MBA, Others Respond to Proposed Revisions to Regulation Z and Ability to Repay Provisions

By: Jann Swanson •

The Mortgage Bankers Association (MBA) joined by 15 other trade associations has sent a letter to the Consumer Financial Protection Bureau supporting the Bureau's decision to reopen the comment period on proposed changes to Regulation Z and the Ability to Repay/Qualified Mortgage (QM) provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

MBA said their 75 page letter was in response to specific questions raised by CFPB but it believes that CFPB has sufficient latitude to create a rule that allows risky loans without stemming sound credit or unduly regulating underwriting and is working on an approach to ability to repay that will not harm consumers or undermine the economic recovery.

The Bureau had asked for specific comment on (1) data it received from the Historical Loan Performance (HLP) dataset of the Federal Housing Finance Agency (FHFA) regarding loan performance by year and debt-to-income (DTI) range as well as other data relevant to loan performance; and (2) estimates of litigation costs and legal liability risks associated with claims alleging a violation of ability-to-repay requirements for a loan that is a "not qualified mortgage" versus a "qualified mortgage."

Comments on FHFA Data

MBA had earlier suggested that the QM could require compliance with widely accepted underwriting standards but a mechanism should also be established to approve standards available at other points in time from other than the Government Sponsored Enterprises (GSEs.  The other approach offered would involve using objective, numerical standards such as a particular DTI and a "waterfall" of alternative criteria.  MBA said it sees no reason emerging from FHFA data to choose any specific DTI number proposed from it as a default.  "Loan performance and ability to repay does not markedly change at any of these points and a DTI number included in a waterfall should be greater."

MBA also does not believe that relying exclusively on DTI ratio is wise.  "There are multiple factors that along with DTI have a significant impact on predicting mortgage performance and ability to repay."

The letter states that the Bureau should not establish QM standards for the U.S. Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Department of Agriculture and Rural Housing Service (RHS) loans.  "Exercising their authority under Dodd-Frank, the agencies should put out simple rules that say that their loans meeting the product standards in Dodd-Frank, e.g., no negative amortization, etc., and meeting the respective programs' underwriting standards shall be QMs."

The letter addresses other questions raised by CFPB over specific performance data such as residual income, liquid reserves, and the role of stable income in a timely payment history and concluded and that an emphasis on documentation and verification of income, assets, and employment is likely to be most beneficial for performance going forward.  "Fully documented purchase loans have traditionally shown much stronger performance than low documentation loans."

Liability and Litigation Risks

MBA does not believe there will be many law suits alleging ability to repay regarding non QMs simply because there will be few non-QMs originated is the QM is structured as broadly as it should be.  However, establishing the QM as a rebuttable presumption will invite litigation, increase costs, and cut off credit to too many qualified borrowers because attorney fees are awarded under the Truth in Lending Act.

The availability of the new claim at foreclosure, if a rebuttable presumption, will ensure that an action regarding ability to repay will become nearly perfunctory for all foreclosures.  This will cause the costs of foreclosure to rise dramatically and require lenders and investors to price that risk into all loans.  MBA included an extensive discussion of litigation costs in their letter and the accompanying background materials.

Considering the overarching significance of this rule to the availability and affordability of credit for consumers, there has been intense discussion since it was first proposed nearly fifteen months ago.  Having considered this and the earlier comment request, MBA urges that the finalization of this rule be guided by the following principles:

  1. Define QM broadly so as to reach as many borrowers as possible with safe, affordable, and sustainable financing.
  2. The rule must include clear, specific, and objective standards and government programs will likely require separate rules and standards.
  3. Most important, the QM must be a safe harbor, and
  4. The requirements need to be crafted to avoid unintended consequences.

Among those signing the MBA letter were the American Bankers Association, Community Mortgage Lenders of America, American Escrow Association, Housing Policy Council, and the U.S. Chamber of Commerce.