Consumer Mortgage Choice Act Under Fire From CRL

The Center for Responsible Lending (CRL) has released a brief issues paper voicing objections to HR 1077, The Consumer Mortgage Choice Act.  The bill currently sits in the House Financial Services Committee of which its sponsor Representative Bill Huizenga (R-MI) is a member.

The bill amends the Truth in Lending Act (TILA) with respect to disclosures of points and fees for so called "high cost" mortgage loans and has the following key points

• Excludes from the computation of such points and fees: (1) the amount of any loan level price adjustment payment set by Fannie Mae, Freddie Mac, FHA, or similar government entity, (2) any compensation paid by a mortgage originator to an employee or creditor; and (3) any escrow for future payment of insurance.
• Modifies the inclusion in the computation of all compensation paid to mortgage brokers and specifies instead all compensation paid directly by a consumer to a mortgage originator, including a mortgage originator that is also the creditor in a table-funded transaction.
• Modifies the criteria for exclusion from the computation certain reasonable charges elsewhere exempted from the computation even though a creditor receives compensation, but only in so far as the creditor or its affiliate retains the compensation as a result of their participation in an affiliated business arrangement. Requires the charge to be: (1) a bona fide third party charge not retained by the mortgage originator, creditor, or an affiliate; or (2) a fee or premium for title examination, title insurance, or similar purposes.
• Modifies the conditions under which federal departments and agencies may exempt refinancings under a streamlined refinancing from an income verification requirement that, at the time a refinancing is consummated, the consumer has a reasonable ability to repay the loan and all applicable taxes, insurance, and assessments. Repeals the exception for bona fide third party charges not retained by the mortgage originator, creditor, or an affiliate from the requirement that total points and fees not exceed 3% of the total new loan amount. (Thus subjects such charges to the same 3% ceiling.)

CRL says the new bill would weaken a key mortgage reform by allowing loans with excessive fees to improperly meet the Qualified Mortgage definition.   Its issue paper, written by Ken Edwards, points to the proposed legislation's exemption of fees like yield spread premiums from the 3 percent points and fees limit for loans meeting the definition of a Qualified Mortgage.  

Yield spread premiums, which are payments made to mortgage brokers through increasing a loan's interest rate, are complicated transactions, Edwards says, and as a result, borrowers often do not understand if they are paying a competitive price.   He quoted a 2010 Federal Reserve report which said "Yield spread premiums are complex and may be counter-intuitive even to well-informed consumers... The Board's consumer testing indicated that disclosures about yield spread premiums are ineffective. Consumers in these tests did not understand yield spread premiums..."

"These new loopholes would lead to more expensive loans for borrowers.  Creating a points and fees exception for yield spread premiums and other fees will result in more borrower confusion and more expensive loans. This would create new incentives for abusive lending," the CRL paper concludes.

HR 1077 was introduced by Huizenga in March.  It has the support of the National Association of Mortgage Brokers, the Mortgage Bankers Association and the National Association of Federal Credit Unions.  Over two dozen groups, largely consumer organizations, are on record as opposing the legislation including The NAACP, National Peoples Action, National Fair Housing Alliance, and the Consumer Federation of America.