Interpreting QM Revisions; CFPB on Originator Testing, FTC, and Underserved Counties

By: Rob Chrisman •

"The guy next door" as well as multi-billion dollar venture capital funds know that, right? Well, the housing industry is hoping that venture capital funds like Blackstone don't go into the house flipping business, but many folks are doing it.

Organizations and analysts continue to ruminate on the CFPB's latest rulings on the QM (Qualified Mortgage) box. Put another way, the industry is abuzz with the regulator's underwriting guidelines. The Ohio Mortgage Bankers Association wrote, "In short, the final rule:

  1. Removes compensation to individual loan originator employees from the calculation of the points and fees limit for purposes of both the QM and Home Ownership and Equity Protection Act (HOEPA) rule;
  2. Establishes a new smaller creditor portfolio QM;
  3. Loosens requirements for smaller creditors originating balloon loan QMs for two years; and
  4. Establishes new exemptions from the ability to repay requirements for credit extended under Emergency Economic Stabilization Act programs, community-focused lending programs and by certain non-profit creditors. 

It does not address the following:

  1. Lender paid compensation to mortgage brokers will still be included in the QM points and fees test;
  2. Fees paid to lender-affiliated settlement providers will still count toward the 3% QM cap."

And the NAIHP summed it up by saying, "Lender Paid Compensation will be included in the 3% Points and Fees Cap, Affiliated Business Fees will be included in the 3% Points and Fees Cap, and Fannie and Freddie Loan Level Price Adjustments will be included in the 3% Points and Fees Cap."

Jeff T. writes, "The CFPB is finally settling down on some new rules that go into effect early 2014. One of them was going to regulate the total cost a borrower can pay to 3% of the loan amount. And that WAS to include any compensation paid to the loan originator EVEN if NOT paid by the borrower. This would have killed off any lending under $200k in my opinion. That rule appears to be modified to just borrower closing costs at 3%. However, that still makes a loan under $125k VERY difficult to meet the new rules - so much for protecting the consumer? I guess if they can't get a loan at all, they are safe?"

David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA), announced, "The CFPB and Director Cordray have shown that they are listening to the broad constituency of organizations involved in housing finance.  Today's announcement makes important changes to the rule that will benefit consumers by better allowing lenders of all shapes and sizes, including non-profit entities, to help and serve borrowers. We are pleased at the adjustments made to the rule as it relates to smaller lenders, regardless of business model, that will allow them to continue to provide the safe and sustainable mortgage products that they are currently offering their borrowers. 

"We also welcome the stipulation that compensation paid by brokers and lenders to loan originator employees do not count toward the points and fees threshold for what constitutes a 'Qualified Mortgage.'  Both of these provisions should facilitate a more efficient and affordable marketplace for borrowers. While obviously there is more we would have liked to have seen done, particularly around the points and fees calculation, I think today's announcement shows that the bureau is trying to appropriately balance consumer protection with access to affordable credit for qualified borrowers."

But from Reno, NV, comes, "Seems to me, the CFPB (and Congress and everyone else outside the business) does not understand that broker agents (like me) cannot be paid directly. I receive compensation from my broker/company. The company charges an origination fee. The company receives payment from the escrow company, and then the company pays me my compensation; just like Wells Fargo, or REMAX Realty, or Allstate insurance. 

"I don't think they realize I, along with other commission agents, do NOT stand alone. For that matter, the broker cannot be paid personally: the company is paid. What about correspondent lenders that allow brokers to take as much as 4% YSP (yield spread premium)? Even though the YSP goes to the borrower, it is used to cover broker/lender costs. Mortgage bankers sell immediately to a lender or investor, and can keep as much as 4% from some lenders. What needs to be addressed is the disclosure of the YSP to the borrower.  Now the company is receiving compensation based on the interest rate.  I cannot be paid based on the interest rate, but the company can."

And I received this note. "Rob, regarding the CFPB's statement that 'Under the revised rule, the compensation paid by a mortgage broker to a loan originator employee or paid by a lender to a loan originator employee does not count towards the points and fees threshold. This amendment does not change the January 2013 final rule under which compensation paid by a creditor to a mortgage broker must be included in points and fees, in addition to any origination charges paid by a consumer to a creditor.' My question is pretty simple.  A lender never pays compensation to a loan originator, it is paid to the 'broker'/company and then the company pays the LO.   The part where I am at a loss is the part in italics. Can you define 'creditor'? Is that a lender/wholesaler?"

Unfortunately I am not a compensation attorney. But creditor is defined as, "An entity (person or institution) that extends credit by giving another entity permission to borrow money if it is paid back at a later date. Creditors can be classified as either "personal" or "real." Those people who loan money to friends or family are personal creditors. Real creditors (i.e. a bank or finance company) have legal contracts with the borrower granting the lender the right to claim any of the debtor's real assets (e.g. real estate or car) if he or she fails to pay back the loan." Given that, my opinion is that it is the lender.

Lastly the American Banker wrote, "The Consumer Financial Protection Bureau has managed to take one of the most controversial provisions of the Dodd-Frank Act - a rule that would effectively redefine the mortgage market - and craft it in a way to please both the banking industry and consumer groups. The agency's revised final ability-to-repay rule released this week went a long way to easing many concerns from bankers that the version it initially offered in January would restrict access to credit, while also not giving so much ground that it alarmed consumer watchdogs...

"Under Dodd-Frank, the agency had to outline requirements to ensure lenders adequately assessed a borrower's ability to repay a loan as well as create an ultra-safe class of 'qualified mortgages' that were protected from legal liability. It amended its final rule to expand the legal protections for small creditors to lend beyond the rule's main requirements and offered them a longer timeframe to adjust to restrictions on balloon loans. Small lenders can now count balloon loans as qualified mortgages for the first two years of the rule's enactment, based on the size of their assets and mortgage portfolio instead of the size of their community. After two years, they will have to meet the CFPB's definition of a 'rural' or 'underserved' community. Smaller lenders can also charge a higher annual percentage yield and still receive the safe harbor legal protections for up to 350 basis points of the average benchmark. It was previously 150 basis points for all lenders.

Additionally, compensation paid by a brokerage or lender to a loan originator employee is no longer included in the rule's 3% cap on points and fees."

American Banker goes on. "To be sure, there are still some objections from banking and consumer advocates, particularly on the 3% cap on points and fees for a loan to be considered a qualified mortgage. But most of these appear relatively minor compared to the complaints made with the CFPB's initial rule. The agency will likely have to make further adjustments once the rules go into effect on Jan. 10. Lawmakers have pressed CFPB officials to make changes if they discover the rules adversely impact the mortgage markets."

But QM is not the only item that the CFPB is directing the industry on - it is also addressing testing for originators. As a reminder, the CFPB has issued guidance that provides states may use the Uniform State Test (UST) developed by the Nationwide Mortgage Licensing System and Registry (NMLSR) to satisfy the testing requirement of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). Every originator knows that the SAFE Act requires state-licensed mortgage loan originators to pass a "qualified written test" developed by the NMLSR.  In addition to questions about other subjects, the test must include questions covering state laws and regulations. 

The CFPB's guidance confirms that this requirement can be satisfied through a UST rather than a separate test for each state covering the state's particular laws and regulations combined with a National Test Component developed by the NMLSR.  According to the CFPB, a state can use a UST if "it adequately tests required laws and regulations." By my simple reckoning, 31 state regulators have already adopted (or announced that they are adopting) the UST.  Although these agencies will no longer require a state specific test component as a prerequisite for mortgage loan originator licensure, many states will continue to require state specific education.  It is expected that eventually nearly every state will adopt the UST. Here is the CFPB's take.

And the Federal Trade Commission's annual letter to the CFPB on its 2012 administrative and enforcement activities related to Regulations B (ECOA), E (Electronic Fund Transfers), Z (TILA) and M (Consumer Leasing), stressed that it is "committed to continuing its vigorous enforcement and intends to do the same with other rules the CFPB issues." As most know, the FTC shares enforcement authority with the CFPB under these regulations regarding non-banks. So what's the FTC done recently? Well contained within the official letter they describe: TILA/Reg Z enforcement actions dealing with non-mortgage credit, including actions against five auto dealers for allegedly deceptive advertisements and an action against a payday lender and related entities for allegedly inaccurate disclosures, enforcement actions against several companies for allegedly making false claims in connection with offering forensic mortgage loan audits to borrowers seeking loan modifications, submission of a comment letter to the CFPB on its proposal for integrating the application and closing disclosures required by TILA and RESPA for mortgage loans, and EFTA/Reg E enforcement actions. Anyone interested in the annual letter can find it HERE.

Lastly, don't forget that the CFPB has issued final "clarifying and technical" amendments to its final mortgage escrow account rule dealing with the establishment of mandatory escrow accounts on higher-priced mortgage loans. The final escrow rule contains exemptions for certain creditors operating primarily in rural areas. Such creditors are also the subject of (1) a provision allowing balloon payment mortgages in the final ability-to-repay rule, (2) an exemption from the balloon payment prohibition on high-cost mortgages in the 2013 final HOEPA rule, and (3) an exemption from a requirement to obtain a second appraisal for certain high priced mortgages in the 2013 interagency final appraisals rule. These rules rely on the criteria for "rural" and "underserved" areas in the final escrow rule. The final amendments clarify how to determine whether a county is considered "rural" or "underserved". The CFPB released a final list of "rural" or "underserved" which determines which counties fall within the scope of these rule changes.

After several days of volatility that no one liked, Thursday the markets settled down and barely did anything. We did have one piece of housing news (Pending Home Sales: fewer Americans than forecast signed contracts in April to buy previously owned homes, possibly indicating limited inventory is holding back further progress in the housing market) and Jobless Claims which unexpectedly increased. But earlier this week yields for 10-year U.S. Treasuries touched 2.23%, the highest level since April 2012, due to strength in housing, jobs, and speculation the Fed will reduce asset purchases. Is it so bad that maybe the U.S. economy doesn't need cheap, long-term credit to fuel growth and that we're returning to an economy that can support itself? After all, the Fed has been holding rates at artificial levels for quite some time.

It's already Friday! We have Personal Income & Consumption, Chicago PMI, and Consumer Sentiment. Yesterday the stable market conditions and data that points to a suboptimal growth outlook for jobs and the economy was enough for real money and money managers to take advantage of attractive yield and spread levels and do some buying - causing a slight rally in MBS prices. And regardless of what happens later this year, right now mortgage banker selling (in the $2.0 billion area) is more than offset by Fed demand (in the $3 billion per day area).

Personal Income & Consumption for April came in (expected at +.1% and unchanged respectively, they came in at unchanged and -.2%) with a few numbers ahead of us. We find the 10-yr around 2.09% and MBS prices a shade better.