[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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76-115 WASHINGTON : 2013
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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
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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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