerson, and Mr. Weickenand, the three of
you, it sounds like the CFPB amendments are continuing to
improve QM and it sounds like you all are happy with it.
But my question is timing. With some of the new
clarifications as late as last fall, does that timing put you--
do you feel like you need an extension to ensure that you get
it right, or do you think that would just put you at a
disadvantage?
Mr. Hartings. We are a small shop. I have 68 full-time
equivalent employees, and I have 7 offices that we have to
manage. We have kind of all hands on deck today from our
mortgage lenders, our commercial lenders all trying to figure
out everything we need to do with the new mortgage regulations.
More time would be very helpful, because we also have to
see how our software vendors--although they may put in fixes,
we want to make sure how that integrates into--we have multiple
software vendors that certainly have to integrate into each
other.
So all of those take a lot of time. And the massive amount
of changes with this legislation has really put us--it is
difficult doing anything else except trying to comply with QM
and the mortgage regulations along with it.
Mr. Murphy. Do you think that holds true for basically all
community bankers?
Mr. Hartings. Yes, I believe it does.
Mr. Murphy. Thank you.
Mr. Weickenand. I would agree.
With the confusion that is out there, trying to communicate
and educate your employees on the changes and then trying to
communicate to the members who come in the door, can lead to a
lot of disruption and confusion.
Mr. Murphy. Thank you.
Mr. Emerson. The amendments are out, the rule is out there,
so from that perspective, there is not much we can do from a
time.
Obviously, there is a lot of work that goes into the
technology build and everything associated with getting the
systems right, not only internally but you are relying--a lot
of lenders are relying on third-party vendors to make sure that
they have it correct.
So I think the industry has done its level best to get to a
place where they are trying to comply with the rule, with the
QM rule.
We appreciate Director Cordray's statement that there is
going to be some grace period, not--it is kind of not defined--
of making sure that you are giving a good faith effort to
comply and get it in there.
But I think in hindsight, time, certainly a little bit more
time would have been helpful.
Mr. Murphy. Thank you.
Last question for Mr. Calhoun: If a lender originates a
loan and is willing to keep it on the portfolio, from a policy
standpoint, why is it not safe to assume that lender has
already determined the ability to repay?
Mr. Calhoun. So, the challenge is, we have a long history
on this, that a lot of the past and even present subprime
lenders were portfolio lenders, and they won one of two ways.
If the loan paid, they collect the high fees and interest.
And these loans, 90 percent of subprime loans, were
refinancing, not first-time home loans. So they would target
people who had equity in the home that would cover the losses
if they had to foreclose. And that is one of the challenges.
I think it raises the point--and let me be clear, we
support the need for the clarity and the broader standards, a
lot of which have been talked about today.
But, for example, FHA is in its problems today with
finances in large part because a nonprofit housing program,
seller-assisted downpayments, was operated through nonprofits
and produced over $15 billion of losses at 3 to 4 times the
rate of their normal rate of business.
So, we do need to draw these lines carefully. And I think
the CFPB, with guidance from this committee, and the House and
Congress can get us there.
Mr. Murphy. Thank you.
Chairwoman Capito. The gentleman's time has expired.
Mr. Calhoun. It does need to be done with a lot of care.
Chairwoman Capito. Mr. Barr?
Mr. Barr. I thank the chairwoman for the recognition and
for holding this important hearing.
And I thank the witnesses for their testimony.
I think few would disagree that some kind of ability-to-
repay analysis should obviously be part of the mortgage
underwriting process.
But what I am hearing from most of the witnesses here today
is that the QM rule is really a government, one-size-fits-all
solution that deprives mortgage lenders of the flexibility to
make individualized judgments about the creditworthiness of a
particular borrower, and that it, at the same time, deprives
creditworthy borrowers from a range of products that might not
fit within the CFPB's bureaucratic credit box.
And so, my question--my first question would be directed to
Mr. Hartings. And I appreciate your advocacy of a potential
solution to provide additional flexibility, specifically a bill
that I introduced, the Portfolio Lending and Mortgage Access
Act.
And it kind of dovetails onto the comment from Mr. Calhoun
that he didn't think that portfolio lending would really remedy
the problem of what caused the financial crisis.
But it seems to me that one of the principal causes of the
financial crisis was government policy that encouraged an
originate-to-distribute model and that if you had an incentive
through an amendment to the QM rule that would encourage
lenders like community banks to retain the risk on their
portfolio, that you would actually prevent some of the problems
that caused the financial crisis, and at the same time provide
that flexibility for creditworthy borrowers who, again,
wouldn't necessarily fit into that bureaucratic credit box that
is created by the CFPB.
So, if you could, Mr. Hartings, please elaborate on your
support for this particular solution and maybe respond to Mr.
Calhoun's objections.
Mr. Hartings. I can talk about my own experience. We went
through the mortgage meltdown and we didn't have a lot of
issues because we couldn't put our customers in a product, and
I talked about adjustable rate mortgages before, that was going
to put them in a subprime situation, actually create a
foreclosure.
And when you have it on your books, you have 100 percent of
the risk.
I look at it that I have always made qualified mortgages
because everyone who comes into my institution, I try to
qualify them.
There are certainly always outliers. And I can't prevent
those.
But let's look at making the regulation; let's look at our
regulators. We do have prudential regulators. We have--in my
case, I have the FDIC and the State of Ohio.
If they find that I am doing something incorrectly, UDAP,
is a great example, unfair and deceptive practices, can pull
that in to take a look at those institutions.
So I think we have to look at those regulators to be able
to be able to control that situation maybe going forward,
versus trying to regulate it. Because when you try to regulate
it, if I was to write a QM rule today, it would exclude people.
I couldn't write it without excluding people.
And so, unless you tier that regulation and say portfolio
lenders, we are going to give you a tier to allow you to make
those and take those responsibilities, I think it is a great
solution.
Mr. Barr. One other piece of legislation I have introduced
that I would love the panel to comment on is H.R. 2672, the
CFPB Rural Designation and Petition Correction Act.
And one of the concerns I have with the QM rule as
currently constructed is the impact it will have, particularly
in rural communities. And, as you may know, in rural
communities, access to balloon loans, for example, can be
particularly important in the agricultural context and other
places.
These loans are going to away if they continue to be
designated as non-QM, so what we want to make sure is that the
CFPB's designation of ``rural'' is accurate. This is a very
simple piece of legislation, bipartisan, that would allow a
community to petition the CFPB for a correction to be
designated as rural if it truly is a rural community so that
those mortgage lenders could originate balloon loans and fit
within the QM safe harbor.
My understanding is that Senator McConnell has introduced
companion legislation in the Senate today, and I am
appreciative of that.
Could you all comment on that as a potential solution as
well in terms of modifying the QM and providing responsible
mortgage credit?
Mr. Hartings. I know, our association, ICBA, does support
your bill. I think any time you try to be that prescriptive on
what a rural area is, it is difficult in the United States. So
I like the idea of being able to petition to get into rural.
Mr. Emerson. From the MBA's perspective, we haven't studied
the rule yet. We are going to look at it, and we will get back
to you and let you know what we think.
Mr. Barr. My time has expired. I yield back. Thank you very
much.
Chairwoman Capito. Mr. Heck?
Mr. Heck. Thank you, Madam Chairwoman.
And I would like to add my expression of gratitude to each
of you for spending your considerable amount of time here
today.
I would like clarification on a couple of points or some
provocative responses to questions beginning with Mr. Calhoun's
assertion that there is a documented history, actually, of
banks and credit unions making loans to people held in
portfolio that did not go well.
Mr. Calhoun, I do want to amend one thing you said when you
laid it off to nonprofits. Actually, the bulk of the red ink at
FHA is attributable to reverse mortgage defaults, a problem
that has been fixed thanks to Congress and the President's
signature in August, in large part.
But, this question fascinates me. And let me preface this
by saying, I think it is beyond the pale for us to assert that
every hair on the head of every proposed rule is inherently
virtuous and perfect. I don't think that is ever the case. And
it is certainly not the case here.
But, having said that, there is a clear and fundamental
difference of opinion between, perhaps, Mr. Hartings and Mr.
Calhoun on this issue of mortgages held in portfolio.
Mr. Hartings, you asserted that we bear 100 percent of the
risk. But frankly and with all due respect, that seems prima
facie not to be true if there is substantial equity in a
refinanced instrument, or if you are making this loan into a
rapidly rising market and your fees and interest rates are
sufficient that even in the eventual unfortunate headache
circumstance of a foreclosure, your opportunity to re-coup is
virtually assured.
So, while I have sympathy for this issue, any time you draw
a fine, bright line in reduced flexibility, you are going to
exclude somebody who otherwise, on the basis of merits, might
be warranted an opportunity.
But sir, how do you counter the factual statement that you
are not bearing 100 percent of the risk given market conditions
and context?
Mr. Hartings. I am a lender. I have my lender certificate.
As a bank president, I have to make that decision if we are
going to foreclose. And I also have to work through the courts
and the customer on those. And I can tell you, that is
absolutely the last thing I want to do in any situation.
Mr. Heck. Excuse me. I take you at your word. And I believe
you.
Then why did it happen so often?
Mr. Hartings. I think sometimes if you look at the types of
products, they don't pass the smell test.
If it is an adjustable rate mortgage--again Congressman
Meeks talked about the predatory lending in some of those
situations. Interest-only loans can have a tendency to get a
customer in trouble, because they are not paying back any
equity. So, I don't know.
There are always going to be those players. But, I look at
the same situation of if you look at the mortgage crisis, it
was really everybody figured out how to game the system--or, I
shouldn't say everybody, but the folks who got us in trouble--
got them in trouble figured out that there is this no-doc loan
out there. I know how to do that system.
So when you make hard and fast rules and you think that is
going to fix something, what it ends up doing is just the
outliers figure out how to game the system again. So, that is
what concerns me is, I can see that if I hold it on portfolio I
know how I would look at these loans. I know the risk I take.
And I know how I look at my customers accordingly.
I don't design products that are going to put them in
trouble. Do they get in trouble from time to time? Absolutely.
That happens everywhere in the economy. But, I can't answer the
outliers because I am not one of those.
Mr. Heck. So as one of the newbies here, let me just lay
off some of my frustration on the panel.
I am frankly a little tired of finger pointing. It is all
government which evidently has become a two syllable word. It
is all on my side, predatory lenders or it is all borrowers
made stupid decisions that they knew better than to make.
The truth of the matter, as we all know, is that there is
plenty of culpability to spread around.
And I can either walk away from this kind of frustrated
that we have amplified beyond measure the differences of
opinion about how we might fix this proposed rule when in the
wider scheme of the thing, we really are fixing a problem that
was very, very material to our Nation's economy, and our
family's well-being. And maybe I can walk away celebrating a
little bit that the differences between us in the broader
context, frankly, really aren't that big, so let's get to work
and make it work.
Thank you, Madam Chairwoman. I yield back the rest of my
time.
Chairwoman Capito. Mr. Kildee?
Mr. Kildee. Thank you, Madam Chairwoman, for allowing me to
participate in this hearing as a non-member of the
subcommittee. I have a particular interest in this subject so I
have found it to be as helpful as I expected it would be. So, I
certainly appreciate your willingness to allow me to join.
And, in respect for time, I just have two subjects that I
would like to quickly get some responses on. Many of the
questions that I had planned to ask have been asked and I think
answered quite adequately.
Before I do that, though, I want to make a comment on Mr.
Emerson and his company. And while I don't represent Detroit, I
represent Flint, which is--my district starts about 35 miles
north of Detroit. I had a very good conversation with Mr.
Gilbert last week. And I just want to say that while I suspect
we agree on a lot of policy issues, even though we might not
agree on all of them, I will say that Quicken, from the
standpoint of corporate citizenship, is demonstrating what a
company can do to not only do well in terms of your business
plan and your business model and be a productive and profitable
company, but to make sure that in doing so, some of that
profitability is actually shared in rebuilding the community
that is the host to your company.
And I know that other folks here in this room appreciate
that as well. But as a person involved in urban policy for a
long, long time, I just want to say that to you and convey to
your company and to other members of your company that
appreciation.
Thank you.
Mr. Emerson. Thank you. We appreciate it.
Mr. Kildee. I wonder if perhaps Mr. Spencer--to be quick
about this--could comment on some of the compensating factors
that might actually open up home ownership, and lending
possibilities, access to credit, particularly from the
perspective of Habitat.
Can you just tell me about the experience with your
clients, your customers, and what you do to prepare those
individuals who otherwise might not succeed?
Setting aside the role of Habitat as a developer, but in
preparing folks to be able to become homeowners through--
particularly through home ownership counseling and how that has
affected the success rate of your clients.
Mr. Spencer. Absolutely. Every Habitat homeowner goes
through financial training--and actually more than just
financial. If you have never grown up living in a home, there
are things you don't know about changing filters and fuse
boxes, and we train everything from financial literacy through
being a good neighbor and how to resolve disputes with your
neighbor. So, we work on all of that.
And then, we stay involved with the families. The result is
that our overall foreclosure rate, although it does happen, is
extremely low. I think it would be a number that most of our
for-profit brethren might envy. So we run below--depending on
the affiliate--2 percent to 4 percent is about our failure
rate, and so we try to avoid it. We are very successful at it.
And overwhelmingly, more families have paid their loans in full
by an order of magnitude than have ever been foreclosed on.
Mr. Kildee. Thank you for that. And thank you for being a
very qualified set-up man for the follow-up question, and that
is--and I would certainly invite Mr. Calhoun to comment, as
well, but particularly for the three lenders--what do you think
can be learned from the experience of Habitat, particularly if,
as a compensating factor, we were able to somehow integrate
housing counseling into the homeownership process generally?
Given that experience, I don't think there is anything
particular about your clients that is distinguishable from many
other folks who go directly through a traditional lending
experience. Do you think that there is value in thinking about
counseling as an integrated part of the mortgage origination
closing servicing process? If you could, any of the three of
you?
Mr. Weickenand. Certainly, we do that already. But I think
the example that Habitat shows is that giving people an
opportunity, through your judgment and your processes, is not a
bad thing, meaning that you are giving people an opportunity,
to whom you normally would not give an opportunity, for
homeownership and things of that nature.
Mr. Calhoun. If I may add, we have proposed and supported
that counseling could be one of those compensating factors to
provide more room there. And I would say, just in general, one
of the problems here is we are not writing the rule for the
groups that you see here at this table today. These are the
responsible lenders. The challenge is, how do you write a rule
that protects both home borrowers and these responsible lenders
from folks who drove the market in an unsustainable way, that
caused our country so much harm?
Mr. Kildee. I think my time has expired. I will follow up.
I thank you for your indulgence in allowing me to participate.
Chairwoman Capito. Thank you. Mr. Lynch?
Mr. Lynch. Thank you, Madam Chairwoman.
I do want to thank all of the panel members for your help
today. I felt badly about coming back here and asking more
questions, because I think you have probably suffered enough.
But I want to say that one of the--to your credit, for
community banks and credit unions, and, God knows, Habitat for
Humanity, the reason that your programs, especially with the
credit unions and the community banks, outperformed the big
banks during the crisis is because you know your customer. You
know the people to whom you are lending. And so, you have the
ability to look beyond even these criteria that are being laid
out in the QM rule. You can look at someone--and I was there,
when I bought my first house, I am sure that I was on the
margins. As an ironworker, I probably didn't have the credit
history that is being required here today in this rule, but
thank God my banker knew I was a hard worker and so gave me a
mortgage.
Our difficulty here is trying to craft a rule that fits
everyone. And so the way this works, the way it is set up to
work by the CFPB is that small banks will still be able to make
that loan that is on the margins. You will still be able to
make that loan, even though it will be a non-QM loan. And to be
honest with you, it makes you, the people who are best able to
judge that risk, liable, if you are going to hold it in
portfolio.
The challenge for us is if we lower the bar in the rule, it
will allow every bank to allow every customer who might have
insufficient assets or insufficient income to get that loan.
And we saw the consequences of that in the last housing crisis.
So, that is the difficulty we have.
But one thing I keep coming back to is this threat of
liability. And, when I look at the ability-to-repay standards
here, it requires you to look at if a person is currently or
reasonably expected to earn certain income or have certain
assets. It requires you to look at their current employment
status, the monthly payment on the covered transaction. It
requires you to look at the monthly payment on any simultaneous
loan, the monthly payment for mortgage-related obligations,
current debt obligations, and alimony, and child support. Those
are all factors that I think should be considered when you are
going to give someone a loan, rather than just someone's credit
history.
So I don't think that the requirements and the ability-to-
repay rule is really unreasonable. And what I am hoping is that
there are some instances that you have brought up where folks--
we might need to tweak the rule a little bit. But we are in a
much better situation if you are making that decision on
whether or not a person qualifies for a mortgage where you have
the best information, and I don't see a lot of lawsuits coming
from people if you do that due diligence. I don't get the
threat of liability that comes with this rule. I don't. I don't
see it. I don't think lawyers are lining up.
If you go through even a modicum of scrutiny to make sure a
person has the ability to repay, I don't think you are going to
have a long line of lawsuits. I don't see the litigation risk
here that I think is being overstated in every single case.
Mr. Calhoun, I would like to have your thoughts on that.
Mr. Calhoun. We have worked through 15 to 20 State laws
where this was a major concern. And a lot of those, including
North Carolina, have a lot more legal liability and a lot more
signee liability than these do. Countrywide Mortgage initially
said they wouldn't make any loans in North Carolina because of
the North Carolina law. We only wish they did stay in the State
through its harm.
But people found there have not been lawsuits, and this is
tailored to make it extraordinarily difficult to bring a class-
action lawsuit. And so that by itself is a major reduction.
But the rating agencies have been looking at this and
coming to similar conclusions, that there is liability there,
but practically these are not cases that lawyers can make money
on, and that is what lawyers look for--
Mr. Lynch. Exactly.
Mr. Calhoun. --in whether they decide whether to take a
case. It is a borrower in default who just wants to try and
stay in their home. It is hard for--there is no big contingent
fee for the lawyer in these cases.
Mr. Lynch. Thank you.
Madam Chairwoman, I yield back.
Chairwoman Capito. The gentleman's time has expired.
And I would like to thank the witnesses. I think we have
covered a lot of ground. We have a lot of common area. We have
a lot of questions. And like I said, this sort of sets the bar.
As we move forward, we will have another hearing--or at least
more information as we move through this to see where we
actually are. But I appreciate everyone's patience and your
information.
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.
And without objection, this hearing is adjourned.
[Whereupon, at 12:48 p.m., the hearing was adjourned.]
A P P E N D I X
January 14, 2014
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