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From Banking and Finance Law Daily, June 18, 2013

Mortgage Rules Will Harm Home Ownership, Hearing Told

By John M. Pachkowski, J.D.

The House Financial Institutions and Consumer Credit Subcommittee held a hearing on June 18, 2013, to examine the effect the Consumer Financial Protection Bureau’s Ability to Repay (ATR) rule will have on the availability of mortgage credit for consumers. The hearing was the second in a series of hearings the subcommittee is holding on the ATR rule. The first hearing (webcast) heard from CFPB officials about the status of the rule and the feedback they are hearing from market participants.

Relationship-based decision making. In her opening remarks, committee chairman Rep. Shelley Moore Capito (R-WVa) noted that although revisions to the ATR rule provided clarity to lenders, the need for these changes highlighted the fundamental problem with the ATR rule. She added, “Mortgage lending can be highly subjective business, especially in rural and underserved areas. This element of relationship based decision making is completely ignored by the premise of the rule. It will be nearly impossible for the CFPB to endlessly amend the rule to accommodate the ability of lenders to make these relationship based loans. Unfortunately, the end result will be some consumers losing access to credit and the ability to own their own home.” She concluded, “I fear that without significant revision or repeal of the rule in its entirety, the consumers that proponents of the rule are attempting to protect will be the very consumers that are blocked out of the system. Without significant changes, consumers who live in rural areas with low property values will see a change in the availability of credit. The consequences of this rule, whether intended or unintended, will be very real these communities.”

Flexibility. In his written testimony, Charles A. Vice, Commissioner of the Kentucky Department of Financial Institutions, who testified on behalf of the Conference of State Bank Supervisors, noted, “If the regulatory framework for the ability-to-repay requirement is going to encompass all mortgage lending, it needs to have the flexibility to adapt to varying business models—from originate-to-distribute lenders, to large banks that originate mortgages in a more production-line fashion, to community banks that hold loans in their portfolios.” He did caution, however, that the treatment of balloon loans is one example where regulation is taking a broad brush approach that disadvantages community banks, but added, “The CFPB has made an effort to limit the negative statutory effects on balloons held in portfolio by extending the time frame before the balloon loan restrictions take place, potentially offering Congress an opportunity to act on this issue.”

Well-intentioned but … James C. Gardill, Chairman of the Board, WesBanco, Inc., provided testimony on behalf of the American Bankers Association. He noted that while Dodd-Frank’s Ability to Repay and Qualified Mortgage (QM) rules may have been well-intentioned, they “will end up restricting mortgage credit, making it more difficult to serve a diverse and creditworthy population.” Gardill also told the subcommittee that a charitable program administered by his bank to help large families buy homes is threatened by the Dodd-Frank rules. “We currently have approximately 100 active loans under this program, providing homes to families who otherwise would not be able to afford one. We are concerned that, under the new rules, loans like these will not qualify for QM status, and as a result it will be very difficult to continue this program that has given so much back to the community. Of even greater concern is the fact that some borrowers served by this program would not meet the Ability to Repay standards and thus could not be helped by this or any other bank program going forward,” Gardill said.

Hamper homeownership. Another hearing witness, Jerry Reed, Chief Lending Officer of the Alaska USA Federal Credit Union, representing the Credit Union National Association, said the QM “bureaucratic standard” will hamper homeownership. He added, “The unfortunate result will be that some members who would otherwise have qualified for a mortgage from their credit union may not receive loans.” Reed concluded, “Congress and the regulators should encourage financial institutions to offer loan products focused more on the individual. Unfortunately, depending upon how the QM rule is interpreted by the prudential regulators and how it is utilized within the marketplace, the QM rule may stop this from happening.”

Regulatory complexity. Debra W. Still, Chairman of the Mortgage Bankers Association (MBA), noted that, although the MBA applauds the CFPB for getting a great deal right and for their deliberative and inclusive approach, “We are experiencing a marked shift in real estate finance—a shift from regulatory uncertainty to regulatory complexity.” She added, “we should all be concerned about the cumulative effect of the new rules on the availability of credit to qualified consumers. To avoid or at least lessen this possibility, there is considerable work to be done.” Still noted there was a need for collaboration between the CFPB and Congress to make sure that the new rules are right and that they support access to credit. Also, the rules need to be aligned with each other and with other regulations so that the totality of the rules fosters rather than frustrates the availability of sustainable credit to all qualified borrowers. Finally, according to Still, the industry needs clear guidance from the CFPB and adequate time to implement the rule.

Competition and choice. Gary Thomas, President of the National Association of Realtors®, noted that his organization has been generally supportive of the CFPB’s efforts to craft a QM rule that is not unduly restrictive and provides a safe harbor for lenders making QM loans. In his testimony, Thomas said that H.R. 1077, the Consumer Mortgage Choice Act, is essential to maintain competition and consumer choice in mortgage origination. Without this legislation, one-quarter to as much as one-half of loans currently being originated by affiliated lenders would likely not be eligible for the QM safe harbor, he said. Consequently, those loans would likely not be made or would be concentrated among the largest retail lenders, thereby limiting consumer choice.

Hits right balance. Finally, Michael D. Calhoun, President of the Center for Responsible Lending, testified that “As a whole, these rules continue the CFPB’s approach of expanding access to credit while ensuring that loans are sustainable for the borrower, the lender and the overall economy.” He added the Qualified Mortgage definition “hit the right balance of protecting consumers and facilitating compliance with these rules” and uses “clear, bright lines—in addition to providing borrowers in the riskiest mortgages with the opportunity to raise a legal challenge when necessary” to create incentives to avoid future subprime lending abuses and unnecessary foreclosures.

Companies: Alaska USA Federal Credit Union; Center for Responsible Lending; Conference of State Bank Supervisors; Credit Union National Association; Mortgage Bankers Association; National Association of Realtors; WesBanco, Inc.

MainStory: TopStory CFPB DoddFrankAct Loans Mortgages TruthInLending

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