[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                    THE IMPACT OF DODD-FRANK'S HOME

                       MORTGAGE REFORMS: CONSUMER

                        AND MARKET PERSPECTIVES

=======================================================================



                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 11, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-144



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           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            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 11, 2012................................................     1
Appendix:
    July 11, 2012................................................    47

                               WITNESSES
                        Wednesday, July 11, 2012

Bentsen, Hon. Kenneth E., Jr., Executive Vice President, Public 
  Policy and Advocacy, the Securities Industry and Financial 
  Markets Association (SIFMA)....................................     7
Cohen, Alys, Staff Attorney, the National Consumer Law Center 
  (NCLC).........................................................     8
Hodges, Tom, General Counsel, Clayton Homes, Inc., on behalf of 
  the Manufactured Housing Institute (MHI).......................    10
Hudson, John Howland Pell, Chairman, Government Affairs, the 
  National Association of Mortgage Brokers (NAMB)................    11
Judson, Rick, First Vice Chairman of the Board, the National 
  Association of Home Builders (NAHB)............................    13
Louser, Scott, 2012 Vice President and Liaison, Government 
  Affairs, the National Association of REALTORS (NAR)...........    15
Stein, Eric, Senior Vice President, the Center for Responsible 
  Lending (CRL)..................................................    17
Still, Debra, CMB, Chairman-Elect, the Mortgage Bankers 
  Association (MBA)..............................................    18

                                APPENDIX

Prepared statements:
    Bentsen, Hon. Kenneth E., Jr.................................    48
    Cohen, Alys..................................................    56
    Hodges, Tom..................................................    76
    Hudson, John Howland Pell....................................    88
    Judson, Rick.................................................   107
    Louser, Scott................................................   119
    Stein, Eric..................................................   126
    Still, Debra.................................................   149

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of the American Bankers Association (ABA)..   166
    Written statement of the Credit Union National Association 
      (CUNA).....................................................   175
    Written statement of Habitat for Humanity....................   180
Cohen, Alys:
    Additional information provided for the record in response to 
      a question from Representative Huizenga....................   184


                    THE IMPACT OF DODD-FRANK'S HOME

                       MORTGAGE REFORMS: CONSUMER

                        AND MARKET PERSPECTIVES

                              ----------                              


                        Wednesday, July 11, 2012

             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 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Renacci, Royce, 
Hensarling, McHenry, Pearce, Luetkemeyer, Huizenga, Duffy, 
Canseco, Fincher; Maloney, Watt, Hinojosa, Baca, Miller of 
North Carolina, Lynch, and Carney.
    Also present: Representatives Miller of California and 
Green.
    Chairwoman Capito. The Subcommittee on Financial 
Institutions and Consumer Credit is called to order. I would 
like to welcome everybody here today. As you know, this 
morning's hearing is the second installment in a series of 
Financial Services Committee hearings this month leading up to 
the 2-year anniversary of the Dodd-Frank Act.
    This morning, our subcommittee will examine the 
implementation of Title XIV of the Dodd-Frank Act, which 
establishes new standards for mortgage origination and imposes 
liability on the secondary mortgage market for mortgages that 
do not meet these standards. It sounds like it might be kind of 
a boring hearing, but I don't think it will be. There is a lot 
of interest here, and it is going to cut across a lot of the 
economy, so it is extremely important that we get this right.
    The financial crisis of 2008 was caused partly by relaxed 
underwriting standards which led to a proliferation of riskier 
mortgages; we all know that. There is little doubt that some 
lenders departed from traditional underwriting standards in 
order to meet the demand for mortgages from consumers with 
subprime credit.
    The Dodd-Frank Act seeks to address these issues by 
establishing underwriting standards for all mortgage 
originations, focusing on the borrower's ability to repay the 
loan. While I have no doubt the intent of this section is to 
protect consumers, which we all want to do, we must be sure 
that these rules are being implemented by the Federal financial 
regulators, and that they are structured in a manner that 
provides an adequate level of consumer protection without 
restricting access to credit, particularly access to credit for 
those folks who maybe have less availability of credit to them 
as families.
    Although the authority to promulgate these rules began with 
the Federal Reserve, we all know that was transferred to the 
Consumer Financial Protection Bureau (CFPB) in July of 2011. In 
addition to establishing these new underwriting criteria, the 
CFPB must determine what legal protections will be afforded to 
the lenders whose loans meet the Qualified Mortgage (QM) 
criteria.
    They have two options: These loans can be determined to 
be--can be afforded a safe harbor that would preclude ability-
to-repay lawsuits or lenders who originate loans that meet the 
criteria would enjoy a presumption that they have satisfied 
these requirements. However, the borrower can rebut the 
presumption if they have evidence that the loan did not meet 
the original criteria for a borrower to repay the loan.
    Earlier this year, CFPB Director Roger Cordray testified in 
front of this committee that there might need to be brighter 
lines or bright lines in defining the standards in order to 
mitigate the litigation. To this point, later this week 
Representative Sherman and I, along with over 90 of our 
colleagues, will be sending a letter to the CFPB urging them to 
adopt a strong safe harbor for mortgages that meet the 
underwriting criteria. We must ensure that the underwriting 
standards and the subsequent legal protections provide 
sufficient consumer protection but do not overly, as I said 
before, restrict credit.
    We all want consumers to have safely underwritten 
mortgages, however, we must ensure that these reforms do not 
increase the cost of mortgage credit, and therefore, restrict 
creditworthy borrowers from receiving their mortgages. If there 
is not sufficient legal certainty for these loans, the cost of 
credit could rise, and fewer mortgages could be issued. We want 
to make sure that the CFPB produces a workable rule, and we 
also want to see them do so in a timely fashion.
    One of the great challenges facing our economy is the 
amount of uncertainty we have here in Washington. The CFPB has 
already announced they will not produce the final rule on a 
Qualified Mortgage until this fall, and they have until January 
21st of 2013 to produce the final rules. I would urge the CFPB, 
and they know I am urging them, this is not new to them to meet 
this deadline, so lenders and borrowers have the certainty 
necessary to move forward. This morning's panel of witnesses 
will provide the subcommittee with an assessment of the current 
landscape and the effect the proposed rules will have on 
availability of credit.
    I would now like to recognize the ranking member, Carolyn 
Maloney from New York, for the purpose of making an opening 
statement.
    Mrs. Maloney. I thank the chairwoman for calling this 
important hearing, and I welcome our distinguished panel, many 
of whom have testified before this Congress many times. I must 
acknowledge my former colleague and very good friend, Ken 
Bentsen, from the great State of Texas. It is good to see you 
again. You have been back here so many times testifying that I 
am beginning to think you are still a Member of Congress. But 
it is always good to see you.
    We are now at that--2 years ago this month, we passed the 
important financial reform bill, and it brought many provisions 
that are important for the safety and soundness of our 
financial industry and institutions that will bring 
transparency to the over-the-counter derivatives market that 
will allow for the safe unwinding of a failing financial 
institution. But two reforms were particularly important to 
consumers.
    The first was the creation of the Consumer Financial 
Protection Bureau, which is a bureau that--and this is a 
first--will make taking care of consumers and looking at their 
concerns their top priority. Too often, it was the second 
priority, or the third, or not thought about at all.
    And the second was Title XIV of the Wall Street Reform Act 
that dealt with mortgage lending. It contributed, in many ways, 
to the financial crisis from early 2007 through the end of 
2011. Approximately 10.9 million homes had started the 
foreclosure process. That is huge. And according to the 
testimony of Mark Zandi on February 9, 2012, when he testified 
before the Senate Banking Committee, he said, ``$7.4 trillion 
in homeowner equity was lost in the housing crash with close to 
$500 billion of that occurring in 2011.''
    So this was a huge impact on the financial stability of our 
country, and getting this right is important for our recovery. 
Economists tell us to this day that the biggest challenge we 
face in our economy is the housing market, how we can get it 
moving again, how we can make it stable, how we can make it a 
productive part of our economy. Harmful lending practices were 
restricted by the Dodd-Frank Act for Qualified Mortgages 
specifically in two ways: One, 2/28 mortgages with 5-year 
teaser rates that then reset at unaffordable high amounts were 
banned; and two, interest-only loans leading to negative 
amortization were also banned.
    The CFPB just closed their comment period. They are 
expected to come out with a rule before the end of the year. We 
look forward to hearing that rule. We look forward to your 
testimony. Getting that rule right is a big important part of 
not only protecting consumers, but I would say the industry and 
the overall economy. I look forward to your testimony. Thank 
you all for coming and for your hard work in trying to build a 
stable economy in our country. Thank you. I yield back.
    Chairwoman Capito. I now recognize Mr. Royce for 1 minute.
    Mr. Royce. Thank you, Madam Chairwoman. As we discuss the 
real-world impact of Dodd-Frank, it is becoming apparent that 
the biggest impact may fall on those consumers who are looking 
for a mortgage. Yesterday, we had a hearing on the Capital 
Markets Subcommittee, and there was a reference made to Mark 
Zandi's study which suggests that the premium capture cash 
reserve accounts portion of the risk retention rule would cause 
mortgage rates to increase between 100 and 400 basis points, 
and that is just that one PCCRA provision.
    Today, we are talking about the potential for a narrowly-
defined Qualified Mortgage rule with a murky safe harbor 
protection. It is a wonder why any financial institution would 
choose to make a loan with the potential added cost and 
liability of these proposed rules. With government entities 
exempted from most of these new rules, it appears Washington is 
doing everything in its power to prevent a robust recovery in 
the private mortgage market. I will note one point of 
bipartisan agreement on this front, and it is a fix on the 
points and fees definition in the QM rules with a goal of 
bringing it back to what Congress originally intended. I am 
pleased to be a co-sponsor of this legislation with Mr. 
Huizenga and Mr. Scott, and I thank the Chair for holding this 
hearing. I look forward to the testimony of the panel. Thank 
you.
    Chairwoman Capito. Thank you. Mr. Hinojosa for 3 minutes.
    Mr. Hinojosa. Thank you. Thank you, Chairwoman Capito and 
Ranking Member Maloney. Here we are at yet another hearing that 
is purely what I believe is a political messaging opportunity 
for my friends on the other side of the aisle. While I am 
concerned about what impact the Dodd-Frank Wall Street Reform 
and Consumer Protection Act is having on community banks and 
credit unions, I would rather hear about specific issues and 
proposals rather than a broad brush attack on that law.
    When we sat down back in 2008 to create a law to respond to 
the financial crisis, we listened carefully to the community 
banks and the credit unions, and we took into account that they 
were not the culprits in the financial crisis, and should not 
be treated in the same manner as the large international banks. 
To reflect this fact, we created many exceptions for small 
community banks. Additionally, the CFPB must consult with the 
community banks and credit unions to establish the impact of 
rules on these institutions I mentioned.
    Today, we are discussing the impact of the Dodd-Frank Act 
on mortgage origination. Just this week, the CFPB released 
their prototype for standard, easy-to-understand mortgage 
documents, something that was greatly needed. Much of the 
subprime crisis was caused by mortgage products that were 
opaque and difficult for the layman to understand. These new 
forms are a step in the right direction and will add sunlight 
to the closing process for the average consumer.
    While I am open to hearing legitimate concerns about the 
effects of particular upcoming rules, such as the Qualified 
Mortgage definition, and will listen to ideas about how to 
fine-tune the current law, I flat out reject any broad attack 
on the Dodd-Frank Act. It is political theater and unproductive 
in a time when so many Americans are looking to Congress for 
action, and I look forward to the testimony from each one of 
the panelists.
    Before yielding my time, I want to acknowledge the presence 
of my good friend and former colleague, former Congressman 
Kenneth Bentsen, who sat on this committee for many, many years 
and did an outstanding job. I want to say to you that we miss 
you on this side of the aisle. With that, I yield back.
    Chairwoman Capito. The gentleman yields back.
    Mr. Huizenga for 1 minute.
    Mr. Huizenga. Thank you, Madam Chairwoman, and Ranking 
Member Maloney. I appreciate you holding this hearing today. As 
we all know, mortgage rates have fallen to a record low while 
housing affordability is frankly at an all-time high, and we 
are here to discuss some of those specific reforms that need to 
happen. And I believe my bill, H.R. 4323, that Mr. Royce had 
mentioned--it is actually sponsored by myself, Mr. Clay, Mr. 
Royce and Mr. Scott--is going to help stabilize the housing 
market while ensuring access to affordable mortgage credit 
without overturning important consumer protections and sound 
underwriting. I believe we need to pass bills like H.R. 4323 
and other bipartisan commonsense reforms that promote 
homeownership and protect the American dream for future 
generations.
    So as we move forward, we are looking forward to your 
comments as to where we are and where we need to go. That is, I 
think, an important part of this. So again, Madam Chairwoman, I 
appreciate you holding this hearing and I look forward to 
hearing from our witnesses today. Thank you.
    Chairwoman Capito. Thank you.
    Mr. Lynch for 2 minutes.
    Mr. Lynch. Thank you, Madam Chairwoman. I would like to 
also thank and welcome the witnesses here. Thank you for 
helping us with our work. Today is the second day of hearings 
in which the committee highlights ``unintended consequences of 
the financial reform'' while ignoring the problems that brought 
us here. Let's take a minute to review the many bad practices 
in the subprime mortgage market that caused the housing bubble 
to inflate in the first place, and started the chain of 
economic events that led to the global economic meltdown.
    In the years leading up to the crisis, underwriting 
standards in this country in the mortgage industry deteriorated 
so badly that some argued that they no longer existed. Because 
lenders could make more money dealing in exotic mortgage 
products than plain vanilla mortgages that were the hallmark of 
one of the strongest housing markets in the world, they started 
dealing more and more on stated income and no-doc loans. 
Instead of verifying even the most basic information such as 
proof of income, the industry was happy to accept certification 
from borrowers instead of doing their homework.
    One of our witnesses, Ms. Cohen, states that--I read her 
testimony last night--some lenders actually redacted income 
information from their files. These products were then packaged 
and sold up the food chain with the knowledge that only two 
people would suffer from these bad underwriting standards: the 
last person who bought these mortgages; and the borrowers 
themselves. When the mortgage market collapsed, 3.6 million 
Americans lost their home, often their primary source of 
household wealth, to foreclosure, and the damage caused by 
reckless underwriting practices in the mortgage industry has 
been a catastrophic drag on our economy. Yet, we are here today 
to discuss in part how the modest commonsense reforms in Dodd-
Frank are actually holding back the mortgage industry. How 
quickly we forget what brought us down in the first place.
    Yes, I am happy to work with my colleagues to ensure that 
the rules written by the CFPB and others are reasonable and 
they are tailored to preventing another housing crisis. We do 
indeed need to make sure that the definition of Qualified 
Residential Mortgage (QRM) is not too narrow that it denies 
reasonable housing opportunities to otherwise creditworthy 
borrowers, but we cannot afford to forget why Dodd-Frank exists 
in the first place. Madam Chairwoman, I yield back.
    Chairwoman Capito. The gentleman yields back.
    Mr. Canseco for 1 minute.
    Mr. Canseco. Thank you, Madam Chairwoman. Recently, I heard 
from some community banks in Texas, including: Union State Bank 
in Kerville; the First State Bank of Paint Rock in San Angelo; 
Citizens State Bank in Luling; and Marion State Bank in Marion. 
And all of these institutions have ceased making mortgage loans 
largely because of Dodd-Frank and the burdens it places on 
small institutions across the country. But what I haven't heard 
yet is an explanation for how families and consumers in 
Kerville, San Angelo, Luling, Marion, and elsewhere are being 
protected or are better off when they can no longer go to their 
local community bank and get a mortgage loan. This is but one 
of the side effects of Dodd-Frank. And I look forward to 
bringing greater attention to it at today's hearing. I yield 
back.
    Chairwoman Capito. The gentleman yields back.
    Mr. Fincher for 1 minute.
    Mr. Fincher. I thank the chairwoman for having this hearing 
today. As we examine the impacts of the Dodd-Frank Act on 
mortgage reform, I want to call attention to the manufactured 
housing industry, which is currently facing several regulatory 
challenges. To address these challenges, Congressman Donnelly, 
Congressman Miller, and I introduced H.R. 3849, the Preserving 
Access to Manufactured Housing Act. One of the provisions in 
our bipartisan bill adjusts the threshold in which small 
balance manufacturing home loans are classified as high-cost 
mortgages under the Home Ownership and Equity Protection Act, 
which was revised in Dodd-Frank. Dodd-Frank expands the range 
of loan products that can be considered high-cost mortgages 
without recognizing the uniqueness of manufactured home loans 
compared to the rest of the housing industry. That one-size-
fits-all approach is reducing the home buying public's access 
to manufactured homes.
    I thank the chairwoman again, and I look forward to hearing 
the testimony today. I yield back.
    Chairwoman Capito. The gentleman yields back. I think that 
concludes our opening statements. So I will recognize each 
witness as we move forward for the purposes of making a 5-
minute statement.
    But I would like to join my colleagues in welcoming our 
former colleague, Kenneth Bentsen, back to the committee. We 
served on the committee together, but I was way down there in 
the corner at that point. I am very happy to see you here.
    Our first witness is the Honorable Kenneth E. Bentsen, Jr., 
executive vice president of public policy and advocacy for the 
Securities Industry and Financial Markets Association. Welcome 
back.

 STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., EXECUTIVE 
  VICE PRESIDENT, PUBLIC POLICY AND ADVOCACY, THE SECURITIES 
       INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Bentsen. Thank you, Chairwoman Capito, Ranking Member 
Maloney, and members of the subcommittee. I also languished 
down at the very end for many years, and so I am envious of 
your post now. I was always glad that the witnesses were still 
alive by the time they got around to me to ask questions. I 
appreciate the opportunity to present SIFMA's views today on 
the Qualified Mortgage rulemaking proposal. Our views on the 
proposal were developed by our diverse membership which 
includes financial institutions that act as residential 
mortgage originators, securitization sponsors, broker/dealers 
that act as underwriters, placement agents, market makers and 
asset managers that include some of the largest most 
experienced investors in residential mortgage-backed securities 
and other structured financial products.
    SIFMA has been an active participant in this rulemaking and 
will continue to advocate for a sensible outcome. SIFMA 
believes in the underlying concept of Title XIV of the Dodd-
Frank Act, that a borrower should be required to show an 
ability to repay a mortgage. However, SIFMA believes it is 
important that the QM definition promotes the ability of 
secondary markets to provide funding for mortgage credits as 
over 90 percent of mortgage credit is currently funded through 
securitization and the secondary markets.
    I will be focusing my statement today on two key points: 
first, that the parameters of the Qualified Mortgage definition 
must be scaled broadly; and second, that the QM definition must 
create clear bright lines for lenders and borrowers at time of 
origination and should provide a safe harbor for compliance.
    We are very concerned that the QM regulations may be 
constructed in a narrow manner with unclear parameters that 
will not allow for the certainty of compliance at origination. 
We believe such an outcome would restrict the availability of 
credit through increased cost and restrictive underwriting and 
would be detrimental to consumers.
    Title XIV of the Dodd-Frank Act imposes a requirement on 
lenders to determine ability to repay on virtually every 
residential mortgage loan and define the necessary criteria to 
demonstrate compliance with the ability-to-repay requirement. 
Thus, the QM definition should broadly outline the parameters 
of responsible lending. Defining QM broadly will create 
compliance guideposts for lenders that want to lend 
responsibly.
    In our view, the vast majority of future mortgage lending 
will be loans that are QMs. Loans that are not QMs will carry 
with them liability for purchasers of the loans, so-called 
assignee liability. Due to this liability and supervisory, 
reputational, and other concerns, we do not expect significant 
origination of non-QM loans. We are aware of the contention 
that a narrower definition of QM will not be disruptive because 
lenders in secondary markets will be comfortable operating 
outside of the protection supported by QM with reasonable 
pricing and premium for those loans. These predictions 
contradict feedback from our member firms that run these 
businesses, and we believe that the CFPB would be ill-advised 
to implement QM rules based on those views. History has shown 
that loans that carry significant or uncertain liability are 
made with a significant pricing premium or not made at all. We 
believe that lenders in secondary markets would respond to the 
liability risk through very restrictive underwriting 
guidelines, significant pricing premiums or both. These actions 
will result in less available credit to creditworthy borrowers, 
borrowers who would have otherwise received it had the 
boundaries of QM been drawn more broadly.
    Given the impact of assignee liability discussed above, 
SIFMA believes it is critical that the final rules provide for 
certainty of compliance with the ability-to-repay requirements 
at the time of origination. The proposal provided two options 
regarding assurance of compliance: a rebuttable presumption; 
and a safe harbor. SIFMA believes that consumer credit 
availability would be best protected through a safe harbor, as 
a rebuttable presumption provides no comfort. A rebuttable 
presumption will likely cause lenders of secondary market 
investors to implement standards conservatively as an overlay 
narrower than the actual bounds of the QM definition.
    Credit-worthy borrowers with credit profiles within but 
close to the edge of the QM would be impacted negatively. 
Regardless of whether or not a safe harbor is provided, clear 
QM standards that provide certainty of compliance at the time 
of origination are paramount. Lenders and investors must know 
at the time of origination whether the loan meets the QM 
standards. The standards that define QM compliance must be 
clear, objective, and verifiable. If bright lines are not 
implemented in the final rule, borrowers will pay more for 
their loans and have a harder time obtaining them as once 
again, lenders will operate conservatively. We hope that in 
constructing the final rules, the CFPB creates a regime that 
not only corrects flaws exposed in recent years, but also 
serves as a basis for the development of a positive, inclusive, 
and forward-looking housing policy. A broad definition of QM 
and bright lines for compliance will help achieve this goal. 
Thank you, and I am happy to answer your questions.
    [The prepared statement of Mr. Bentsen can be found on page 
48 of the appendix.]
    Chairwoman Capito. Thank you very much.
    Our next witness is Alys Cohen, a staff attorney at the 
National Consumer Law Center. Welcome.

STATEMENT OF ALYS COHEN, STAFF ATTORNEY, THE NATIONAL CONSUMER 
                       LAW CENTER (NCLC)

    Ms. Cohen. Chairwoman Capito, Ranking Member Maloney, and 
members of the subcommittee, thank you for the opportunity to 
testify today. As a staff attorney at the National Consumer Law 
Center, I provide training and technical assistance to 
attorneys across the country representing homeowners who are 
facing foreclosure, and I also lead the Center's Washington 
mortgage policy work. I have spent the last 15 years 
specializing in the regulations and laws governing mortgage 
lending and servicing, including the recent reforms of the 
Dodd-Frank Act. I testify here today on behalf of the National 
Consumer Law Center's low-income clients.
    In 2007, a global economic crisis was unleashed by a 
meltdown in the mortgage market. The loans that triggered this 
international collapse were primarily high-cost adjustable rate 
mortgages and loans with other risky features made in violation 
of longstanding, prudential underwriting guidance but subject 
to little or no formal regulation. Dodd-Frank's regulation of 
the mortgage market is essential to our economic security. 
Underwriting traditionally served as a hedge against the 
origination of unaffordable loans. But in the years leading up 
to the foreclosure crisis, underwriting all but disappeared. 
Lenders relied on securitization to spread the cost of the 
inevitable foreclosures. Throughout the subprime market, 
pricing replaced underwriting as a risk control mechanism. One 
lesson from the crisis is clear: mortgage lending will endanger 
all of our economic well-being if it is not subject to 
regulation. The rules outlined in Dodd-Frank are nothing more 
than a codification of the basic precepts of residential 
underwriting for decades. Dodd-Frank's mortgage affordability 
rule would restore balance and fairness in the marketplace best 
if it contained a broad rebuttable presumption with clear 
lines, not a safe harbor. A safe harbor would provide legal 
insulation to creditors who make predictably unaffordable 
loans. Rule writers will always be several steps behind the 
market, but if the incentives are in the right place, the rule 
will do its job, even as new unanticipated developments arise. 
The essential incentive for the mortgage market is the rule 
that every mortgage must be evaluated for affordability.
    A broad, clear, rebuttable presumption will still require a 
stiff uphill climb for homeowners, but will restore balance and 
provide a backstop to reckless lending. The claim that 
borrowers pose a significant litigation risk to creditors if 
there is a rebuttable presumption or otherwise is without 
basis. Most homeowners never find an attorney. Those who do 
will face courts which defer to the standards already set out 
by the CFPB. Anyone who prevails will be entitled only to 3 
years of damages, a limited and predictable amount. And in 
relation to the size of the mortgage market, the incidence of 
truth-in-lending claims historically has been vanishingly 
small.
    Further adjustments to the underwriting standards in Dodd-
Frank are best done by agencies with substantive expertise, 
including the Consumer Financial Protection Bureau. Pending 
before the subcommittee is H.R. 4323, which seeks to narrow the 
protections afforded by Congress, including on payments to loan 
originators and payments to affiliates of the creditor such as 
title companies. Title insurance and ancillary title fees, 
among other third-party fees, are rightly subject to heightened 
standards. They have been a source of price gouging of 
consumers in recent years and are a significant source of undue 
profit to creditors. Typically, the mortgage lender, not the 
borrower, chooses the title company, even though the borrower 
pays the cost of title insurance. The result is a form of 
reverse competition. Title companies compete to offer lenders 
the best deal and lenders are free to steer homeowners to 
affiliated companies where the sometimes hefty profits from 
title insurance can be retained in-house.
    Title insurance premiums are subject to little or no 
regulation at the State level. Coverage chosen by title 
insurers often meets the needs of the insurer, but not the 
broader needs of the homeowner, and loan amounts often are 
increased as a means of increasing the basis for the ancillary 
fees.
    Dodd-Frank strikes a sensible balance in restoring fairness 
and efficiency to the market. Administrative rule writing is 
the best context for working out the technical details. The 
regulatory process should move forward in order to restore 
vigor to communities and to the mortgage markets. Thank you for 
inviting me to testify today.
    [The prepared statement of Ms. Cohen can be found on page 
56 of the appendix.]
    Chairwoman Capito. Thank you very much. I would like to 
yield to my colleague, Mr. Fincher, for the purposes of an 
introduction.
    Mr. Fincher. Thank you, Chairwoman Capito. It is my 
pleasure to welcome Tom Hodges to today's subcommittee hearing. 
Tom is a fellow Tennesseean from Knoxville and has worked for 
Clayton Homes in multiple roles since 1995. He now serves as 
general counsel and is responsible for understanding how Dodd-
Frank and related regulations will impact Clayton Homes and the 
manufactured home industry. Tom, it is good to have you, 
welcome, and we look forward to hearing your testimony.

STATEMENT OF TOM HODGES, GENERAL COUNSEL, CLAYTON HOMES, INC., 
     ON BEHALF OF THE MANUFACTURED HOUSING INSTITUTE (MHI)

    Mr. Hodges. Thank you, Chairwoman Capito, Ranking Member 
Maloney, and members of the subcommittee for the opportunity to 
testify today concerning the impact of Dodd-Frank's home 
mortgage reforms. Also thank you, Congressman Fincher, for that 
warm introduction. My name is Tom Hodges. I serve as general 
counsel for Clayton Homes, and I represent the Manufactured 
Housing Institute at the hearing today.
    I have submitted my complete written testimony for the 
record. But in my oral remarks today, I would like to discuss 
some key challenges to our industry that will significantly 
impact the industry's ability to provide safe, reliable, and 
affordable manufactured housing. For over 60 years, 
manufactured housing has been an important source of housing 
for low- and moderate-income families across the country. There 
are approximately 22 million Americans living in about 8.7 
million manufactured homes. The average cost of a new 
manufactured home is less than $61,000 versus roughly $208,000 
for a new site built home. More importantly, the median income 
for manufactured homeowners is $32,000 compared to $60,000 for 
all homeowners.
    An even greater indication of the Nation's reliance on 
manufactured housing as an affordable housing choice is that 72 
percent of all new homes sold under $125,000 in 2011 were 
manufactured homes. In addition to its role as an important 
source of affordable housing, nearly 60,000 U.S. jobs were 
sustained by the manufactured housing industry in 2011.
    Because of the smaller size of loans that the manufactured 
housing market relies on, the sections of the Dodd-Frank Act 
that have a unique impact on the industry are contained in 
HOEPA and the Qualified Mortgage provisions. The HOEPA APR and 
points and fees threshold, as well as the points and fees 
limitations for Qualified Mortgages, make it extremely 
difficult for a lender to offset the cost to originate and 
service small balance manufactured home loans. For example, the 
impact on a $200,000 site built loan and a $20,000 manufactured 
home loan is very different. Though the cost of originating and 
servicing these two loans is similar in terms of real dollars, 
as a percentage of each loan size, it is significantly 
different.
    It is this difference that effectively discriminates 
against the small balance manufactured home loan which is at a 
much higher risk of either being categorized as a high-cost 
mortgage or failing the Qualified Mortgage standards. Of the 
loans our company originated in 2010 and 2011, approximately 
more than 40 percent would have been characterized as a high-
cost mortgage. Likewise, for the same loans, nearly 40 percent 
or more would have failed the Qualified Mortgage standards.
    The practical effect is that lenders will not make these 
loans, and credit will become less available for purchases of 
manufactured homes. The impact will be felt by low- and 
moderate-income families seeking to purchase new homes, as well 
as the 22 million Americans who are currently residing in 
manufactured homes who could see the ability to resell their 
homes effectively wiped out. For this reason, MHI supports H.R. 
3849, the Preserving Access to Manufactured Housing Act, which 
would provide relief to consumers and the industry. Our 
industry's regulatory challenges are not limited to HOEPA and 
the Qualified Mortgage. The industry is already feeling the 
impact of the SAFE Act. H.R. 3849 also clarifies that sellers 
of manufactured homes who are not compensated for loan 
origination activity should not be licensed or registered under 
the SAFE Act.
    Manufactured home sales people are fundamentally involved 
in selling homes, not originating mortgage loans. MHI is very 
grateful for the leadership and support of Representatives 
Stephen Fincher, Joe Donnelly, and Gary Miller, to help develop 
a bipartisan solution to provide modest relief to the 
manufactured housing market in these areas. MHI appreciates the 
consideration of Chairman Bachus and Ranking Member Frank to 
Congressmen Fincher, Donnelly, and Miller on these issues and 
for their long-term support and commitment to preserving 
manufactured housing as a viable and sustainable source of 
affordable housing. Thank you for the opportunity to testify, 
and I look forward to the questions.
    [The prepared statement of Mr. Hodges can be found on page 
76 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. John Hudson, on behalf of the 
National Association of Mortgage Brokers. Welcome.

  STATEMENT OF JOHN HOWLAND PELL HUDSON, CHAIRMAN, GOVERNMENT 
  AFFAIRS, THE NATIONAL ASSOCIATION OF MORTGAGE BROKERS (NAMB)

    Mr. Hudson. Thank you. Chairwoman Capito, Ranking Member 
Maloney, and members of the subcommittee, thank you for this 
opportunity to be here today to speak about the impacts of 
Dodd-Frank. I am John Howland Pell Hudson, the chairman of 
government affairs for the National Association of Mortgage 
Brokers, and the Central and South Texas manager for Premier 
Nationwide Lending, part of a privately owned mortgage bank 
headquartered in Flower Mound, Texas.
    NAMB is the only nonprofit trade association that 
represents mortgage brokers as well as mortgage loan 
originators employed by mortgage banks and depositories. NAMB 
advocates on behalf of more than 116,000 State-licensed 
mortgage loan originators in all 50 States and the District of 
Columbia. Since 1973, NAMB has been committed to enhancing 
consumer protection, industry professionalism, high ethical 
standards, and the preservation and promotion of small business 
and homeownership in this country.
    My testimony highlights the fact that Dodd-Frank was passed 
in haste and some would say anger at the unknown of what 
happened during the Wall Street meltdown. The creation of the 
Qualified Mortgage, Qualified Residential Mortgage, hardwiring 
underwriting standards into legislation, capping fees at 
arbitrary percentages of a mortgage amount, and giving lenders 
no bright line regarding legal liability will ultimately harm 
consumers, the very people the Dodd-Frank Act was intended to 
protect.
    NAMB is calling for an 18- to 24-month extension of all 
mortgage-related regulatory deadlines in the Dodd-Frank Act in 
order for Congress to amend sections of Dodd-Frank to take out 
or amend the unintended consequences that will harm consumers 
in the mortgage market today.
    ``Skin in the game'' was a popular mantra during the years 
leading up to the passage of Dodd-Frank, and we certainly think 
the mortgage market is better at determining what that means 
than the regulators. What was a great sound bite has turned 
into a complex restructuring of the mortgage underwriting 
system that regulators, industry, and many in Congress have 
concluded is not going to work as intended and will ultimately 
be harmful to consumers.
    Overlooked in this debate was evidence in the VA loan 
program that clearly shows that downpayment does not correspond 
to default: 91 percent of all VA home loans are made with no 
money down, meaning technically, these home loans are 
underwater at the time that they are closed. In addition, VA 
has higher debt-to-income ratios and lower credit scores on 
average than that of FHA loans, yet VA loans still perform 
better with an astonishingly low default rate when compared to 
other mortgage loans. QRM and QM should be completely placed on 
hold by the regulators or Congress in order for us to think 
through all aspects of harm that will result from moving 
forward with these shoot-from-the-hip ideas. For example, the 3 
percent cap on fees and points in the QM debate is wrongheaded 
and will harm consumers. In Texas, we have a loan program known 
as the Texas Veteran Land Board, which offers below market 
interest rates for military veterans. In fact, this week, 
mortgage rates for disabled veterans in the State of Texas 
through this program will be an astonishing low 2.61 percent on 
a 30-year fixed-rate loan. However, the 3 percent cap will take 
away the viability of this program because of the free fee 
structure associated with it.
    The land board allows originators 2 percent, leaving 1 
percent for all other costs. This simply does not work. This 
problem will be found all across the country in many State and 
local bond money programs designed for low- to moderate-income 
home buyers, thereby destroying the specific loan programs 
which are there to help these consumers in need. Also, the 
problems with the affiliated company's revenue being included 
in the 3 percent will also cause harm for small businesses.
    In many smaller communities, a business needs several 
revenue streams in order to stay in business. These small 
companies need the income for mortgage, title insurance, and 
other services needed to close a real estate loan in order to 
meet all payroll and other expenses. In addition to striking 
the points and fee caps from the QM, the industry must be given 
a legal safe harbor to originate safe loans. If not, credit 
standards will continue to tighten, consumers will pay more, 
and the economy will continue to drag. Among a myriad of 
concerns with Dodd-Frank, I would also like to point out that 
loan originators and mortgage broker entities are currently 
defined the same and what they are in effect doing is forcing 
small business mortgage brokers and lenders to limit 
compensation to employees and to limit loan programs.
    There are some fixes with this which would mean that Dodd-
Frank adopt the SAFE Act's definition of mortgage loan 
originator. Also, consumers are still paying more for property 
appraisals than they currently need to. Some appraisal issues 
could be fixed by allowing mortgage professionals to order 
directly, and for appraisals to be portable, meaning that 
consumers can purchase one appraisal and that appraisal can be 
transferred from lender to lender to lender during their loan 
shopping.
    Again, Congress must act to make sure that arbitrary 
deadlines do not shut out credit for consumers and destroy the 
availability of mortgage credit. Thank you.
    [The prepared statement of Mr. Hudson can be found on page 
88 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Rick Judson, first vice chairman of 
the board of the National Association of Home Builders. 
Welcome.

STATEMENT OF RICK JUDSON, FIRST VICE CHAIRMAN OF THE BOARD, THE 
          NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB)

    Mr. Judson. Thank you. Chairwoman Capito, Ranking Member 
Maloney, and members of the subcommittee, thank you for the 
opportunity to be here with you today. My name is Rick Judson. 
I am a builder developer in Charlotte, North Carolina and the 
first vice chairman of NAHB. You all mentioned in your opening 
remarks the objective of having access to credit. NAHB believes 
that the housing finance system should provide adequate and 
reliable credit to home buyers at reasonable interest rates 
through all business cycles and conditions, and it is critical 
to our economic health in this country. The relative slowness 
of growth in housing can be traced, in large part, to 
respective home buyers finding it more difficult to obtain 
mortgage credit, ironically in a period of historically low 
interest rates.
    According to an NAHB housing market index survey conducted 
in January of this year, almost 70 percent of the builders 
report that qualifying buyers for mortgages is a significant 
problem in their selling homes. As this subcommittee examines 
the Dodd-Frank Act's mortgage lending reforms, NAHB believes it 
is critical if such reforms are imposed in a manner that causes 
minimum disruptions to the mortgage markets while ensuring 
consumer protections.
    Great care must be taken to avoid further adverse changes 
in liquidity and erosion of affordability. Hence, NAHB believes 
it is essential that a definition of the Qualified Mortgage or 
QM loan and the ability-to-repay standards are well-structured 
and properly implemented. The QM is extremely important, given 
it will set the foundation for the future of mortgage 
financing, as all mortgages will be subject to these 
requirements. NAHB urges policymakers to consider the long-term 
ramifications of these rules on the market and not to place 
unnecessary restrictions based solely on today's economic 
conditions.
    Overly restrictive rules will prevent willing and 
creditworthy borrowers from entering the housing market, even 
though owning a home remains an essential part of the American 
dream, according to all recent polls. NAHB has joined with 32 
other housing, banking, civil rights, and consumer groups to 
urge the CFPB to issue broadly defined and clear QM standards. 
A narrowly defined QM would deny financing to many creditworthy 
borrowers, which would undermine the prospects of a national 
recovery. Many observers believe few lenders will pursue 
business outside the QM market. If made, these non-QM loans 
would be far more costly and will not include important 
protections, burdening families, particularly first-time home 
buyers who are least able to deal with these expenses. This 
seems to go against Congress' intention for the ability-to-
repay requirement.
    After carefully considering proposed alternatives for QM, 
NAHB supports the creation of a bright line safe harbor to 
define the QM to best ensure safer, well-documented, and sound 
underwritten loans without the decreasing the availability or 
increasing the cost of credit to borrowers. NAHB supports a QM 
safe harbor that provides a sufficient availability of funding 
to provide consumers with strong protection and provide lenders 
with definitive lending criteria that reduces excessive 
litigation potential. The safe harbor should incorporate 
specific ability-to-repay guidelines. The final rule should 
provide creditors with discretion to responsibly adapt debt 
income or residual income requirements based on changing 
markets and not impose simply a rigid American standard. This 
should be sufficiently objective to make sound underwriting and 
credit decisions.
    NAHB recommends that the regulators at corporate NAHB and 
other industry stakeholders develop a workable safe harbor. It 
is important to note that the establishment of the safe harbor 
under the QM does not eliminate lender liability. Consumers 
must have access to a responsible and sustainable housing 
credit market so as we can strengthen the lending regulations 
to avoid past excesses that have been addressed. We must be 
careful not to create an environment where mortgage loans are 
subject to unnecessarily tightened litigation risks or costs. 
Excessive litigation exposure and overly severe penalties would 
cause unnecessary uncertainty, resulting in liquidity issues 
for the entire population, and could cause low- to moderate-
income and minority populations to suffer disproportionately.
    I thank you for the opportunity to speak, and I will be 
happy to answer any questions. Thank you.
    [The prepared statement of Mr. Judson can be found on page 
107 of the appendix.]
    Chairwoman Capito. Thank you. Our next witness is Mr. Scott 
Louser, 2012 vice president and liaison of government affairs, 
National Association of REALTORS. Welcome.

  STATEMENT OF SCOTT LOUSER, 2012 VICE PRESIDENT AND LIAISON, 
  GOVERNMENT AFFAIRS, NATIONAL ASSOCIATION OF REALTORS (NAR)

    Mr. Louser. Thank you, Chairwoman Capito, Ranking Member 
Maloney, and members of the subcommittee. Thank you for holding 
this important hearing on the impact of Dodd-Frank's home 
mortgage reforms. As mentioned, my name is Scott Louser. I am 
the 2012 vice president and liaison for government affairs for 
the National Association of REALTORS, and I am honored to be 
here today to testify on behalf of the 1 million members who 
practice residential and commercial real estate.
    I have been a REALTOR for more than 15 years. I am the 
broker-owner of Preferred Minot Real Estate in Minot, North 
Dakota. In addition to being a REALTOR, I am also a current 
member of the North Dakota State legislature representing 
District 5, so it is quite an honor to be on this side of the 
table today.
    If you had asked economists and housing market analysts 
about the current state of the housing market, most would agree 
that today's underwriting standards are too tight and 
contribute to a slow housing recovery. Because of this, NAR 
believes that an unnecessarily narrow definition of the 
Qualified Mortgage that covers only a modest portion of loan 
products and underwriting standards and serves only a small 
portion of borrowers would undermine prospects for a housing 
recovery and threaten the redevelopment of a sound mortgage 
market. For this reason, NAR urges Congress and the 
Administration to work together on a broadly defined QM rule 
using clear standards. We believe that this is the only way to 
help the economy and at the same time, ensure that the largest 
number of creditworthy borrowers are able to access safe, 
quality loan products for all housing types, as Congress 
intended in the enacting of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act.
    NAR also believes that the QM will define the universe of 
readily available mortgages for a long time to come and non-QM 
mortgages will be rarely made. Every version of the ability-to-
repay provision introduced in Congress and including the final 
version of Dodd-Frank that became law paired the ability-to-
repay requirement with the QM as the best means of ensuring 
sound lending for borrowers.
    A narrowly defined QM would put many of today's loans and 
borrowers into the non-QM market, which means that lenders and 
investors will face a high risk of an ability-to-repay 
violation, and even a steering violation. As a result, these 
loans are unlikely to be made. In the unlikely event they are 
made, they will be far costlier to consumers. Creating a broad 
QM which includes sound underwriting requirements, excludes 
risky loan features, and gives lenders and investors reasonable 
protection against undue litigation risk will help ensure the 
revival of the home lending market.
    The ability-to-repay provisions of Dodd-Frank include a 
provision that if a loan's fees and points do not exceed 3 
percent, the loan will be considered a Qualified Mortgage. The 
problem is that the calculation of fees and points under the 3 
percent cap discriminates against real estate and mortgage 
firms with affiliates involved in the transaction. When an 
affiliate is involved additional items beyond the points and 
fees typically associated with the industry must be also 
included.
    NAR strongly urges the Financial Services Committee to hold 
a hearing on, and then work to pass, H.R. 4323, the Consumer 
Mortgage Choice Act, to correct this discrimination and level 
the playing field between affiliated and unaffiliated firms. If 
these provisions are not corrected, up to 26 percent of the 
market or more could be affected. Consumers will be denied the 
choice of using in-house services, there will be less 
competition in the lending and settlement services industry, as 
well as likely reduced access to credit.
    REALTORS believe that one of the biggest issues impacting 
the housing economy is uncertainty in the rules that govern the 
housing finance industry. This uncertainty impacts all 
participants in housing finance: lenders; investors; and 
consumers. Until there is market certainty that encourages the 
return of private capital, FHA and the GSEs--Fannie Mae and 
Freddie Mac--will continue to dominate the housing finance 
system with the taxpayer on the hook. Therefore, we believe it 
is crucial to break the regulatory logjam and complete work on 
the rules related to QM and the QRM now that the Fed Basel III 
proposal is known.
    The very first step to creating certainty in the housing 
finance system is to define QM so that it encompasses the vast 
majority of high-quality lending being done today. An effective 
ability-to-repay rule that provides strong incentives for 
lenders to focus on making well-underwritten QMs affordable and 
abundantly available to all creditworthy borrowers will require 
a clear objective definition of the QM that itself is not 
unduly restrictive. This action, along with a correcting of the 
3 percent cap on points and fees will ensure that credit and 
housing services are available and affordable to the consumer. 
If we are able to get these first steps right, the market will 
continue its recovery.
    Once again, on behalf of the 1 million REALTORS, thank you 
for the opportunity to testify on the impact of Dodd-Frank 
reform. And as always, the National Association of REALTORS is 
available to Congress and our industry partners for any 
questions. Thank you.
    [The prepared statement of Mr. Louser can be found on page 
119 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Eric Stein, the senior vice 
president of the Center for Responsible Lending. Welcome, Mr. 
Stein.

STATEMENT OF ERIC STEIN, SENIOR VICE PRESIDENT, THE CENTER FOR 
                   RESPONSIBLE LENDING (CRL)

    Mr. Stein. Thank you very much. Chairwoman Capito, Ranking 
Member Maloney, and members of the subcommittee, thank you for 
inviting me to testify today. I am senior vice president of the 
Center for Responsible Lending, which is a nonprofit, 
nonpartisan research and policy organization dedicated to 
protecting homeownership and family wealth. It is affiliated 
with Self-Help. Today, I am representing CRL.
    During the housing boom years, the private market engaged 
in essentially a science experiment: What would happen if lots 
of mortgage lending happened almost entirely outside of 
government oversight? The resulting foreclosure crisis is a 
stark reminder in my view as to why Dodd-Frank was important. 
Private mortgage lending dominated. Fannie Mae's and Freddie 
Mac's shares of the mortgage market decreased by 20 percentage 
points while the private market, private label security market, 
Alt-A and subprime loans, increased by 30 percentage points to 
comprise 40 percent of the market by 2006. This market was 
largely unregulated. Mortgage brokers originated 70 percent of 
nonprime loans on behalf of nonbank lenders who sold those 
loans to investment banks on Wall Street, creating securities 
that credit rating agencies rated, and then sold to investors.
    Each actor was motivated more by volume than by performance 
and none of these actors were regulated at the Federal level. 
The lending bypassed Fannie Mae and Freddie Mac, which had 
stricter standards, and really bypassed the banking system, 
which was regulated. And to the extent that the banks were 
involved, I think it is fair to say that the regulators didn't 
do that much.
    These private loans were largely bad mortgages. They had 
harmful features that made it more likely that the borrowers 
wouldn't be able to repay the loans. Additionally, these were 
adjustable rate mortgages that had built-in payment shock even 
if interest rates stayed the same, and the lenders failed to 
determine whether the borrowers could afford the increase in 
payments.
    Countrywide acknowledged that 70 percent of their loans 
wouldn't meet the basic standards of accounting for built-in 
payment shock. At CRL, we knew that these results would be bad, 
but we didn't know how bad they would be. In 2006, we estimated 
that abusive subprime lending would lead to 2.2 million 
foreclosures. We were accused of being very pessimistic, but, 
in fact, we were overly conservative. The private label 
security loans performed very poorly, much worse than 
conventional loans.
    And it was in this context of massive Federal regulatory 
and private market failures that Congress enacted Dodd-Frank. 
Dodd-Frank addressed the abusive mortgage practices in the 
private label security market and charged the new CFPB with 
supervising bank and nonbank lenders alike and also with the 
research goal of seeing where emerging risks in the economy 
would develop that provide risk to consumers, like the rapid 
increase in Alt-A and subprime lending.
    Now to move to two of the provisions of the mortgage bill, 
which is the ability to repay and the Qualified Mortgage 
provisions. The ability-to-repay provision requires lenders to 
assess a borrower's ability to repay the loan, which sounds 
commonsensical but clearly did not occur during the mortgage 
boom. Also, the Qualified Mortgage provision establishes a 
default standard that lenders can use to demonstrate that, in 
fact, the borrower had the ability to repay the mortgage. The 
Center for Responsible Lending joined with the Clearing House 
Association, which is owned by the large banks in the country 
which have the most significant share of the mortgage market, 
along with two other groups, the Consumer Federation of 
America, and the Leadership Conference on Civil and Human 
Rights, to make three to the CFPB on how to define QM, how to 
presume that a loan is, in fact, affordable. And those 
recommendations are attached to my testimony.
    We at CRL make three recommendations, and the first two I 
think I have heard all down the line here, which is, first, 
that QM be defined broadly so that it encompass the entire 
existing mortgage market so that QM protections would be 
available for all borrowers, all creditworthy borrowers.
    Second, that QM be defined with bright line standards so 
everybody knows whether the loan is a QM loan or not. And 
third, that once you have those first two elements, there 
should be a significant litigation advantage to the lender to 
provide an incentive to make QM loans, which would be safer for 
borrowers, but that advantage should be a rebuttable 
presumption and not a safe harbor which would be absolute 
immunity. We believe that once a loan is a QM, the burden on a 
borrower to raise a claim is very large and there is unlikely 
to be much borrower litigation in the QM space, and as long as 
QM is broad and there are clear standards, then you are not 
going to see that much litigation.
    The biggest risk to lenders in terms of lending, and I 
think the current constraint on lending, is investor put-back 
risk where investors will buy a loan and then decide that they 
don't want it anymore and put it back on the originator, which 
makes the originators very conservative.
    And that is happening now. Broad standards with--broad QM 
with clear standards and a litigation advantage would provide 
minimal put-back risk on lenders so they can originate with 
confidence that they can sell the loan and they wouldn't have 
to take it back.
    Again, thank you for inviting me, and I am happy to answer 
any questions.
    [The prepared statement of Mr. Stein can be found on page 
126 of the appendix.]
    Chairwoman Capito. Thank you.
    And our final witness is Ms. Debra W. Still, chairman-elect 
of the Mortgage Bankers Association. Welcome.

  STATEMENT OF DEBRA STILL, CMB, CHAIRMAN-ELECT, THE MORTGAGE 
                   BANKERS ASSOCIATION (MBA)

    Ms. Still. Thank you, Chairwoman Capito, and Ranking Member 
Maloney. I appreciate that you have called this hearing on one 
of the most significant regulations to impact the Nation's 
housing system. This Qualified Mortgage rule has the potential 
to significantly alter the landscape of homeownership. It must 
be crafted with a well-balanced, thoughtful approach to ensure 
it does not harm the very borrowers that Dodd-Frank is designed 
to protect. The Mortgage Bankers Association recognizes that 
the industry bears responsibility for its share of credit risk 
excess during the housing boom. Today's lenders agree that 
reasonable rules must be put in place so that the mistakes of 
the past can never happen again. Dodd-Frank achieved much by 
addressing several of the key drivers that contributed to the 
mortgage lending crisis. The prohibition of certain exotic loan 
products with high-risk features, and the requirement that all 
loans be fully documented, have gone a long way toward 
restoring responsible underwriting parameters.
    In the aftermath of the housing crisis, mortgage credit is 
now tighter than it has been at any time during my 36 years as 
a mortgage lender. Chairman Bernanke recently commented on 
restricted credit availability, noting that the tight 
environment is preventing lending to creditworthy borrowers. 
And HUD Secretary Shaun Donovan observed that 10 to 20 percent 
of potential home buyers are capable of carrying mortgage debt, 
but are being locked out of today's market. Against this 
backdrop, it is critical that the CFPB structures the 
definition of a Qualified Mortgage such that credit 
qualification parameters do not become even more conservative 
than they already are. The MBA believes that the QM definition 
must be defined broadly so that all qualified borrowers enjoy 
access to safe and affordable mortgage credit.
    It is our strong opinion that setting overly tight credit 
parameters will hurt middle-class home buyers. This is contrary 
to the spirit of Dodd-Frank and could also jeopardize the 
fragile housing recovery. For the rule to be effective, lenders 
must know how to comply. Clear and unambiguous standards and a 
strong legal safe harbor are essential for a vibrant mortgage 
market in the future.
    Importantly, the safe harbor is misnamed. It is neither a 
pass for lenders, nor does it deprive consumers of an 
opportunity for court review. Under a safe harbor, a borrower 
may opt to go to court and seek review of an alleged violation. 
The issue is how extensive and expensive the legal proceedings 
will be. Uncertain and unbound legal exposure runs counter to 
the availability of affordable credit to qualified borrowers. 
Without bright line standards and a legal safe harbor, lenders 
will have no choice but to alter their business strategies: 
some lenders may choose to exit the business, lessening 
competition; others, to mitigate risk, will create even tighter 
credit guidelines than the QM definition; and still others will 
price their loans higher. Whether it is less competition, 
tighter credit or higher cost, all of these outcomes will harm 
consumers.
    It is also extremely difficult to envision a secondary 
mortgage market for non-QM loans. Even if you can imagine the 
future with a non-QM marketplace, how long would it take for 
such a market to develop, and can our economy wait that long? 
Just as importantly, how much would it cost a non-QM consumer, 
who by definition would be the least likely to afford the 
higher cost?
    MBA believes that the CFPB must carefully assess any 
unintended consequences resulting from the definition of QM. Of 
particular note is the cap on points and fees and how it is 
defined in the final rule. Unless this provision is amended, 
moderate-income households that need smaller loans or consumers 
who make large downpayments will find credit less available and 
more expensive.
    MBA strongly supports the Consumer Mortgage Choice Act, and 
I want to personally thank Representatives Huizenga, Scott, 
Royce, and Clay for their work on this legislation. This 
bipartisan bill would clarify that escrow payments and loan 
officer compensation are not counted toward the 3 percent cap 
on points and fees. The bill also creates parity between 
affiliated and unaffiliated title services, ensuring consumers 
can choose the provider that is best for them.
    Madam Chairwoman, it is impossible to overstate the 
importance of getting the QM rule right. This rule will define 
who does and who does not get mortgage credit in the future. It 
is imperative that the rule strike the perfect balance between 
consumer protection, fair and responsible access to credit for 
all qualified borrowers, and a competitive marketplace. The 
only way we are going to do that is by defining the QM broadly 
with clear standards and a legal safe harbor.
    Thank you for the opportunity to testify.
    [The prepared statement of Ms. Still can be found on page 
149 of the appendix.]
    Chairwoman Capito. Thank you.
    I appreciate all of the testimony. I think I have heard, 
and I am sure my colleagues have heard, from all the presenters 
two themes, broad and clear--well, three--bright lines. It just 
depends on what bright lines, I guess, you wish to be drawn.
    So I would like to ask Mr. Bentsen, does risk retention 
have the potential to promote consolidation of lending risk 
bearing and market share just amongst the very large 
institutions, in your opinion?
    Mr. Bentsen. Madam Chairwoman, I don't know that we know 
the answer to that question. I think, obviously, how risk 
retention is ultimately defined in the rulemaking process will 
have various impacts. But I don't know that we can look at it 
and say, at this point at least, that it will lead to 
consolidation. I don't think we know the answer to that.
    Chairwoman Capito. I am trying to get to, with the Title 
XIV issue, how it might affect smaller lenders in more rural 
areas. My colleague from Texas mentioned that several banks in 
Texas have already ceased offering mortgages, and I think 
research is showing that some smaller institutions are moving 
away from this, and I think the QM definitions and whether they 
can meet those standards or whether they can meet the legal 
possibilities that they may see--
    Mr. Bentsen. Certainly with respect to QM, our view--and 
this is both a buy side and a sell side view--is that if you 
define QM so narrowly that it were to really almost be a QRM 
like that, it would not capture a very sufficient part of the 
mortgage marketplace. And so, from our members' perspective, 
fewer investors would likely move into that market. Were that 
to be the case, and you are pushing off a large non-QM market 
elsewhere, it is not clear who is going to pick up that market. 
And then when you lay on top of that the Basel III standards 
that will come into play. So the capital risk retention 
notwithstanding, the capital associated with that, it is likely 
it could have an impact on community banks and others.
    Just from our perspective, if the QM is so narrow that our 
members don't believe that they will participate in that 
market, somebody else will have to pick up that slack; and it 
is not clear who will do it and who will have the capital to do 
it.
    Chairwoman Capito. Ms. Still, would you like to respond to 
that?
    Ms. Still. Yes. I think another concern for the small 
community lender would be the uncertainty in a rebuttable 
presumption. Not knowing how to comply clearly would create 
liability and uncertainty.
    If you look at the size of the penalties of not complying 
with QM, one infraction could be ruinous to a small lender. I 
think MBA originally estimated an infraction could cost between 
$70,000 and $110,000. Our new numbers, based on new research, 
would suggest that it could be as high as $200,000. If you 
liken that to the repercussions of a repurchase, those are the 
same extraordinary numbers that would cause small community 
lenders not to be able to lend.
    Chairwoman Capito. In terms of the borrower in the lower 
range who maybe doesn't have as much credit availability, the 
consumer who doesn't have the options that some other, 
wealthier or better-credit-risk consumers would have, in terms 
of the rebuttable presumption versus the safe harbor, I said in 
my opening statement that I think the safe harbor is the way to 
go because I think that is the way that those who are on the 
bubble a little bit are going to be able to get into the 
market.
    Mr. Judson, would you have an opinion on that?
    Mr. Judson. Yes. Thank you.
    The lenders would like to loan money. That is their 
business. The first-time buyer is about 40 percent of the 
market right now, and if they can't get construction loans or 
if they can't get a permanent loan because it doesn't meet the 
lending requirements, that may explain the rise in the rental 
market. So we feel that a clear definition for QM would 
perpetuate lending and encourage it.
    Chairwoman Capito. When you say clear--and I don't mean to 
interrupt--but when you say clear definition, you really mean 
the safe harbor versus the rebuttable. That is the core of what 
we are--
    I have heard a lot of talk about what the fees would 
constitute and what 3 percent constitutes and some exemptions. 
You mentioned title insurance that is not part of it that could 
become a large--
    Ms. Cohen, would you like to respond? Expand a little bit 
on the title insurance issue.
    Ms. Cohen. The question about the points and fees is, under 
the Qualified Mortgage definition now in Dodd-Frank, the 
limitation for a Qualified Mortgage is 3 points and fees. Some 
fees are included in that and some are not. And the ones that 
are included include those fees that are paid to the affiliate 
of the creditor because the creditor is getting that money in a 
way that is different from if the title insurance or another 
third party provider is not associated with the creditor. So 
the question you are alluding to is whether those parties 
should be in or out of that cap.
    Chairwoman Capito. Right. Thank you.
    Mrs. Maloney?
    Mrs. Maloney. Thank you.
    It is rare that we have a panel who agrees on everything, 
and you all seem to agree with a broad definition and also of 
the bright lines and clear standards. I want to see if you all 
agree with the ability to repay.
    Many of the analysts believe that if there had been an 
ability-to-repay requirement prior to the financial crisis, it 
would have significantly lessened, if not prevented, the 
mortgage meltdown. I know, leading up to the crisis the joke in 
New York was, if you can't afford your rent, go out and buy a 
home. And it was almost true. You didn't have to give any 
documentation or anything. You could just go out and buy a 
home.
    I would like to ask all of the panelists, do you think it 
is reasonable to have an ability-to-repay requirement and to 
ensure that borrowers document their income in mortgage 
applications and that they can in fact repay it? To me, this is 
just common sense. Does anyone disagree with an ability to 
repay?
    No one disagrees.
    Then I would like to go to the testimony where there was an 
area of disagreement. Certainly, the purpose of a Qualified 
Mortgage is to incentivize mortgage originators to lend 
responsibly and to make loans that are safe for institutions 
and consumers. In the Federal Reserve's first proposed QM rule, 
it proposed two alternatives to that by either creating a 
rebuttable presumption for lenders or a safe harbor as a shield 
from liability and foreclosure proceedings. There was a 
difference of opinion on these two areas, and I would like to 
hear arguments in support, and then in opposition, and how 
these standards differ.
    I would like first to hear from Mr. Stein and then Mr. 
Louser, then Ms. Cohen, then Mr. Judson and then anyone else 
who wants to justify. How do they differ? Could you comment on 
the pros and cons of these two standards? Your comments, 
please.
    Mr. Stein. Absolutely.
    As I mentioned, the recommendation that we provided on 
this--on QM with the Clearing House, there are three 
components--broad, clear, rebuttable presumption--and they are 
all interrelated.
    Because if you had a narrow QM--some of the panelists have 
talked about if it were narrow and you had a safe harbor, it 
wouldn't help you very much. Because a lot of the lending would 
be outside of QM, and there wouldn't be a safe harbor. There 
would be a lot of liability. And it is fraught to lend outside 
of QM.
    If QM is fuzzy, if it just talks about Generally Accepted 
Underwriting Standards, there would be a lot of litigation over 
whether or not this loan is a QM. And, therefore, it gets to 
safe harbor.
    So I think those first two elements are actually more 
important as to whether there is going to be litigation and 
whether there is going to be lending than the safe harbor 
question.
    Mrs. Maloney. But there is agreement from everyone on the 
panel on those first two. The disagreement is on the rebuttable 
presumption and safe harbor. And so, if you could direct your 
comments to the differences between the two?
    Mr. Stein. Absolutely.
    A safe harbor would be an absolute immunity to the lender 
that, in an egregious case where they knew that the borrower 
couldn't afford the loan and they acted in bad faith, there is 
no ability to raise that claim, only whether it is in or out of 
QM. We think there is enough certainty once the loan is a QM 
and the rebuttable presumption is a strong enough incentive, 
strong enough litigation advantage, that there is going to be 
very little borrower litigation. And more importantly, 
secondary markets are not going to put those loans back on 
lenders, and they are going to have the confidence to lend 
vigorously.
    Mrs. Maloney. Thank you.
    Mr. Louser?
    Mr. Louser. Representative Maloney, from our testimony, we 
didn't address safe harbor versus rebuttable presumption. The 
REALTORS would prefer the safe harbor, and our concern is not 
necessarily the potential for litigation up-front but, once 
that begins, that would be standard if it was a rebuttal 
presumption.
    Maybe the lenders are a better indicator of this. One of my 
roles as vice president has been to meet with the large lenders 
across the country, and consistently, we have found that they 
agree with the safe harbor.
    Mrs. Maloney. Ms. Cohen?
    Ms. Cohen. The difference between the rebuttable 
presumption and the safe harbor is whether, in an extreme 
circumstance, a homeowner has any recourse at all.
    If the lines are bright and clear, it will be easy for a 
creditor to make a loan that is within a Qualified Mortgage. 
But if they have additional information that rule writers can't 
contemplate now, for example, extremely high costs that are 
documented and that they do have access to at the moment of 
making the loan and while they are preparing the loan, that 
homeowner with a predictably unaffordable loan will have no 
legal recourse at all in a safe harbor.
    In the rebuttable presumption, the homeowner will still 
have a very steep hill to climb. They need an attorney, and the 
courts in general will defer to the standards set by the 
government agency writing the rules.
    And in terms of whether there is a large amount of 
litigation risk, between 2005 and 2010, there were almost 65 
million homes in foreclosure. There were, around the same 
timeline, 60 cases about the truth-in-lending rebuttable 
presumption that already exists.
    Mrs. Maloney. My time has expired. May I ask for 30 
additional seconds for Mr. Judson to respond?
    Chairwoman Capito. Mr. Judson?
    Mr. Judson. We clearly support the ability-to-repay 
requirement. We would also support the safe harbor in that it 
is more likely to lead to availability of funding, which is 
really what this is about. Availability of funding makes more 
mortgages available to the average buyer, the consumer.
    Chairwoman Capito. Mr. Renacci?
    Mr. Renacci. Thank you, Madam Chairwoman.
    I want to thank all of the witnesses for being here.
    Mr. Bentsen, I want to go back to your testimony. You say 
that your association is very concerned that the QM regulations 
may be construed in a narrow manner, parameters that will not 
allow for the certainty of compliance at origination. Would you 
tell me today, based on just that comment and the way that the 
Dodd-Frank rules are moving forward, that your industry does 
have some uncertainty and unpredictability of the future?
    Mr. Bentsen. Certainly within the housing finance sector, 
there is a great deal of uncertainty, because we don't know 
what the final QM rule is going to be. We expect the QRM rule 
and risk retention rules to come behind that. So maybe 
December, January QM comes out. Then, following on the heels of 
that, QRM risk retention. So that creates a lot of uncertainty 
in market participants as to what the structure of new mortgage 
finance will be. Not to mention, we still don't know what 
Congress--what you all are going to ultimately decide to do 
with the respect to the GSEs. So I think that does create a 
fair amount of uncertainty in the housing finance sector.
    Mr. Renacci. It is one of the things I hear back in my 
district in Ohio, that this uncertainty is one of our issues. 
Government is causing so much more uncertainty.
    I know that you were on this side of the table at one point 
in time, so it is interesting to get your perspective now that 
you are on the other side that you do agree that Dodd-Frank is 
causing some uncertainty and unpredictability at this point in 
time.
    Mr. Bentsen. In our count, there are about 150 
rulemakings--I guess you can slice and dice it any way you want 
to get to a count--that have to be done across all aspects of 
the financial markets, including a large part of the capital 
markets that we represent. And until all those rules are done, 
whether you agree with them or not--and we have questions 
certainly on a number of them--the markets--our member firms 
will have to adapt to what those final rules are. We know they 
are coming, but we don't know what they are going to be. So 
there will be a great deal of adaptation among market 
participants to comply with the new rules. But until they are 
done, there are still a lot of questions.
    Mr. Renacci. Sometimes we wonder why markets are frozen up 
or why capital is not out there. But when government causes the 
uncertainty, sometimes that could be the answer, too. That is 
what I was trying to get out, and I think that is what you are 
saying. I hear it all of the time back in my district. So it is 
interesting, some of your comments.
    Mr. Hodges, in your written testimony you expressed 
frustration that half of all loans to purchase manufactured 
homes could be at risk by being categorized as high cost under 
Dodd-Frank. Could you explain why the economics of originating 
and servicing these small loans often result in APR fees being 
higher than conventional home mortgages?
    Mr. Hodges. Absolutely.
    It is best described by way of example. If the average cost 
to originate a loan is, let's call it $2,000, well, $2,000 is 1 
percent of a $200,000 mortgage. It is 10 percent of a $20,000 
mortgage. And of course that scale goes--it runs the scale 
there. Since most manufactured housing loans are smaller loans 
with the same cost to originate and service--or similar--it 
just adversely affects us just by virtue of applying the 
percentages in HOEPA and QM. It adversely--our transactions, it 
would be easier to hit those caps.
    Mr. Renacci. Mr. Hudson, you also describe in detail the 
concern with the 3 percentage point fee cap, that it is biased 
against mortgage loan originators who are not creditors. Can 
you explain that?
    Mr. Hudson. Again, just to follow up on my colleague with 
regard to it's best used by example, in the State of Texas, 
there is currently a 3 percent cap in existence on Texas home 
equity loans. Borrowers cannot pull cash out of their property 
unless it is in an ADLTV with a 3 percent cap. That does not 
include the items that are currently in the proposed QM.
    Currently in the State of Texas, consumers are hard pressed 
to find any lender willing to make a home equity loan for less 
than $150,000 simply because it is so easy to hit that 3 
percent cap, coupled with the fact that the State of Texas, on 
average, has the second-highest closing costs in the country, 
second only to Ranking Member Maloney's State of New York. So 
it is going to be very easy to hit that 3 percent cap.
    And in particular, when it comes to home loan programs that 
are specifically designed for low- to moderate-income 
consumers, such as bond money programs--for example, my company 
has been the lender of the year for 3 years running now for the 
Texas Department of Housing and Community Affairs. We originate 
a lot of bond loans for first-time buyers. We don't necessarily 
do them because they are a profit center but because consumers 
need to have access to these products to participate in the 
American dream of homeownership.
    So if this 3 percent cap comes into place, loan amounts 
will be set at a minimum standard. Otherwise, we will have to 
charge higher interest rates to offset that balance; and, 
therefore, you run into another whole new set of legal 
liability.
    Mr. Renacci. Thank you. I yield back.
    Chairwoman Capito. Mr. Watt for 5 minutes.
    Mr. Watt. Thank you, Madam Chairwoman.
    Let me start by thanking the chairwoman and the ranking 
member for putting together a very balanced and broad-based 
panel. It is an important subject.
    When I first saw the notice of the hearing, I actually 
shuddered a little bit, because I thought it was going to be 
another one of these hearings about the broad-based attack on 
Dodd-Frank. That was justified somewhat because we had just had 
a hearing yesterday in the Judiciary Committee that was kind of 
a broad-based attack on Dodd-Frank. I don't know why we were 
having it in Judiciary. It seemed to suggest that we were at 
the 2-year anniversary, and there was some concerted effort to 
just make this broad-based attack. But you have put together a 
good, balanced panel; and I think that is very important and 
instructive.
    I want to applaud the work that has been done by this broad 
bipartisan industry/consumer/civil rights group of folks who 
put together the discussion draft that was apparently submitted 
to the CFPB as part of the comment process. Seldom will you 
see--except when I had to work with all of them in the back 
room to try to get to the language that we were trying to get 
to in Dodd-Frank--a public coalition between the Center for 
Responsible Lending, the Consumer Federation of America, the 
Leadership Conference on Civil Rights, and something called the 
Clearing House Association, which consists of Bankco Santander, 
Bank of America, the Bank of New York Mellon, BB&T, Capital 
One, Citibank, Comerica, Deutsche Bank, HSBC, JPMorgan Chase, 
KeyBank, PNC, RBS Citizens, Regions, UBS, U.S. Bank, Union 
Bank, Wells Fargo, City National, Fifth Third Bank, First 
Citizens, and M&T. That is one heck of a coalition when you put 
all of those people together and they come up with a joint 
proposal.
    So I guess my question to the panelists--I know Mr. Stein's 
group was part of that coalition, and Ms. Cohen's group was 
part of that coalition. Does anybody else on this panel have a 
membership on that coalition?
    Ms. Cohen. Excuse me, Representative Watt. We are not part 
of the coalition, just so you know.
    Mr. Watt. I give you more credit or blame than you are due, 
and I apologize for that.
    Maybe I should ask the question this way: Has anybody 
looked at the recommendation that this broad coalition made to 
the CFPB in its comment? Have you looked at it? Do you have 
substantial disagreement with any parts of it, Ms. Still?
    Ms. Still. Only one part of it. We very much think that the 
Clearing House document is a good place to start the 
discussion. We support the attempt to come up with some bright 
line standards.
    Mr. Watt. What is it that you disagree with?
    Ms. Still. The piece we would observe and disagree with, 
first, I am not sure that a 43 percent back ratio is not too 
tight and wouldn't cut out qualified borrowers.
    Mr. Watt. Okay, what else?
    Ms. Still. The second thing is we would put the bright line 
standards in a safe harbor at the Mortgage Bankers Association, 
not the--
    Mr. Watt. So we are back to the safe harbor issue.
    Does anybody else who has read this document have any 
concerns about it other than Ms. Still's group?
    What about you, Mr. Louser, and you, Mr. Hudson, in 
particular? And you, Mr. Bentsen? You all represent broad 
coalitions of members. Are there specific things in this 
proposal that you are concerned about? Or have you read it?
    Mr. Hudson. I have not read the specific proposal.
    Mr. Watt. Okay, then I won't ask the question.
    What about you, Mr. Bentsen?
    Mr. Bentsen. Mr. Watt, I can tell you that I have not 
personally read it. Our team has looked at it. While we think 
there is much in there that we like, and we work with these 
various groups from time to time, our view still is from a 
concern about assignee liability, that we really believe the 
safe harbor is the better approach to go. So that is mainly 
where we disagree.
    Mr. Watt. So this law, much of which was drafted by Mr. 
Miller and I, based on the North Carolina law, where there is a 
presumption but no safe harbor, very little litigation, that 
doesn't influence you on this issue?
    Go ahead?
    Ms. Still. I think in North Carolina, you have loans over 
$300,000 that are excluded from consideration. You also have a 
50 percent back ratio, and you don't have the recoupment of 
attorneys' fees and you have much lower penalties for 
infraction. So I think there is a huge difference between the 
two.
    Mr. Watt. Mr. Stein may disagree with some of those points.
    Mr. Stein. Just for clarification, the North Carolina 
ability to repay is a later addition. Since 1999, North 
Carolina has required a net tangible benefit for all 
refinancing transactions. That has significantly greater 
damages than the ability-to-repay provision does and virtually 
no litigation. So I think that is the history of the North 
Carolina law.
    Chairwoman Capito. The gentleman from Texas, Mr. Hensarling 
is now recognized.
    Mr. Hensarling. Thank you, Madam Chairwoman.
    I want to pick up on the concept of the ability to repay. 
Ms. Still, you seem to be very anxious to say something, so I 
am going to give you the first crack. Representing the Mortgage 
Bankers Association, can you explain to me why it is in the 
interest of your individual members to loan money to people who 
can't afford to repay it? Why is that in your interest?
    Ms. Still. It is not.
    Mr. Hensarling. So it is not in your interest to loan money 
to people who can't pay you back?
    Ms. Still. We absolutely support the ability-to-repay rule. 
It is critical, though, that we get the rule correct. We have 
to make sure that we strike a balance between ability to repay 
and not restricting credit to deserving borrowers.
    Mr. Hensarling. But you need a rule to tell you not to loan 
money to people who can't pay it back?
    Ms. Still. I think good, balanced underwriting criteria is 
always advisable for all consumers. I think the clarity of that 
and the balance of that is going to be critical, absolutely. 
But the Mortgage Bankers Association--
    Mr. Hensarling. I don't disagree with you. We certainly had 
a huge erosion in underwriting standards. I just find it 
somewhat ironic, when I look at the affordable housing goals 
that were thrust upon Fannie and Freddie, when I look at CRA, 
to think that we essentially have had Federal regulation tell 
people to loan money to people who couldn't afford to pay it 
back. And now all of a sudden, we need a Federal regulation to 
tell you not to do what they told you to do in the first place. 
And I just can't help but recognize the irony of that.
    Also, when we are talking about the ability to repay, who 
has the greater information base in figuring out whether or not 
you can repay a loan to buy a home? Having bought a home 
before, although there are voluminous amounts of disclosure, 
sooner or later I was given a piece of paper that told me how 
much I had to pay each month and how many months I had to pay 
it. I ended up with that piece of paper in the disclosure.
    But, when I am sitting down with the people who are loaning 
me the money, I am trying to figure out, if I was about to send 
a kid to college, would I know that or would my banker know 
that? If I was about to get laid off from my place of 
employment, would I have the greater knowledge base of that or 
the person loaning me the money? The tragedy of divorce, as 
tragic as that is to a family, it is also a financial tragedy, 
so who would have the greater knowledge base of the ability to 
repay? Would that be the borrower or would it be the lender?
    Ms. Still, your opinion?
    Ms. Still. There are certain objective criteria that any 
lender needs to look at: income; assets; job stability, et 
cetera. They are objective. They are verifiable.
    There are other things that we don't take into 
consideration, and a lot of that is buyer intent. Will you send 
your kids to private school or will you send them to public 
school? Will you keep the air conditioning on 24 hours a day or 
will you be conservative in your energy bills?
    And so, it is a shared responsibility. Certainly, the 
lender has to own the standards that are objective and that 
would keep a consumer in bounds in terms of--
    Mr. Hensarling. Forgive me. I see my time is starting to 
run out here.
    In yesterday's hearing--and I see, Mr. Bentsen, you are 
becoming a frequent guest here. I guess you miss us from your 
days of service in this institution.
    But I was a little taken aback when I saw this study--which 
I intend to study much more closely--from Mark Zandi of Moody's 
Analytics, whom I believe is the most frequently quoted 
economist from my friends on the other side of the aisle, 
looking at just one aspect of Dodd-Frank, the premium capture 
cash reserve account. In his study, he estimated that mortgage 
rates could increase 1 to 4 percentage points if the rule is 
implemented as proposed. Again, seeing that, I think 30-year 
fixed-rate loans are going for about 3\3/4\ percent. 
Essentially, what Mark Zandi is saying is that one aspect of 
Dodd-Frank could double interest rates.
    I am curious if anybody else has seen this study. Mr. 
Bentsen, I know that you have. Mr. Judson, have you seen this 
study? And if so, what would a doubling of interest rates do to 
home building?
    Mr. Judson. It would hurt the home building industry and 
the ability to get financing.
    Mr. Hensarling. I would say you have a knack for the 
understatement, sir.
    I see my time has expired. Thank you.
    Chairwoman Capito. Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Madam Chairwoman.
    I have heard concerns from community banks in my 
congressional district and also others who have come into my 
office here in Washington. I have also heard from REALTOR 
groups, both nationally and in deep south Texas, about the 
upcoming Qualified Mortgage rules that the CFPB is formulating.
    My question is for Ms. Cohen and for Mr. Hudson: What do 
you predict the benefits will be of having a well-defined 
Qualified Mortgage and how will a broad criteria impact the 
industry versus a more narrow criteria?
    Ms. Cohen. If the question is about broad versus narrow and 
clarity, the benefit from the perspective of the consumer is 
that the Qualified Mortgage definition is meant to provide 
affordable loans to homeowners. So if the definition is broad, 
it reaches more loans. And by definition, then it would reach 
out to more homeowners who would come under the purview of this 
more privileged and more predictably affordable loan category.
    We still worry about people around the edges, but the fewer 
people you have around the edges, the better off for the 
population in this particular context.
    With regard to clarity, it is also better for homeowners if 
the rules are clear because the creditors will have a better 
sense of what it means to make an affordable loan; and when the 
loan is not affordable, it will be easier to demonstrate 
whether the rules were complied with or not.
    Mr. Hinojosa. Mr. Hudson?
    Mr. Hudson. Thank you, Congressman.
    I live in San Antonio, Texas. My family is from 
Brownsville, Texas. I have originated home loans as an 
originator in Brownsville, Texas. And I can tell you that one 
of the great things about measuring an ability to repay is that 
if I have some broad guidelines I can still do what I can to 
make sure that I am giving a consumer the loan that they 
deserve. If we get too narrow in scope, my real fear is that 
there is a large segment of consumers, particularly in south 
Texas, who will be limited in their access to credit and be 
forced into a permanent class of renters, which is, I think, a 
real shame.
    With respect to ability to repay, I think I can pretty much 
say that everybody on the panel might agree with me on this, 
the industry--we are already determining a borrower's ability 
to repay. I think the chart that the CFPB put out for us to 
comment on with regards to debt-to-income ratios, the bottom 
line was 2009 numbers with regards to debt to income ratios.
    So, post-collapse, pre-Dodd-Frank, you could already see 
where the industry has already come back and decided, you know 
what, we are going to actually verify that consumers can make a 
payment. If you simply look at those delinquency numbers, they 
will reflect that.
    But my fear is if we get too narrow in scope, then we will 
be harming the consumers who need access to credit the most.
    Mr. Hinojosa. If Dodd-Frank had been in place, say 6 years 
ago, Countrywide lenders in Texas would not have had so many 
violations, as we now find out.
    Looking at one of the Wall Street reports on the reforms 
containing a number of other reforms that will benefit 
consumers, including a requirement that the CFPB design a new 
disclosure form to be used at the time of a mortgage 
application--and we have seen some forms that have been given 
to us as examples, and so I will refer to that. In fact, just 
this week, the CFPB announced this proposed rule after using 
the last year or so to test draft forms with the industry, with 
consumers, and with other stakeholders, and all of these 
reforms were designed to level the playing field between 
consumers and loan originators so that we never have to see 
another multi-billion dollar settlement for weak servicing 
standards. Ms. Still, have you seen any of those proposed forms 
that would be tested?
    Ms. Still. Yes. We have had committees at the Mortgage 
Bankers Association that have done a review of every iteration 
of the rounds of activity to get to the final forms that have 
been proposed. We clearly support clear, transparent 
disclosures for consumers.
    Mr. Hinojosa. I think that all of us want consumers to 
understand exactly what the amount is, the principal and the 
projected payments. Honest costs for, say, appraisals. There 
were many, many violations that we learned about after having 
congressional hearings here. So I am pleased to see that an 
effort is being made by all of the stakeholders to be able to 
come up with something as simple as what I have in my hands 
that will tell the consumer exactly what he or she is getting 
into.
    I yield back.
    Chairwoman Capito. Mr. McHenry for 5 minutes.
    Mr. McHenry. Thank you, Chairwoman Capito.
    Ms. Cohen, you say in your testimony that a QM safe harbor 
will leave the door open to known types of abusive lending; is 
that correct?
    Ms. Cohen. Yes.
    Mr. McHenry. Mr. Bentsen, how do you respond to this 
concern? I will read it again. The QM safe harbor, Ms. Cohen 
says in her testimony, will leave the door open to known types 
of abusive lending.
    Mr. Bentsen. From our perspective, Congressman, our view 
looks at it from the standpoint of securitizers and investors.
    Mr. McHenry. That is why I asked you.
    Mr. Bentsen. Yes. So we are looking at it from the 
standpoint of, we are getting the loan from the lender. So we 
really have two concerns. The main one is assignee liability, 
that a rebuttable presumption transfers the potential liability 
of litigation to the securitizer and to the investor in the 
mortgage. So we mainly are concerned about that.
    We think a consequence of this also could be that lenders 
would become equally concerned and very conservative, and 
therefore they probably would be overly strict in their 
underwriting for fear of litigation.
    So we think--from our standpoint, we are concerned about 
assigning liability.
    Mr. McHenry. Let me interrupt, and I will ask something a 
little more specifically to you.
    You said in your testimony that you expect any limited 
lending outside of the confines of the QM definition will be 
performed at far greater cost to the consumer and, therefore, 
will be more likely to be provided by less-regulated, less-
well-capitalized and possibly less-reliable entities. Implicit 
in that, if I may, is that a narrow QM definition would have 
the unintended consequence--or the consequence of creating an 
active non-QM market; is that correct?
    Mr. Bentsen. Yes. But we also think that non-QM market, at 
least from the standpoint of the secondary market, would be 
very small. So there would be a non-QM market. It would be 
funded somehow. But our members don't believe that is a market 
they would participate in.
    Mr. McHenry. I understand that they wouldn't participate in 
it, but who would this affect, then?
    Mr. Bentsen. It would affect those borrowers who don't meet 
the threshold of a QM, were they able to get credit--
    Mr. McHenry. I am asking who those are. Obviously, those 
who don't meet that QM threshold.
    Mr. Bentsen. Depending on where a QM is established, it 
could be lower-income borrowers whose debt-to-income ratio is 
above that certain level, that they would be priced out. They 
would be priced out of the market.
    Mr. McHenry. Okay. To that end, I want to ask Ms. Still, in 
terms of setting a downpayment requirement, what would the 
effect be on the marketplace here? If we simply set a 20 
percent downpayment requirement, what impact would that have?
    Ms. Still. It would have an enormous impact.
    Mr. McHenry. Would it be positive or would it be negative?
    Ms. Still. It would be negative.
    Mr. McHenry. Mr. Judson, to the same question, do you think 
that would be beneficial to home building in America?
    Mr. Judson. I would say it would not be beneficial, no. It 
would be quite negative.
    Mr. McHenry. That is a very soft way of saying it. I 
appreciate my neighbor saying that.
    To that end, Mr. Judson, you said in your testimony that 
the establishment of a bright-line safe-harbor definition for 
QM, Qualified Mortgage, is the best way to ensure that safer 
loans are made without increasing the cost of credit. So there 
are obviously trade-offs between consumer protection and 
maintaining credit availability. What is that balance, in your 
estimation?
    Mr. Judson. I can't give you a numerical number for that, 
but common sense will say that if you are creating the cottage 
industries you referenced earlier, which is what would happen, 
you are going back to the same thing that got us into this 
dilemma in the first place. If we have a broader interpretation 
for the safe harbor and the bright line, you are going to get 
broader participation and more availability of funds, which 
casts its net over a broader segment of the buying public, 
particularly that first-time buyer and the minority, who are 
the ones who will be most impacted by this cottage industry of 
the non-QM lender.
    Mr. McHenry. Thank you.
    I yield back.
    Chairwoman Capito. Mr. Miller for 5 minutes.
    Mr. Miller of North Carolina. Mr. Stein, since the question 
wasn't addressed to you earlier, could you answer in just 30 
seconds, or a minute at most, why a lender, if there were no 
risk retention rules or if there were still prepayment 
penalties or if we still had an appreciating housing market, 
why would a lender make a loan where the borrower did not have 
the ability to repay?
    Mr. Stein. I think the private label security market was a 
perfect example where no one was bearing the risk and they 
didn't really care if the loan performed. And so, you had the 
2/28 exploding ARMs, you had yield-spread premiums where 
brokers were paid more if the interest rate was higher, 
prepayment penalties that locked people out of bad loans, 
didn't escrow to make it look cheaper, those are all things 
that increased volume; and so people received fees, but they 
caused a lot of defaults and hurt the economy. Those are 
exactly the things that Dodd-Frank cracked down on in the no-
doc lending.
    Mr. Miller of North Carolina. And if the lender no longer 
owned the mortgage, the default was not really their problem?
    Mr. Stein. Exactly.
    Mr. Miller of North Carolina. Mr. Stein, in your testimony, 
you have urged a rebuttable presumption as opposed to a safe 
harbor, which presumably means an irrebuttable presumption. You 
don't really offer any examples of the kind of conduct that 
might rebut the presumption, the kind of circumstances that 
might rebut the presumption. Can you imagine any? Or, failing 
that, can you think of some practices that existed at the time 
Congress passed HOEPA that did not exist at the time of HOEPA 
and so would not have been forbidden if Congress then very 
thoroughly forbid abusive practices?
    Mr. Stein. I think the important thing about the ability-
to-repay test for the lender, it is true that borrowers--going 
back to the previous question--know more about their 
circumstances. All that lenders are being held to is what they 
knew at the time the loan was made, what they have received the 
information on.
    I think because the practice--I never could have predicted 
the yield spread premiums' prepayment penalties, the abuses 
that occurred, and I don't have the creativity to predict 
abuses that may happen in the future, and so I think having 
this little fail-safe for egregious cases available to 
borrowers would be prudent. And lenders have enough certainty, 
and they are going to win the vast majority of cases while the 
loan is QM.
    Mr. Miller of North Carolina. The old cases--when I say 
``old cases,'' 300- or 400-year-old cases on fraud--the courts 
say in very quaint language that there should not be a fixed 
definition lest crafty men find ways to evade it.
    Ms. Cohen, can you think of some practices that have been 
hailed as innovations that were really just an innovation to 
get around regulation?
    Ms. Cohen. When HOEPA was first passed, at the time I was 
working at the Federal Trade Commission, and I got a lot of 
calls from homeowners. The problems at the time were that the 
points and fees were very, very high. They were 10, 12, and 
higher percent.
    The other big innovation at the time was credit insurance.
    Both of those abuses dried up when HOEPA was passed, and 
the exploding ARMs that Mr. Stein was just talking about and 
similar loans where there was a jump in the interest rate 
essentially or prepayment penalties that were quite excessive 
came much later for the most part and locked people into their 
abusive loans in ways that were permitted by HOEPA.
    Mr. Miller of North Carolina. So if we had a rigid 
definition that did not allow other circumstances and 
innovation, might a new practice evade the existing definition, 
the rigid definition in a way that we don't anticipate?
    Ms. Cohen. That seems quite likely.
    Mr. Miller of North Carolina. Mr. Hodges, the GSEs are 
supposed to recognize the secondary market for personal 
property as well--in other words, manufactured homes that are 
not affixed to dirt--but they haven't done much to create those 
markets, and they say it is because there is not much demand. 
Do you think the GSEs, by helping to create more of a secondary 
market, what effect do you think that might have on the demand 
for loans secured by real property? In other words, 
manufactured homes?
    Mr. Hodges. The Manufactured Housing Institute--what you 
are alluding to is the duty to serve obligation in the Housing 
Economic Recovery Act. So the Manufactured Housing Institute, 
we are big supporters of that.
    And so, to answer your question, we do believe that if the 
GSEs would create a viable market for personal property, for 
purchasing personal property manufactured home loans, what it 
would do at the least is make that market available and in some 
ways more attractive for other lenders to get back into it. We 
haven't really had it ever from the personal property side, so 
we would really like to think that it would be helpful in 
bringing lenders into that market.
    Mr. Miller of North Carolina. Thank you. My time has 
expired, Madam Chairwoman.
    Chairwoman Capito. Mr. Luetkemeyer for 5 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    I appreciate all of you being here today. It is an 
interesting discussion that we are having.
    We are in a situation where the government pushed the 
lenders to loosen up some of the lending standards and we had a 
disaster, and now we have the pendulum going in the other 
direction where we are probably tightening up too much to the 
point where we are restricting the availability of credit. And 
now we are trying to figure out where that fine line is between 
where we can loan safely, encourage home building, encourage 
homeownership, and yet don't go so far as to get back into the 
same problem that we had. So I appreciate the chairwoman's 
ability to put this hearing together. It is quite interesting 
today.
    To follow up with Mr. Hodges on something Mr. Miller 
brought up, how has the money accessibility been since 2008 in 
your industry? Has it dried up significantly or is there still 
plenty of access to loans? Can you tell me about your industry 
as a whole?
    Mr. Hodges. Are you asking from the GSE standpoint or 
securitization or just lending in general?
    Mr. Luetkemeyer. No, just lending in general for your 
product.
    Mr. Hodges. I would say, since 2008, it is safe to say 
there is less lending for small balance manufactured home 
loans, especially personal property, than there may have been 
10 years before that.
    Mr. Luetkemeyer. I would have thought it would have 
increased as, obviously, your product that you are selling is 
less in cost than a bricks-and-mortar home. Is it because there 
are not as many people who have jobs to be able to do this? Or 
is it because access to credit has restricted the ability of 
people to buy homes? Why is it less?
    Mr. Hodges. I think in some ways it is because manufactured 
housing finance is really affordable housing credit. So a lot 
of the buyers who come to the manufactured housing sector would 
be low- and moderate-income people who are worthy buyers but 
may not have the credit history that other bigger financial 
institutions want to really maybe entertain that market.
    Mr. Luetkemeyer. So what you are saying is, because of the 
restricted credit analysis that goes on, they have lost the 
ability to enter into your market; is that right?
    Mr. Hodges. As credit scores have tightened, as lenders 
have gotten more conservative on credit scores, for example, it 
takes our low-income buyer really out of that market. It makes 
it a lot harder for them to find financing, which is why we 
believe supporting the manufactured housing market, which will 
loan to people who are worthy in that regard, is really 
important to this type of housing.
    Mr. Luetkemeyer. That is very interesting.
    I was listening to Mr. Hudson's testimony a while ago, and 
he made the comment about veterans being basically a better 
group to loan to than the average citizen. So it was 
interesting to listen to your testimony, sir.
    Mr. Hudson. Yes, Congressman. With regards to VA loans, in 
all honesty, they are relatively simple: verify that they have 
a job; verify that they have income; and verify that they have 
some assets. And there is another little piece in there known 
as residual income, meaning we are going to make sure that a 
borrower has a certain amount of cash at the end of the month 
to cover other cost-of-living items that we don't currently 
include when we underwrite loans.
    Mr. Luetkemeyer. I would submit that there may be another 
issue there, and that would be the character of the individual 
to whom you are loaning money.
    Mr. Hudson. Yes and no, Congressman. Some people could say 
that because these people are military, that they have a better 
sense of duty and honor in paying back debts. But, at the same 
time, I would like to point out that there are lots of members 
of our military who do not meet credit standards, who do not 
have good enough credit scores. So I think, honestly, when it 
boils down to consumers and borrowers, it is less the fact that 
they are in the military as much as the fact that we are 
actually verifying their income.
    Mr. Luetkemeyer. As somebody who has been on the other side 
of the table and loaned money to people, I would certainly like 
to see a veteran across the table from me. It certainly makes 
my job a little bit easier.
    Ms. Still, you mentioned something a while ago about 
downpayments. You were asked a question about it. What do you 
think is an adequate level for downpayments? I know you said 20 
percent is going to dry up the market, but yet I think everyone 
would agree the home buyer needs to have a little skin in the 
game as well. What do you feel would be an adequate figure?
    Ms. Still. That is very difficult to answer, because every 
borrower is different. I think it depends on the loan program. 
If you look at the VA program, which is 100 percent financing, 
we have just touched on that. If you look at the borrowers that 
the FHA loan program targets, 3.5 percent downpayment compared 
to maybe 5 percent plus in the GSE lending, I do think that 
skin in the game absolutely helps.
    I am not sure that I believe skin in the game would be 
determinant of ability to repay. I think as we talk about this 
rule, income and debt load is probably a better driver, 
although maybe not the single driver, of ability to repay.
    Mr. Luetkemeyer. Thank you. I see my time is up.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Mr. Lynch for 5 minutes.
    Mr. Lynch. Thank you, Madam Chairwoman.
    Ms. Cohen, I think the import of Dodd-Frank is really to 
reinject the ability to repay as a controlling concern of 
lenders.
    Earlier in the hearing, the gentleman from Texas asked a 
question, rhetorical in some regard, but he asked what would 
cause a lender to extend a loan to someone who did not 
demonstrate the ready ability to repay; and I think in your 
testimony you pointed out that a lot of these loans that went 
into default were very high-cost loans where the fees were 
evaluated and that these lenders had the ability--the 
originators had the ability to push these out in the 
securitization stream, and so they could escape any 
consequences of making an unstable or a loan to a non-
creditworthy person. Are those factors that you think led to 
the original problem that we had with subprime?
    Ms. Cohen. That appears to be the main factor in how the 
machine was oiled. If the party making the loan doesn't care 
whether it performs because they sell it right away and they 
earn their fees up front, then they have no incentive to make 
sure that the loan is affordable. And, on the other hand, the 
assignee liability that Mr. Bentsen was talking about before is 
key for the homeowner, because it is the party who holds the 
loan at the time of the loan payment problem who needs to be 
accountable to the homeowner so that the homeowner can get a 
remedy.
    Mr. Lynch. Let me go over to the safe harbor versus the 
rebuttable presumption argument. The safe harbor appears to be 
a structure, sort of a check-the-box situation, where if the 
lender can fit their product and their process within the safe 
harbor guidelines, then we can check that box, and they are 
pretty much immune to any backlash, any litigation, any 
liability further on down the road.
    We had such a structure in the mortgage rating or the 
security rating portion where, regardless of the real quality 
of some of these asset-backed, mortgage-backed securities, as 
long as they had that AAA stamp on them, they were fine and 
people were buying them up and they were fungible, even though 
behind that check-the-box, AAA situation, we had some wholly 
unsustainable securities, and they weren't anywhere near the 
quality of a U.S. Treasury.
    Are we getting into that same situation here where we 
create this safe harbor, check-the-box type of situation, yet 
we all know that through innovation and creativity, you might 
have a situation where a lender could check the box but yet 
still convey a mortgage that is really, given the circumstances 
of that individual customer, not repayable or is of highly 
questionable ability to repay? Ms. Cohen?
    Ms. Cohen. I will focus on the safe harbor. I am not an 
expert on the ratings agencies.
    With regard to this question about whether if you check the 
box you are golden, no matter what you have done, that is 
essentially what the safe harbor does. Several witnesses said 
it is not an absolute insulation to litigation. To the extent 
that you don't meet the Qualified Mortgage definition, you can 
raise the question of whether you have done that or not. But 
once you have properly checked those boxes and you can prove 
it, the homeowner has zero recourse even if you made a 
predictably unaffordable loan.
    Mr. Lynch. And if you are a lender and you basically have 
to prove that you have investigated the applicant's ability to 
repay, wouldn't you have evidence that you have walked through 
that process? Wouldn't that be extremely valuable to a lender, 
having that information regarding that particular applicant?
    Ms. Cohen. That is the underwriting process that the 
statute hopes to reinvigorate.
    Mr. Lynch. Ms. Still?
    Ms. Still. Congressman, I think you have touched on exactly 
why it is so important to get these standards right. If we 
could all agree on a set of standards that legitimately 
evaluated a borrower's ability to repay, then it would be good 
to have the certainty of a safe harbor and we would all agree 
that the checklist, if you will, was very appropriate for any 
given borrower.
    I think by having a safe harbor and a very explicit 
checklist, you incent good behavior and lenders know exactly 
how to comply, and so we will get a better business result at 
the end because there will be clarity on how to do this right.
    The only other thing I would point out is that, in the 
past, lenders were managing to guidelines, whether it was GSE 
guidelines or private investor guidelines. This is law, and it 
is not a guideline. It is the law. And so I think you do get 
much higher levels of compliance than in the past.
    Mr. Lynch. But the difficulty with legislation is that 
sometimes it is better to have the rule-making agency deal with 
the particulars. It is very difficult for us with 435 Members 
of Congress to sometimes agree on the precise word and not its 
second cousin in terms of crafting legislation.
    So I am just worried about the innovative, creative lender 
who might be able to push out a loan to a non-creditworthy 
customer and that creates a certain advantage for that firm and 
pushing the envelope. We want to provide some type of recourse, 
perhaps this rebuttable presumption, for the borrower who gets 
snookered, so to speak.
    Thank you. I yield back. And thank you for your indulgence.
    Chairwoman Capito. The gentleman from Tennessee, Mr. 
Fincher, for 5 minutes.
    Mr. Fincher. Thank you, Chairwoman Capito.
    Mr. Hodges, how can Congress and the Administration be 
proactive in providing relief in terms of ensuring that 
potential manufactured home loan customers continue to have 
access to financing options?
    Mr. Hodges. For one, I think supporting House Resolution 
3849 helps. Anything that would help adjust both the HOEPA and 
QM thresholds and caps to help make more low balance 
manufactured home loans come under those thresholds keeps 
financing available in that market.
    I think the CFPB also has authority in this area on both 
HOEPA and QM to provide regulatory assistance. So anything 
coming from this body or others who can help promote that with 
the CFPB--and we have enjoyed our discussions with them--can be 
very helpful.
    And then just I guess lastly, if anybody is concerned or 
questionable about manufactured housing and its impact and its 
value to low- and moderate-income customers, ask us. We would 
love to help educate and provide more information, just so you 
can feel comfortable like we are with these issues.
    Mr. Fincher. Okay. Second question: In your testimony, you 
explain that the Dodd-Frank Act recognized the need to regulate 
big banks and small banks differently. Could you explain the 
challenges inherent in trying to regulate small manufactured 
home loans on par with larger site-built home loans?
    Mr. Hodges. Sure. And sort of harkening back to the 
question earlier, by way of example, fixed cost to originate 
and service of around $2,000 per loan, that is 1 percent of a 
$200,000 loan or 10 percent of a $20,000 loan, which makes 
hitting those thresholds and caps much more risky for the 
manufactured housing transaction.
    Mr. Fincher. Okay. One more just to wrap up.
    I think you said a few minutes ago you expressed the need 
for the CFPB to clarify that individuals who assist and aid 
customers in the manufactured home buying process are not 
categorized as loan originators for purposes of the SAFE Act. 
Have you had discussions with them about this issue; and, if 
you have, has there been any action on their part following the 
meeting?
    Mr. Hodges. MHI has had discussions with the CFPB staff on 
guidance coming from the SAFE Act. At this point, we haven't 
heard exactly where that guidance may go. We would be very 
pleased to help participate in that and receive guidance from 
the CFPB with respect to manufactured home retailers and 
sellers and whether they would be loan originators under the 
SAFE Act.
    Mr. Fincher. Thank you, Tom. I appreciate it.
    I yield back.
    Chairwoman Capito. Mr. Carney for 5 minutes.
    Mr. Carney. Thank you, Madam Chairwoman.
    I would also like to add to Congressman Watt's comments 
about the panel today. Thank you for putting together a very 
helpful and balanced panel. I appreciate that very much. The 
information being shared and the conversation has been very 
helpful.
    I have heard kind of agreement--basic agreement from 
everybody across-the-board that we need, in terms of a QM, 
something that is broad and something that is clear with bright 
lines. Does everybody--I see everybody pretty much shaking 
their head with that.
    Is your expectation that it will be easy to figure out what 
that is, what constituents broad and clear? I ask Ms. Still if 
she has a notion of what that--I suspect at some point, the 
question is going to get to be, where do you draw the line?
    Ms. Still. Yes, exactly. And I don't think the expectation 
is easy at all. I think the Clearing House document tried to 
make an attempt at starting that dialogue.
    Mr. Carney. Is that the document Mr. Watt was referring to?
    Ms. Still. Yes, exactly. I would look to the Colorado 
Housing Authority, which has set ability to repay at about a 50 
percent back ratio. Fannie Mae has a waterfall that starts at 
45 and goes to 50. North Carolina has set the number at 50. I 
think the interagency guidance from a couple of years ago 
provided the notion that 50 would be a good number. And so, for 
me, that would be part of the review: to look at what the 
States have done already and look at what the current lending 
levels are.
    Mr. Carney. There are good practices. There have been good 
underwriting practices, notwithstanding what has happened in 
the last several years, and good underwriting practice among 
institutions out there in the marketplace currently. So one 
would think that you could arrive at some close place.
    Anyway, Mr. Stein, do you have a view of that?
    Mr. Stein. Yes. We were part of the Clearing House 
recommendations, and the thought there was to set a back end 
debt-to-income ratio as the baseline, which we picked 43, which 
is FHA's manual underwriting standard. So anybody under 43 
would be a QM. But we recognize that there are a lot of 
borrowers who can afford a 43 and shouldn't be denied a home 
loan or the safer type of home loan provided by QM, so we have 
added the compensating factors that lenders have used 
historically. If you have a lot of reserves, if your new loan 
doesn't cost more than your old loan that you successfully 
paid, if you have a low mortgage payment, or if you have 
residual income, which somebody mentioned, if any of those are 
true, you also could become a Qualified Mortgage.
    Mr. Carney. So this is a really important issue, right? I 
have gotten a lot of calls and a lot of comments from people at 
home and here. But your sense is that everybody--so everybody 
has a pretty compelling interest to engage and to try to come 
up with something that works.
    Is there anyone on the panel who has a different view as to 
whether this will be able to come up with something that works?
    Mr. Bentsen, how does it relate to your interests, the 
folks that you represent?
    Mr. Bentsen. Congressman, I think largely QM will become 
the mortgage market.
    Mr. Carney. You said that. So it is really, really 
important, right?
    Mr. Bentsen. Yes. If you consider the fact that 90 percent 
of mortgages are funded through the secondary market or through 
securitization, this is where investors--the main investors are 
going to be. This is where the securitization market will be. 
So it is a very difficult process, no doubt, in how these clear 
and bright lines are determined, but it will define the 
mortgage market.
    Mr. Carney. So, we didn't talk about this much. You 
referred to it briefly, I think, in response to a question 
about the future of the GSEs. How might that affect this whole 
question as well?
    Mr. Bentsen. Certainly you, Congress, are going to have to 
make the determination on what you do.
    Mr. Carney. Let's just take, for example, the 
Administration--about a year-and-a-half ago, the Treasury came 
in here and presented their White Paper, I guess, and their 
preferred option, which was kind of a hybrid government-private 
kind of an option. How would that affect what we are talking 
about today?
    Mr. Bentsen. Obviously, QM, QRM, whatever the GSE 
conforming market, all of those things are going to have to be 
in correlation or coordination with one another. They can't be 
in conflict. And so, wherever QM ends up based upon the final 
rule, risk retention, and then wherever Congress determines 
what to do with the GSEs going forward, whatever that may be, 
all of those things have to be considered in coordination with 
one another.
    Mr. Carney. Thank you. I see my time is up.
    Chairwoman Capito. Thank you.
    Mr. Canseco?
    Mr. Canseco. Thank you, Madam Chairwoman.
    In all my years as a community banker in Texas I have never 
met a banker who made loans that he knew wouldn't get repaid. 
This makes the ability-to-repay requirement and corresponding 
QM and QRM rules included in Dodd-Frank all the more curious. 
And there appears to me a belief behind these rules that 
perpetual liability and the ever-present threat of litigation 
will somehow make the mortgage market function better for 
consumers. And nothing could be further from the truth.
    As I already noted, a number of banks and community banks 
in Texas and around the country have ceased making mortgage 
loans because of Dodd-Frank; and this cuts off a very vital 
source of credit for families in small towns who have relied 
for years on their local institutions.
    This is not consumer protection. In fact, this is harmful 
to the families who are supposed to be protected by all these 
new rules. As we have already learned today, credit could be 
even further restricted to worthy borrowers if common sense is 
not applied to pending rules by the CFPB. So if you want proof 
of just how bad Dodd-Frank is for our economy and the housing 
market, look no further than today's hearing.
    So, Ms. Cohen, as I mentioned in my opening statement, 
there are financial institutions in Texas and around the 
country that have stopped making mortgage loans largely because 
of new compliance regulations. Do you view this as an 
acceptable consequence of the mortgage rules included in Dodd-
Frank?
    Ms. Cohen. Congressman, I don't have any information about 
why those particular banks closed. What I can tell you is that 
I have gotten calls every week for the last 15 years from 
homeowners who got loans they could not afford, largely not 
from community banks, but sometimes from community banks. And 
the protections in Dodd-Frank are intended to address those 
excesses. If the standards are broad and clear and balanced, 
then many lenders intending to make home loans should be able 
to make good loans.
    Mr. Canseco. So do you think that these community banks in 
Texas were making those types of loans that were being forced 
to--these banks that are being forced to exit the market are 
making these type of bad loans?
    Ms. Cohen. I am not in any way saying they were making bad 
loans. My observation generally is that the economy has been in 
a hard place. The economy has been in a hard place because of 
the excesses of the lenders and Wall Street, not because of the 
excesses of consumers.
    Mr. Canseco. Thank you for your opinion.
    Mr. Hudson, I understand that there is a concern from the 
Texas Veterans Land Board over the QM rule and how it will 
affect mortgage availability for veterans in Texas. Could you 
expound on that a little bit, please?
    Mr. Hudson. Yes, Congressman.
    Two weeks ago, the Texas Veterans Land Board, which is an 
agency of the State of Texas, contacted me with their concern 
with the Qualified Mortgage, particularly with reference to the 
3 percent cap on points and fees. Because it is a State bond 
money program, there is no secondary market income or revenue 
for any originating lender. So that money needs to be collected 
up front in order for us to pay for the cost associated with 
originating a loan.
    The Texas Vet Land Board loan is specifically designed for 
Texas veterans. And, like I said, this week, if you are a 
disabled veteran in the State of Texas, you would have a 
mortgage interest rate on a 30-year fixed-rate loan of 2.61 
percent. So the Texas Vet Land Board contacted me because they 
see the threat to their viability to assist Texas veterans, in 
particular disabled veterans, because they see that with this 3 
percent cap, it is going to be impossible for them to allow for 
anybody to originate these loans.
    Mr. Canseco. Have you seen any signs from the CFPB that 
they are aware of this issue in Texas or potentially other 
States?
    Mr. Hudson. Yes. We actually just recently met with the 
CFPB and brought to their concerns the bond money programs that 
will be affected.
    We are also going to be contacting every State agency now 
with regards to their home loan programs to make sure they are 
aware of these issues, too.
    Mr. Canseco. What, in your opinion, should the CFPB do in 
order to address this issue?
    Mr. Hudson. Right off the bat, the first thing that really 
needs to be done is to delay this arbitrary deadline for this 
Qualified Mortgage rule and with respect, also exclude the 3 
percent cap from the ability-to-repay standard.
    Mr. Canseco. Thank you very much. I see that my time has 
expired, and I yield back the 3 seconds I have left.
    Chairwoman Capito. Thank you.
    Mr. Green for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman. And I thank the 
ranking member as well, the two of you, for allowing me to 
interlope. This is not my committee assignment, but these 
things are of great interest to me, and I try to make my way 
over so as to be a part of these informative sessions.
    Let's just start with what has been said, but some things 
bear repeating. We find ourselves here today because, at some 
point, loans were no longer maintained in-house; they were 
moved to a secondary place. And then after they were packaged 
and moved to the secondary place, they went to a tertiary 
place, securitized, and then they went to a quaternary place 
and became a part of credit default swaps.
    So when all of this happened, the person making the loan no 
longer concerned himself or herself with the ability to repay. 
And by no longer being concerned, I don't have to keep it on my 
books. It is going to someone else. These standards became--to 
be kind, they varied.
    Some had pretty good standards. Among the many that had 
pretty good standards were the small banks, because they were 
keeping the loans in-house. And because they kept them in-
house, they were a little bit concerned about your ability to 
repay that loan.
    One of the things that I do hear from my small bankers is 
that they are concerned about the paperwork. They tell me that 
we are creating a lot of paperwork for them, and they have to 
hire people to do this. I have not heard a lot about the 
standard that is being set as much as I have--and I have heard 
some about the standards--but as much as I have about just the 
fact that they have to do the paperwork. And that causes me 
some degree of concern.
    So, given that we do have the large institutions or 
institutions that maintain these loans in-house--and I 
understand the difference between the QM and the QRM and how 
they apply. But the small banks that have this paperwork that 
they have to contend with, has anyone actually looked at the 
amount of paperwork that a small bank would have to contend 
with?
    Ms. Still, you are nodding yes. So have you had a chance to 
look at the paperwork?
    Ms. Still. Certainly, we do. We know that the cost of 
manufacturing a loan has gone up considerably.
    I would start first with what we are doing to the consumer, 
though. We are defensive underwriting. I would suggest that in 
a rebuttable presumption environment, we will ratchet that up 
even more and over document all of our loan files for the 
unknown and the uncertainty. I think it is a real issue for the 
consumer who is trying to buy a home.
    Mr. Green. Okay. You have identified a concern, expressed 
consternation. Now give me a possible solution, because I find 
myself having to do this balancing act. I am concerned about 
the unintended consequences, but I am also very much concerned 
about consumers not going back to where they were and when we 
have this wholesale distribution of loans with standards, as I 
said, that varied. So now give me some indication as to what 
the solution is.
    Ms. Still. I think the solution is a clear definition for 
the ability to repay, a clear, confident way for lenders to 
lend, require the documentation from the consumer that is 
applicable, and make sure that we can lend with confidence and 
not have to over-document loan files because of the uncertainty 
of a rebuttable presumption.
    Mr. Green. Now, I am in complete agreement with you of what 
you just said, but I don't know that it addresses what the 
small bankers tell me about the paperwork and how they have to 
employ additional help for the paperwork. I think you are 
right. I am with you. But I am still trying to help them. Is 
there some way to shrink, condense?
    Ms. Still. I think we will never go back to stated income 
loans where there was no paperwork in the file. So I think some 
of that paperwork is very applicable. I don't think we are 
going to solve the problem. I think we need to acknowledge that 
a well-documented loan file is one of the advantages, one of 
the benefits that Dodd-Frank has brought us. I wouldn't try to 
go back all the way to where we were.
    Mr. Green. I concur. I don't want to go back. Because I 
remember the no-doc loans, and I don't want to go back to loans 
that had these balloons and teaser rates that coincided with 
prepayment penalties. I understand where we were. I don't want 
to go back either.
    But I just try to do what I can to help the little guy that 
is involved in this, and the little guy is a small bank. Now, 
we are not talking about little guy in the sense that you are 
poor.
    But I thank you, and I have to yield back, sir, or I would 
come to you. Thank you. I have to yield back.
    Chairwoman Capito. Thank you.
    Mr. Huizenga?
    Mr. Huizenga. I will grant the first 30 seconds of my time 
to Mr. Stein to answer that.
    Mr. Stein. Thank you very much. That is very kind.
    I was just going to say that I will be curious what your 
banker constituents think about the new form that the CFPB put 
out, the disclosure form which combines two forms into one. It 
simplifies it and makes it clearer for borrowers. I think that 
is an improvement in terms of reducing paperwork and making 
people better understand what they can buy.
    Thank you very much.
    Mr. Huizenga. I appreciate that. Because I am interested as 
well. I have a background in real estate, developing, my family 
is still involved in construction, and this is an issue a bit 
near and dear to my heart.
    I do have to make one quick comment, though, about the 
Zandi report. I have not read it yet. I am looking forward to 
that.
    But it seems to me that this is the--the estimate that the 
1 to 4 percent increase in our mortgage rates may come about if 
this is fully implemented, the way that it has been proposed, 
strikes me as running completely counter to what Chairman 
Bernanke at the Federal Reserve is trying to do by driving 
interest rates down some of us would argue maybe below market 
rates by--through quantitative easing and some of those other 
things.
    But, Ms. Cohen, I know you had made a comment about a 
couple of things. One, you were saying about if there were 
clear, broad, and balanced guidelines, that you didn't think 
there would be a problem, and that this was not excesses of the 
consumers but of banks and of Wall Street.
    I think part of the problem is the balanced part of those 
guidelines. My bill, H.R. 4323, dealing with the 3 percent cap 
that I think Mr. Hudson had referred to and a couple of others 
had referred to is trying to restore some of that balance. And 
I would respectfully put forward that this notion that somehow 
consumers don't have some culpability in this may be a little 
off.
    I am advancing, but I am 43, all right? I know what my 
generation is looking for and those who are slightly younger. 
They are trying to figure out why they can't have the same size 
house mom and dad had, even though mom and dad ended up saving 
50 percent for their downpayment and they bought that home when 
they were 55, not 35. And there is definitely some generational 
element to this, which is why I think we have seen sort of that 
norm go from 20 percent down to 10 percent down to 5 percent 
down to zero down to 120 percent loan to value.
    Nobody wants to go back to those days. It doesn't make 
sense. It didn't make sense at the time, obviously, as we know.
    But it seems to me that we have to have that true balance 
in there. And we know that properly done homeownership is one 
of the most stabilizing aspects in a neighborhood, and we need 
to encourage that.
    I think, as Mr. Luetkemeyer had put forward earlier, that 
pendulum swung way too far where we were encouraging, ``we'' 
being--I wasn't here yet; I am first term--the Congress as a 
whole and others were encouraging lending practices that may 
have brought on some of that. And now it is our job, my job, to 
make sure that the pendulum doesn't swing back so far that we 
lock up the construction, we lock up mortgages, we lock up the 
real estate industry, and really ultimately end up 
destabilizing these neighborhoods further.
    So I don't know if you care to make a quick comment, but I 
also want to get to Ms. Still, as well. So I would like you to 
maybe put forward a little bit about what types of disclosures 
you have to do, and ultimately are customers benefiting from 
being able to use affiliated businesses?
    So if either want to make a quick comment?
    Ms. Cohen. I will answer first, since you asked me about it 
first.
    I, too, am a member of the same generation as you, and the 
other thing that is really challenging people is their lack of 
economic security, their lack of retirement money. And all of 
that has been exacerbated by the recent crisis.
    So as we go forward and we think about what do we want the 
market and our economy and our country to look like and our 
neighborhoods, the question really is, will people have access 
to loans they can afford? If there are incentives to inflate 
fees, we are back into the mid-1990s when there were abusive 
fees that HOEPA tried to get rid of.
    One of the key things that HOEPA introduced was a limit on 
fees that could be paid, and it focused in part on affiliated 
fees. Because it is those companies which can funnel more money 
to the creditor, and the creditor has an incentive to inflate 
the loan amount and to inflate the fees. That is our concern.
    Mr. Huizenga. Okay. Ms. Still?
    Ms. Still. Thank you, Congressman Huizenga, for your 
Consumer Mortgage Choice Act.
    As it relates to affiliates, yes, we do want consumers to 
have choice. And in today's housing environment, the value of 
working in an affiliate relationship, the value of the one-stop 
shop is beneficial to consumers. And so in your bill not 
aggregating the title affiliate and the mortgage affiliate is 
very helpful for consumers to be able to use those services. We 
certainly appreciate that.
    We have talked about the three-point rule, and I just want 
to make one comment. There is a way to address the three-point 
rule. In MBA's comment letter, our recommendation is we, the 
CFPB, change the definition of a low loan amount. I think it is 
set right now at $75,000. Our research would suggest that 
$150,000 would be a better definition of a small loan. And if, 
in fact, we set the definition of a small loan at $150,000, 
which is about the median loan amount in the country, in most 
States the majority of costs would be addressed appropriately 
with that level.
    Chairwoman Capito. The gentleman's time has expired.
    Mr. Miller?
    Mr. Miller of California. I want to thank Chairwoman Capito 
for allowing me to ask questions. I am not a member of this 
subcommittee, so it is very much appreciated on your part.
    You have to wonder what we are doing in this country 
anymore. FHFA is bulk selling foreclosed properties in 
California right now in a market where you go in any real 
estate office and there is a list of buyers looking for homes 
to sell. We asked them why they were doing this, and they said 
because the homes have been on the marketplace far too long. We 
said then give us the definition or breakdown of how long the 
homes have been on the marketplace, just to find out that 70 
percent of the homes were never even listed for sale.
    And so, instead of listing them in the normal, traditional 
way, and selling them off and making a profit for the 
government, we are going to sell those houses to the same 
people who got us in trouble, Wall Street, and give them a 
great deal for doing it, and somebody is going to pay the price 
later. And I think we need to look at what we are doing.
    But then you have to look at QM, and you say, how are they 
going to define it? What is it going to do to the marketplace? 
Any loan that does not meet the Qualified Mortgage designation 
marketplace is going to be a real problem loan. And I am 
concerned about the CFPB. What happens if they adopt a 
rebuttable presumption definition versus a safe harbor? How 
does that impact the marketplace?
    Mr. Bentsen, it is good to see you again. Maybe you would 
like to address that a little bit?
    Mr. Bentsen. Thank you, Mr. Miller.
    Our view is that the rebuttable presumption has the risk of 
assigning liability that will basically force or cause 
investors to consider in their underwriting and investment in a 
loan whether they are going to invest for 5 years, 10 years, or 
30 years. Thirty-year loans tend to prepay often, as you know, 
in an interim period.
    They are also going to be underwriting assigning liability, 
and that is a risk that investors are not inclined to take.
    And, furthermore, given the fact that the government is by 
statute and mandate through rulemaking establishing 
underwriting criteria for the loan, we think that a safe harbor 
is a much more appropriate approach to take.
    Mr. Miller of California. So it is almost like defects 
litigation that occurred. We know how that was expanded on and 
abused. Do you see the same thing that could possibly happen 
here?
    Mr. Bentsen. We think there is a risk, and we think that 
risk will have, at the very least, a price effect. But, let me 
be clear, we think as part of that, we agree with the other 
panelists that you have to start with what is the broad 
definition and then you have to be very explicit about what 
that definition is. So there are the bright lines that we 
understand where the QM market is.
    Mr. Miller of California. The other one I am having 
problems with is loan origination compensation for mortgages. 
And I understand the concern that was expressed when we got 
involved in this, but it is becoming detrimental now to 
actually closing loans. You have a situation where they might 
need to modify compensation in some fashion at the end even 
downwardly, and they are prohibited from doing that.
    Mr. Hudson, can you expand on the loan origination and 
compensation rule and how you believe it is harming consumers 
and individual mortgage brokers?
    Mr. Hudson. Yes, Congressman. Thank you.
    Currently, the way that the loan originator rule from the 
Federal Reserve Board and now the CFPB is adopting is taking us 
to where once I have a payment or a compensation agreement with 
my loan originator and they in effect quote a mortgage rate to 
a consumer, if that consumer were to shop and try and come back 
and say, hey, well, the guy down the street is offering me a 
lower interest rate, can you match that or beat it, under the 
current rule my loan originator cannot. In effect, we have 
taken out the consumer's ability to shop for the better home 
loan program.
    Another concern with the originator compensation piece is, 
in the very definition, creditors and noncreditor mortgage 
companies, which not only are just typically mortgage brokers 
but now more depositories are acting more as a mortgage broker 
as well, are treated differently. So as to where a creditor can 
actually not have to disclose their compensation, what they are 
making on that loan, our mortgage brokers do have to disclose 
everything.
    And where this is going to fall in the piece with the 
Qualified Mortgage definition is, because all of our costs or 
compensation are being disclosed up front, it is going to hit 
that 3 percent trigger much more quickly than a creditor would 
because they are not having to disclose that compensation.
    But with respect to--you have a bill out there, Mr. Miller, 
that will solve some of the problems with regards to allowing 
consumers to shop or even at the same time allowing my loan 
originator to make less--earn less money in order to give that 
consumer a better deal.
    Mr. Miller of California. And it allows you to pay your 
employees, that is traditional in the marketplace, where you 
are prohibited from doing that right now.
    There has been recently a proposal from the CFPB, and you 
think it will affect consumers. Can you expound on that a 
little bit, too?
    Mr. Hudson. I am sorry?
    Mr. Miller of California. The most recent proposal from the 
CFPB, how that will affect consumers?
    Mr. Hudson. Their most recent proposal with regards to LL 
compensation?
    Mr. Miller of California. Yes.
    Mr. Hudson. It actually wasn't a proposal, an official 
proposal, but their idea was to generate a flat fee 
compensation amount, which would mean that our originators 
would make the same on an $80,000 loan as they would on an 
$800,000 loan.
    The problem we see there is that in today's environment, 
everything is built around basis points, percentage of a loan 
amount. And, in effect, my originators or myself as a company 
and mortgage brokers and mortgage bankers, higher loan amounts 
are in effect subsidized to lower loan amounts. So if we 
reduced that ability to compensate an originator on a lower 
loan amount that they were making--
    Mr. Miller of California. I just wanted you to put that on 
the record. Thank you very much.
    Chairwoman Capito. The gentleman's time has expired.
    Mr. Miller of California. Thank you.
    Chairwoman Capito. Thank you.
    Well, I think that concludes the hearing.
    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 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    I would like to thank all of the witnesses for their great 
answers and very candid responses.
    And, with that, this hearing is adjourned.
    [Whereupon, at 12:33 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             July 11, 2012

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