[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




 
                   QUALIFIED MORTGAGES: EXAMINING THE
                  IMPACT OF THE ABILITY TO REPAY RULE

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 21, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-22



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             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            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

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

             SHELLEY MOORE CAPITO, West Virginia, Chairman

SEAN P. DUFFY, Wisconsin, Vice       GREGORY W. MEEKS, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
GARY G. MILLER, California           MELVIN L. WATT, North Carolina
PATRICK T. McHENRY, North Carolina   RUBEN HINOJOSA, Texas
JOHN CAMPBELL, California            CAROLYN McCARTHY, New York
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              NYDIA M. VELAZQUEZ, New York
    Pennsylvania                     STEPHEN F. LYNCH, Massachusetts
LYNN A. WESTMORELAND, Georgia        MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         PATRICK MURPHY, Florida
MARLIN A. STUTZMAN, Indiana          JOHN K. DELANEY, Maryland
ROBERT PITTENGER, North Carolina     DENNY HECK, Washington
ANDY BARR, Kentucky
TOM COTTON, Arkansas


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 21, 2013.................................................     1
Appendix:
    May 21, 2013.................................................    47

                               WITNESSES
                         Tuesday, May 21, 2013

Carroll, Peter, Assistant Director for Mortgage Markets, Consumer 
  Financial Protection Bureau....................................    10
Cochran, Kelly, Assistant Director for Regulations, Consumer 
  Financial Protection Bureau....................................     8

                                APPENDIX

Prepared statements:
    Huizenga, Hon. Bill..........................................    48
    Joint statement of Peter Carroll and Kelly Thompson Cochran..    49

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of the American Land Title Association.....    55
    Written statement of the Credit Union National Association...    59
    Written statement of the Independent Community Bankers of 
      America....................................................    61
    Written statement of the National Association of Federal 
      Credit Unions..............................................   138
    Written statement of the National Association of REALTORS...   140
    Written statement of WesBanco, Inc...........................   144
Duffy, Hon. Sean:
    CFPB QM rule for Wisconsin...................................   153
Huizenga, Hon. Bill:
    Written statement of the Real Estate Services Providers 
      Council, Inc...............................................   154
Peter Carroll and Kelly Thompson Cochran:
    Written responses to questions submitted by Representative 
      Ellison....................................................   161
    Written responses to questions submitted by Representative 
      Watt.......................................................   165


                   QUALIFIED MORTGAGES: EXAMINING THE
                  IMPACT OF THE ABILITY TO REPAY RULE

                              ----------                              


                         Tuesday, May 21, 2013

             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 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Miller, McHenry, 
Campbell, Pearce, Posey, Fitzpatrick, Westmoreland, 
Luetkemeyer, Duffy, Stutzman, Pittenger, Barr, Cotton; Meeks, 
Maloney, Watt, Hinojosa, Scott, Green, Ellison, Velazquez, 
Lynch, Capuano, Murphy, Delaney, and Heck.
    Ex officio present: Representative Hensarling.
    Also present: Representatives Huizenga and Rothfus.
    Chairwoman Capito. The subcommittee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the subcommittee at any time.
    I now recognize myself for 5 minutes for an opening 
statement. In January, the Consumer Financial Protection Bureau 
(CFPB) released the final Ability-to-Repay rule for Qualified 
Mortgages (QMs). This is a very important topic.
    Called for by Title 14 of the Dodd-Frank Act, this 800-page 
rule will potentially forever change the mortgage market in 
this Nation. While the intent is to protect consumers from 
fraudulent mortgages, the practical implications of this rule 
could result in the constriction of mortgage credit for 
consumers.
    I fear, and I have heard this anecdotally, that this 
approach of ``Washington knows best'' will harm the very people 
that the rule seeks to help: borrowers who are on the fringe of 
lacking access to mainstream financial services.
    Since the release of this rule, I have heard from many 
community banks and credit unions in my district about the 
adverse effect of this rule and the adverse effect on the 
communities that they serve.
    These financial services professionals are on the front 
lines of lending in their communities. They know their 
customers and they also know what type of financial products 
are appropriate for their customers based on their unique 
circumstances.
    Many of them have expressed great concerns about their 
continued ability to serve their community's needs for mortgage 
credit under the regime established by the rule.
    One of the most glaring concerns of the rule is the overly 
restrictive definition of what is a rural community. Bill 
Loving, who is president and CEO of Pendleton County Bank in my 
district in West Virginia, raised this issue at a subcommittee 
hearing last month.
    He said, ``I think the members of this committee would be 
surprised at what counties in their own States and districts 
fail to qualify as rural. For instance, in the State of West 
Virginia, 26 out of 55 counties fail to meet the definition of 
rural. Under any reasonable definition, the entire State of 
West Virginia would be considered rural.''
    I am certain my ranking member would consider my entire 
State rural compared to where he lives. To assert that nearly 
half of the State of West Virginia is not rural demonstrates a 
lack of familiarity with what constitutes a rural community.
    Having an accurate rural definition is essential for 
community banks and credit unions that currently offer balloon 
loans to their customers.
    Linda Ashley, who is president and CEO of Poca Valley Bank 
in my district, recently wrote to me about the importance of 
this project: ``Balloon loans enable us to better manage 
interest rate risk and balloon loans are a product with which 
our customer base has been comfortable for many, many years. We 
encourage you to help preserve our ability to serve our 
customers.''
    There is a niche demand for these types of loans in rural 
communities. These loans allow borrowers who would not 
otherwise be able to access credit to purchase a home. The 
decision of whether or not a borrower should be able to access 
this type of credit is best determined by the lender working 
with the individual borrower. This type of labor-intensive 
relationship lending is the linchpin of community-based 
lending.
    I see my time is running out, so I am going to shorten my 
statement and submit the rest of the statement for the record.
    I would also like to submit letters from my community 
bankers for the record. Without objection, it is so ordered.
    There is a very real concern that the implementation of 
this rule will result in less credit, less borrowing, and less 
availability of mortgages for many of our constituents.
    With that, I would like to recognize the ranking member of 
the subcommittee, Mr. Meeks, for 3 minutes for an opening 
statement.
    Mr. Meeks. Thank you, Madam Chairwoman, for holding this 
hearing today.
    And I would like to thank the distinguished panel for being 
here as we examine what is very important: the impact of the 
Ability-to-Repay rule on Qualified Mortgages.
    Sometimes, I come to hearings and you have in your mindset 
what should or shouldn't happen based upon what you have talked 
about. Sometimes, you may come with a different perspective, 
and in Washington, sometimes it might be a Democratic idea or 
it might be a Republican idea.
    This is what we have to get right. I still believe in the 
American dream. And the American dream is owning a home, and 
owning a home can mean the difference for a family and a 
community.
    It can mean the difference in someone's getting an 
education and not getting an education. And that is why it is 
tremendously important that we get this as right as we possibly 
can.
    I have never seen a perfect bill in my 14 years in this 
House of Representatives, so I know that no bill is perfect, 
but this really affects and can affect peoples' lives, so how 
we get it done and how we do it is important.
    I have concerns when we start talking about the QM rule and 
the QRM rule and the differences and it becomes complicated and 
individuals don't--especially some of the banks, small 
community banks which did not cause the financial crisis that 
we entered into; it seems as though they may be unfairly hurt 
by this.
    In fact, I was talking to one banker last night who said, 
``Look, we are just going to stop giving out mortgages 
altogether.'' In fact, they have, but they have made 
arrangements with Morgan Stanley--they have Morgan Stanley in 
the bank--to do the mortgages and they just got out of the 
business altogether because they said they can't take the risk 
of fines and not knowing what qualifies and what doesn't 
qualify because a lot of the rules are not clear to them.
    When you talk about whether or not the cap, the 3 percent 
cap and what is included therein, it is not clear. And whether 
or not you take in the whole person, as opposed to just having 
a cookie box situation where you have to fall in this box and 
you are not allowed to take in the consideration of the whole 
person, that customer.
    I have said it before in this committee and I say it again, 
if it wasn't for someone taking in the fact that my parents, 
their whole situation, they would have never owned a home. Had 
they not owned a home, I would not be sitting here today 
because that home helped finance my and my sister's education.
    I want to make sure that we are not cutting out 
opportunities for individuals who want to own a home which will 
make the community good, and which changes their lives and 
their children's lives for generations yet to come.
    And I am concerned from what I have seen thus far and what 
I am hearing from community banks and small banks that that 
very well may happen if we don't get this thing right.
    So I will be looking forward to hearing from the witnesses 
as we move forward, and I yield back the balance of my time.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Duffy for 2 minutes for an 
opening statement.
    Mr. Duffy. Thank you, Madam Chairwoman.
    I want to address my comments at the CFPB in a broad sense. 
I think this is an appropriate time after what has happened 
over the last several weeks, the issues that have come out with 
the IRS and the AP to reflect on the structure of the CFPB.
    When my friends across the aisle in the House wrote this 
portion of Dodd-Frank, they had talked about having a 
commission of bipartisan members to run the CFPB.
    The way the rule has come out, the CFPB is run by a single, 
politically appointed Director. The CFPB is a very, very 
powerful agency that has a huge impact on the kind of credit 
and access to credit people in all of our districts receive.
    And you look at that powerful agency and I think we can 
learn some things from what happened with the IRS. You have an 
agency that is also very powerful that targets Americans for 
their political beliefs, their political views, and it has a 
chilling effect on people with that political view and belief 
to organize around that set of ideas; it has a chilling effect. 
What has happened with the press? You have had an attack on the 
AP, Fox News, I don't know who else; but they have told us that 
has had a chilling effect on their ability to access 
information from informants and whistleblowers in regard to how 
the government is working.
    What relationship does that have to the CFPB? I have a 
chance to talk to a lot of bankers, big and small, and they 
talk about the exams that are going on from the CFPB that are 
nothing like the other regulators do to them.
    You are very powerful. You are very aggressive, and when I 
say, ``Golly, that is great information, we should expose this. 
Come on in and testify. We want to hear your story,'' guess 
what they say? ``No way, because we are afraid of the 
retribution. We are afraid of the impact on our institution 
from the CFPB because we are going to talk about what they are 
doing to us.''
    Again, a powerful agency that has a huge impact on a very 
important segment of our economy shouldn't be run by one 
director. It should be bipartisan, so we have a whole set of 
people with different views overseeing what the agency is 
doing. I yield back.
    Chairwoman Capito. Thank you. The gentleman yields back.
    I would like to recognize Mr. Ellison for 3 minutes for an 
opening statement.
    Mr. Ellison. Let me thank the chairwoman and the ranking 
member for this excellent hearing; it is very important.
    I think it has been said by some that if we have greater 
rules regarding mortgages, and if rules contemplated now 
regarding Qualified Mortgages go into place, it could result in 
fewer loans and less borrowing. I must say, I hope so.
    The fact is, there were a lot of loans that should not have 
been issued in the last several years. Let's never forget that 
we are not here simply by accident. We are not here because 
people like regulation; 4 million foreclosures happened.
    As a matter of fact, 92 percent of subprime mortgages were 
rated AAA, but then after the meltdown, nearly all of them were 
considered junk bonds.
    So it is not entirely a bad thing that some mortgages which 
seemed like a good idea before the meltdown may now be looked 
at with greater scrutiny.
    A great many of the products that we saw were predatory in 
nature. As a matter of fact, 70 percent of the subprime loans 
from 2005 to 2007 were refis with features like exploding ARMs, 
negative amortization, and balloon payments.
    Of course, balloon payments may be okay for some, but they 
weren't okay for all the people who got them. And we should be 
more diligent in making sure that the product fits the 
customer.
    The products weren't designed to extend credit to 
creditworthy borrowers but to target vulnerable homeowners with 
little equity built up in their homes.
    Lenders often stood to gain more from a default and 
foreclosure than the loan performed. And it was exactly this 
perversion of economic incentives that led to a meltdown in the 
economy and the foreclosure crisis that has only recently shown 
any sign of slowing.
    In the wake of that crisis, there have been many injustices 
visited upon homeowners, and it is unlikely that many of the 
homeowners and many Americans who were forced to bear the 
burden of the economic crisis will ever be made whole.
    But we did manage to do one thing right, and I think that 
is the establishment of the Consumer Financial Protection 
Bureau. Now as the ranking member very wisely said, there has 
never been a perfect piece of legislation, there has never been 
a Federal agency or a corporation that works perfectly.
    Therefore, this committee will have the responsibility to 
monitor and offer oversight, and where it appears that the 
agency is too aggressive, we should say something. But where it 
appears that consumers don't have an advocate, we should say 
something there, too. What we are striving for is balance, not 
to side with consumers or producers, but balance.
    I yield back.
    Chairwoman Capito. The gentleman yields back.
    I recognize Mr. Miller for 1\1/2\ minutes for an opening 
statement.
    Mr. Miller. Thank you, Madam Chairwoman.
    We see the housing market starting to recover and the 
economy is going with it, which I think we all agree is 
important. We need to ensure that policies we pass in 
Washington don't disrupt that in a negative way, and that is 
the problem I have with QM today.
    It is not a personal attack, I just think we need to look 
at the reality of what we are doing out there. The ATR rule 
will govern lending for the foreseeable future. I think none of 
us will disagree with that comment.
    The definition of QM, which is meant to protect consumers 
versus predatory lending, is a good definition. In 2001, I 
started introducing language that defined predatory versus 
subprime and that should be a goal we have. But I am concerned 
that the QM definition as written will probably hurt more 
people than it will help.
    I looked at a recent study by CoreLogic, and it said that 
mortgages made in 2010, half of them would not qualify under 
the QM definition, and I have talked to loan originators up and 
down the State, I have talked to GSA's and they say those are 
some of the best performing loans that they have on the books 
today because they used good underwriting standards.
    But the lenders I am talking to say that we will not 
originate mortgages that do not fall under the QM label. I know 
that there is a period we have to come into that in the GSE's 
but I don't think it is going to happen. They are saying they 
won't do it, and I think the 3 percent point cap as determining 
the ability to repay a mortgage need to be more flexible.
    I think it is drawn too narrowly, but we need to identify 
modifications to the QM that would make it workable in the 
marketplace, and I don't believe it is today.
    Like I said, the housing market is showing signs of 
recovery and we need to make sure that eligible borrowers--I 
don't want to be making loans to people who can't repay them, 
but the QM rule has to be flexible enough to allow eligible 
buyers to buy homes.
    And I see my time has expired. I yield back.
    Chairwoman Capito. The gentleman yields back.
    I would like to recognize Mrs. Maloney for 2 minutes for an 
opening statement.
    Mrs. Maloney. Thank you.
    And I welcome the witnesses. There were a number of 
provisions within Dodd-Frank that tackled the important issue 
of consumer lending, and the Qualified Mortgage rule is 
certainly among the most important.
    The CFPB in my opinion has worked diligently to write a 
fair and balanced rule that followed the intent Congress laid 
out for responsible home lending.
    No one disputes that in the years leading up to the 
financial meltdown, mortgage lending got out of hand, and 
underwriting was nonexistent. The new QM rule will ensure that 
borrowers are protected from the risky lending practices that 
contributed to so many homeowners ending up in delinquency.
    The Bureau has handled over 150,000 complaints. It has 
helped 6 million consumers reap over $400 million in refunds as 
a result of enforcement actions against deceptive practices, 
all while testifying before Congress at least 35 times.
    I want to especially mention the rule that the chairlady 
and I worked on to treat stay-at-home moms fairly in their 
access to credit and credit cards, and the Bureau has worked 
diligently towards its mission, and I look forward to hearing 
more about your work in your testimony today.
    And thank you.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Westmoreland for 1\1/2\ 
minutes for an opening statement.
    Mr. Westmoreland. Thank you, Chairwoman Capito, and thanks 
for yielding and for holding this hearing.
    I do not believe that I have ever heard a good word from my 
constituents about the Qualified Mortgage rule. From 
homebuyers, I hear many might not be able to qualify for a home 
because they fall outside QM's government-anointed standards.
    From bankers, I hear that credit will not be available for 
some borrowers and they have to prepare for possibly 30 years 
of potential litigation from borrowers who cannot repay.
    Policies like QM are the most dangerous to economic freedom 
in this country. If a borrower doesn't fit into the government-
approved box, you pay higher prices. Ironically, for the 
minority and low-income borrowers the QM rule will supposedly 
help, in reality, it will limit the opportunities for these 
Americans to better their lives through homeownership.
    In the end, QM will create another housing bubble just like 
the Clinton affordable housing goals of the 1990s created the 
2008 housing crisis. This country needs sensible housing 
regulation that allows the market to set the price and the 
qualifications for eligible borrowers.
    I urge this committee to swiftly vote to repeal QM and to 
return all Americans to their economic freedom.
    And with that, Madam Chairwoman, I yield back.
    Chairwoman Capito. The gentleman yields back.
    Mr. Green, for 2 minutes.
    Mr. Green. Thank you very much, Madam Chairwoman.
    I thank you and the ranking member.
    And I thank the witnesses for appearing.
    Somewhere along the way, in the 1980s we ceased to qualify 
people as homeowners and we started to qualify them as 
homebuyers. In fact, the Internal Revenue Code provided certain 
advantages to buying homes and selling them within a certain 
amount of time.
    We decided that for some reason, it was not important to 
have the person who qualified the purchaser, to maintain some 
relationship such that that person wanted to be assured that 
the person borrowing could in fact afford the loan.
    This is how we got into the 3-27s, the 2-28s, the no-doc 
loans, the loans that were in some ways making it available for 
those who wanted to buy and flip and take advantage of the fact 
that the market was moving, but it didn't help people who 
wanted to simply buy a home and live in a home, and many 
persons received mortgages that were not suitable for their 
circumstances.
    I am proud to say that we have this Consumer Financial 
Protection Bureau. It is important that consumers have 
advocates for them. There were allegedly agencies available to 
help consumers at the time all of these things came into being, 
but for whatever reason, they did not function efficaciously 
for consumers.
    I am hopeful that we will achieve the balance that Member 
Ellison called to our attention. Balance is important, but as 
we achieve the balance, let's make sure we continue to focus on 
the consumer and make sure that the consumer receives the type 
of product that he or she can afford.
    I am also interested in a definition. I have heard many 
definitions of community bank, community banks versus small 
banks, and I am curious as to whether or not you have embarked 
upon defining community banks versus small banks.
    And finally, your Office of Servicemember Affairs; I care a 
great deal about the persons who serve us in our military, and 
my hope is that we will help protect them from some of those 
who seek to encroach upon their financial circumstances with 
fraudulent items.
    I thank you Madam Chairwoman, and I yield back.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Fitzpatrick for 1\1/2\ 
minutes.
    Mr. Fitzpatrick. Thank you, Madam Chairwoman.
    As I have been meeting with bankers and credit unions in 
and around my district, the conversation inevitably turns to 
this new Qualified Mortgage rule.
    Lenders in Pennsylvania are very concerned, and 
understandably so, because they serve the community by making 
loans, and their ability to provide that service depends on the 
ability to assess creditworthiness. And there is concern that 
by constructing a box in which they must operate that is 
inappropriate, that qualified buyers and borrowers won't have 
access to credit.
    We all want business to be successful and for capital to be 
available in our communities but when it comes to this issue, I 
mainly want to ensure that responsible, working-class families 
in my district can still buy their first home.
    We are all unified in our opposition to ever going back to 
the pre-bubble days; however, we can't allow overregulation to 
dry up credit for the families trying to participate in the 
American dream.
    So I hope to receive those assurances here today. I look 
forward to the testimony, and I yield back.
    Chairwoman Capito. The gentleman yields back.
    That concludes our opening statements. I would like to ask 
all of the guests and Members to join with me in a moment of 
silence of our thoughts and prayers for those victims and 
families in the State of Oklahoma. Thank you.
    [moment of silence]
    Thank you.
    I would now like to welcome our panel of distinguished 
witnesses. Our first witness is Mr. Peter Carroll, the 
Assistant Director for Mortgage Markets at the Consumer 
Financial Protection Bureau.
    Ms. Cochran. Actually, I will start and--
    Chairwoman Capito. All right. Let me introduce you, then. 
Excuse me.
    Ms. Cochran. Thank you.
    Chairwoman Capito. Ms. Kelly Thompson Cochran is the 
Assistant Director for Regulations at the Consumer Financial 
Protection Bureau. Welcome, and we will recognize you for your 
5-minute statement.

  STATEMENT OF KELLY THOMPSON COCHRAN, ASSISTANT DIRECTOR FOR 
       REGULATIONS, CONSUMER FINANCIAL PROTECTION BUREAU

    Ms. Cochran. Thank you, Chairwoman Capito, Ranking Member 
Meeks, and members of the subcommittee for this opportunity to 
testify about the Bureau's Ability to Repay a Qualified 
Mortgage rule and address the concerns that you have raised 
this morning.
    I am Kelly Cochran, the Assistant Director for Regulations 
at the Bureau, and my colleague, Peter Carroll, and I are 
honored to represent the Bureau here this morning.
    During the years leading up to the mortgage crisis, too 
many mortgages were made to consumers without regard for their 
ability to repay the loans. Loose underwriting practices by 
some creditors such as failure to verify the consumer's income 
and assets, so-called no-documentation loans, and qualifying 
consumers for loans based only on their ability to repay low 
introductory interest rates contributed to a mortgage crisis 
that led to this Nation's most serious recession since the 
Great Depression.
    Congress, in the Dodd-Frank Act, adopted a provision to 
protect consumers from such irresponsible practices by 
requiring creditors to make a reasonable, good-faith 
determination of consumers' ability to repay their loans based 
on verified and documented information.
    The Act also provides a presumption of compliance with this 
requirement for a certain category of loans called Qualified 
Mortgages. However, the statute did not define how strong the 
presumption would be, for instance, whether it would function 
as a Safe Harbor or could be rebutted upon certain showings by 
consumers. And it also left significant discretion as to how 
Qualified Mortgages would be defined.
    The Federal Reserve Board issued a proposal to implement 
these provisions prior to the transfer of authority to the 
Bureau in July 2011. In January of this year, the Bureau issued 
both a final rule to implement these provisions and a proposal 
to make certain additional adjustments both to facilitate 
access to credit and to clarify certain provisions defining 
Qualified Mortgages.
    We are now working to finalize that proposal so that the 
new rule as a whole can take effect on January 10, 2014. Our 
written testimony contains a summary of the outreach that we 
conducted in connection with the rulemaking and of the rule 
itself.
    Today, we wanted to briefly highlight some of the major 
policy considerations that underlie the features of the rule. 
Our first consideration in crafting the rule was to protect 
consumers by preventing the return to irresponsible lending 
practices.
    The General Ability to Repay Standard is designed as a 
commonsense measure to ensure that creditors use reliable 
information when they are underwriting and that they evaluate 
consumers' ability to make payments throughout the life of the 
loan.
    Although this statute was not as specific with regard to 
documentation and the underwriting requirements for Qualified 
Mortgages, we felt that it was important to ensure that 
creditors also consider consumers' individual financial 
circumstances when making Qualified Mortgages.
    Accordingly, the rule requires that creditors consider 
consumers' debts, incomes, and assets in making Qualified 
Mortgages in addition to meeting certain statutory limitations 
on loan features and up-front costs.
    At the same time, we also carefully consider the need for 
long-term flexibility. We do not believe that it is possible by 
rule to define every circumstance in which a mortgage is 
affordable given that underwriting is a highly complex and 
individualized process.
    We therefore worked to structure the rule in a way that 
allows room for a range of reasonable underwriting practices 
and models that are used by different types of creditors today.
    We were also concerned that as the mortgage market 
strengthens, the rule should provide appropriate safeguards 
without becoming a straitjacket.
    We balance these considerations in many places within the 
rulemaking, including both leaving flexibility under the 
general ability-to-repay standards for reasonable underwriting 
practices and creating different types of Qualified Mortgages 
that use different sets of safeguards to ensure that 
affordability is being appropriately considered.
    My colleague, Peter Carroll, will now discuss those 
Qualified Mortgage provisions and some of the additional policy 
considerations that went into their formulations.
    [The joint prepared statement of Ms. Cochran and Mr. 
Carroll can be found on page 49 of the appendix.]

  STATEMENT OF PETER CARROLL, ASSISTANT DIRECTOR FOR MORTGAGE 
         MARKETS, CONSUMER FINANCIAL PROTECTION BUREAU

    Mr. Carroll. Thank you, Chairwoman Capito, Ranking Member 
Meeks, and members of the subcommittee for this opportunity to 
testify about the Bureau's Ability to Repay and Qualified 
Mortgage rule.
    I am Peter Carroll, the Bureau's Assistant Director of 
Mortgage Markets. I am also honored to represent the Bureau 
here this morning.
    Building on our policy considerations, the Qualified 
Mortgage provisions of the rule were the most complex part of 
the rulemaking. This was in part because the creation of a 
general ability-to-repay requirement that carries potential 
liability for creditors and asset needs has created anxiety in 
the market.
    A 2008 Federal Reserve Board rule that requires assessment 
of a consumer's ability to repay certain higher-priced mortgage 
loans does not appear to have a caused a significant increase 
in litigation; however, we recognize that concerns about 
liability under the Dodd-Frank Act, the ability-to-repay 
requirement might cause creditors to constrain their lending, 
particularly in the first few years after the rule takes 
effect.
    Access to mortgage credit is already constrained in this 
market and we were concerned about unduly exacerbating these 
constraints throughout rulemaking, while still ensuring 
responsible lending. Several features of the rule address this 
concern.
    First, we provided for different types of Qualified 
Mortgages that we expect will cover the vast majority of 
today's mortgage market. We created a general definition of 
Qualified Mortgage based on bright line standards that include 
a 43 percent debt-to-income ratio.
    Second, we created a temporary Qualified Mortgage 
definition based on eligibility for purchase or guarantee by 
the GSE's while they are in conservatorship and certain 
government agencies whether those loans were sold or held on 
portfolio.
    This definition makes it easier for creditworthy consumers 
with debt-to-income ratios above 43 percent to access credit 
while the industry gets more comfortable with the rule.
    Third, we calibrated the strength of the presumption of 
compliance for Qualified Mortgages based on the loan's pricing. 
We believe the Safe Harbor will provide certainty to creditors 
in the prime market and the rebuttable presumption of 
compliance will create strong incentives for more responsible 
lending in the nonprime market.
    At the same time, the rebuttable presumption preserves 
important consumer remedies in the nonprime market.
    Therefore, we believe that the Qualified Mortgage 
definition is structured to encourage responsible credit in all 
parts of the market over time.
    As my colleague, Kelly, stated, we do not believe that it 
is possible by rule to define every instance in which a 
mortgage is affordable, but we are also concerned that an 
overly broad definition could stigmatize responsible 
nonqualified mortgages or leave insufficient liquidity for 
those loans which could restrict access to credit for some 
consumers.
    For this reason, we defined Qualified Mortgages to provide 
greater protection to consumers and certainty to creditors 
while leaving room for a market for nonqualified mortgages 
where appropriate.
    We will continue to watch the health of mortgage markets 
once this rule takes effect to ensure it is working as we 
expect it will. To address access to credit concerns, we also 
made changes to the part of the rule that treats certain 
balloon payment loans as Qualified Mortgages if they are 
originated and held in portfolio by small creditors in rural or 
underserved areas.
    We significantly expanded the definition of rural areas 
from the Federal Reserve Board's original proposal and made 
other adjustments to make it easier for small creditors to 
continue making responsible balloon loans going forward.
    Several elements of the proposed rule that we issued along 
with the final rule, particularly the proposal to extend 
Qualified Mortgage status to certain portfolio loans by small 
creditors, are also intended to address access-to-credit 
concerns.
    Finally, we want to highlight that the Bureau has made an 
agency-wide commitment to provide implementation support for 
this and our other mortgage rules. We did this in part because 
we realized that such efforts are particularly important to 
small creditors that do not have large legal and compliance 
teams.
    We recognize that an efficient implementation process will 
ultimately benefit consumers in the market as a whole. For 
example, we have published a plain English summary of the rule 
and a compliance guide designed particularly for smaller 
institutions that will need to update their policies and 
procedures and provide training for staff on the rule.
    We are also publishing clarifications to the rule as needed 
to respond to questions from various stakeholders. We are 
coordinating with other agencies to develop examination 
procedures and are developing videos, checklists, and other 
tools that might be useful to creditors as they prepare for the 
implementation date.
    Thank you again for the opportunity to appear before you 
today and provide you with an overview of the Ability to Repay 
and Qualified Mortgage rule. We would be happy to answer your 
questions.
    [The joint prepared statement of Ms. Cochran and Mr. 
Carroll can be found on page 49 of the appendix.]
    Chairwoman Capito. Thank you.
    Thank you both, and I will recognize myself for 5 minutes 
for questioning.
    You mentioned in your statement, Mr. Carroll, that you 
expect over time to see markets developed for the nonqualified 
mortgage. That sort of goes against anecdotally what I have 
seen and heard; most folks who write mortgages feel if it 
doesn't fall within the QM, there is no way they are going to 
write the mortgages. What evidence do you have that this market 
is going to develop around this rule?
    Mr. Carroll. Chairwoman Capito, thank you very much for 
this question.
    The definition of the nonqualified mortgage space was 
something that was definitely a major part of the work we did 
in defining the Qualified Mortgage.
    We are really trying to calibrate the definition of a 
Qualified Mortgage based on feedback we received from broad 
sections of the market, including both industry advocates as 
well as consumer advocates.
    There was certainly consensus that a broad Qualified 
Mortgage was needed, so the Qualified Mortgage would cover a 
broad sector of the market. This was a key concern that was 
expressed to us during the rulemaking process.
    Also, that bright lines be created so that creditors knew 
how to comply with whatever the Qualified Mortgage definition 
would be, is something of which we heard a lot.
    In the short term, while the market is recovering, we feel 
it is very clear that the markets are going to be looking to 
the Qualified Mortgage space. That is why we did extend our 
definition to cover a majority of the market.
    We are expecting that over time--based on our analysis, we 
do think that it is possible to quantify the risks associated 
with nonqualified mortgage lending--
    Chairwoman Capito. Could you move the microphone up close 
to you?
    Mr. Carroll. I am sorry. Yes.
    Chairwoman Capito. I might have to interrupt you here, 
because I only have 5 minutes, but go ahead.
    Mr. Carroll. Sure. No, no, it is fine.
    We do think it is possible to quantify the risks associated 
with nonqualified mortgage lending. We think that is something 
market participants will do over the course of the next few 
years as they become comfortable with the rule, but in the 
short term, I think we agree that a broad Qualified Mortgage 
space is going to be important--
    Chairwoman Capito. So the statistics that I think 
Congressman Miller pointed out, that 52 percent of the loans 
that were written in 2010 would not fall into this Qualified 
Mortgage space, that is, half the people are not going to be 
able to get a Qualified Mortgage and therefore the lenders are 
going to be much less and probably will be unable to write 
those mortgages.
    I have a banker in West Virginia who has written 3,800 
loans a year. He says, ``The QM rules will cause us to offer 
less credit and generally the customers who will fall off the 
table are higher-risk, lower-income customers, and West 
Virginia has many of these.'' And I think you will hear this 
concern expressed a lot.
    One of the questions you mentioned is that the phase-in is 
going to be complicated. You are reaching out to help 
institutions to do that. Do you have any contingency plans that 
if we get up to January 10th and there is still mass confusion 
when this comes on stream, you could push these dates back?
    Ms. Cochran. If I can take that one, the Dodd-Frank Act 
itself in Section 1400 sets certain requirements with regard to 
the implementation process.
    That provision required us, where rules are required to be 
promulgated under the statute, to issue them by January 21st of 
this year. Also, it requires for required regulations, that 
they be implemented within 1 year after they have been issued 
in final form.
    That is why we are investing so much into the regulatory 
implementation process, to facilitate and support particularly 
with regard to small creditors. We realize that they have a 
limited compliance and legal staff, and it is important for us 
to do everything we can to help meet that deadline.
    Chairwoman Capito. So at this point, no. No contingency 
plans to push back.
    My last question is--I have a bank in the northern part of 
the State which has a charitable organization sort of modeled 
after Habitat for Humanity, but they help folks who really--it 
is under $100,000 loans--would and it is a gift basically, but 
their customers who have, that they vet very well and it is a 
wonderful charitable program are not going to fall into this 
ability-to-repay tranche and this bank is saying, ``We are 
going to have to stop this charitable program because we can't 
take the risk.''
    What kind of provisions do you have for exceptions to this 
where you really--these folks are going to have no other way to 
get a home, no other way to access credit without a charitable 
program, confined to one county by a small and very benevolent 
family who many years ago decided that housing was critical to 
these families?
    Ms. Cochran. As we mentioned, at the time that we issued a 
final rule we also issued a proposal to make certain additional 
adjustments. A number of those adjustments were focused on the 
potential exceptions to the Ability to Repay and Qualified 
Mortgage regime to address access to credit.
    So this includes certain types of nonprofits, certain 
housing stabilization programs, housing finance agencies, and 
other very specialized lenders that are specifically focused on 
low- to moderate-income populations and making sure that they 
can access credit in situations where conventional lenders are 
not willing to make those loans.
    That proposal is still pending. We are working to finalize 
it as quickly as possible because we think it is an extremely 
important issue. It had not been proposed as part of the 
original rulemaking, so we wanted to seek comment on it before 
finalizing, but we are working very hard to tie that up.
    Chairwoman Capito. Well, I would encourage you to move 
forward on that.
    And I will now recognize my ranking member for 5 minutes.
    Mr. Meeks. Thank you.
    And let me say as I have heard on both sides we know that 
especially no-doc loans were the cause of this problem that we 
had, the financial crisis. What my concern is, most of the 
loans that we saw that caused the problem really were not 
issued by credit unions or community banks.
    Yet, it seems as though the rule as promulgated is going to 
have a direct effect on them more so than anyone else. Now I 
know that there was a comment period that was open where 
individuals could raise comments and concerns in regards to 
what you were looking at.
    So my question to you is, did you receive comments and 
concerns from some of the community banks and the credit 
unions? What were those? And are any reflected in some of the 
decisions that you made when you promulgated the rules?
    Ms. Cochran. Thank you so much for the question.
    Yes, we received extensive comment from small community-
based creditors, banks, credit unions, and so on, both in the 
original rulemaking and as part of the concurrent proposal that 
I just mentioned.
    So in the final rule, we made a number of adjustments to 
address concerns that had been raised by these institutions, 
including significantly increasing the size of the provisions 
for Qualified Mortgages that involve balloon payments.
    Generally, the Dodd-Frank Act strongly disfavors balloon 
payment loans, but Congress did provide a provision that allows 
such loans under certain circumstances to receive Qualified 
Mortgage status if they are made by small institutions that are 
operating predominantly in rural or in underserved areas.
    We significantly increased the size of the definition, and 
in the concurrent proposal we also sought additional comments 
about creating a fourth category of Qualified Mortgages that 
would be available to small creditors, regardless of whether 
they operated in rural or underserved areas.
    We recognize that these institutions are using 
relationship-based lending, that is highly effective, that 
often leads to much lower foreclosure rates, and we believed it 
was appropriate to propose a separate category of Qualified 
Mortgages to recognize the fact that these institutions, when 
they are holding the loans on portfolio, have significant 
reasons to do a good job of underwriting, and are serving their 
consumers well.
    That proposal is still pending, but we are working to tie 
that off as quickly as possible. We are very sensitive to 
concerns about how this rule will impact small institutions. 
That is one of the main reasons we went back out for comment to 
continue to consider how the different parts of the rule were 
going to influence small institutions.
    We have also proposed increasing the threshold between 
Qualified Mortgages that receive a Safe Harbor and those that 
receive a rebuttable presumption for small creditors in light 
of the fact that they often have higher costs of funds. So 
those are still live issues, but we are taking them very 
seriously, and are hoping to tie them off quickly.
    Mr. Meeks. On those live issues, for example, because that 
is what I also have concern about where the debt to income 
capital for 43 percent looks like it unduly reduces the credit 
for low- and moderate-income borrowers especially, you have 
young people who are buying homes for the first time or who 
still have student loans, so this could just knock them out of 
the market altogether, of being able to look forward to buying 
a home, and so that is a huge impact, I would think.
    Ms. Cochran. For the balloon Qualified Mortgage rules, 
which have already been finalized, we require that small 
creditors consider debt-to-income ratios but not be bound by a 
43 percent threshold. We have proposed the same approach with 
regard to the new category of small portfolio Qualified 
Mortgage.
    As I said, we know that these institutions are using highly 
individualized relationship lending models and that they are 
highly effective. We did not feel in that circumstance it was 
necessary to provide a bright line threshold as long as they 
are considering consumers' debt, income, and assets.
    Mr. Meeks. I only have 39 seconds, so I don't know if I can 
get everything in.
    My question is to Mr. Carroll, in that the CFPB addressed 
the issue of affiliate discrimination in the calculation of 
fees and points in the final QM rule, and I was wondering if 
that has been causing a big issue in New York because of the 
pending costs and whether or not that can be re-calculated?
    Mr. Carroll. Thank you, Congressman.
    Affiliate fees are required by the statute to be included 
in the 3 percent point and fee cap. We did receive a lot of 
comments on this issue.
    On the one hand, there are arguments that affiliates create 
challenges to competition in the market for those services. On 
the other hand, there are arguments that affiliates create a 
more streamlined process that can reduce costs in the market.
    We have considered these arguments in our rulemaking and 
right now we have reflected the statute's requirement that 
those be counted in the points and fees test.
    Chairwoman Capito. Thank you.
    Mr. Duffy, for 5 minutes.
    Mr. Duffy. Thank you, Madam Chairwoman.
    Everyone on this committee, and probably in Congress, 
agrees that we needed some changes to how our lenders were 
making loans. Many of us are concerned about the no interest, 
the negative amortization, the low or no downpayments. We 
weren't verifying income or assets. There were big problems 
that needed to be fixed, and I think all of us would agree with 
that.
    But I think what we are starting to see here too is an 
agreement that we understand one size doesn't fit all, and I 
know that we have tasked you to try to make one size fit all, 
but you start to see all of the problems that come from a 
government that is very large, very expansive, and says, this 
is the cookie-cutter system that we are going to make you work 
in.
    And I think we see this pendulum swinging back and forth 
where we had gone too far over, lax standards and that helped 
us create the crisis.
    Now I think with this rule we have swung the pendulum all 
the way over to the other side, instead of maybe going back to 
some of the standards that we used when the system actually 
worked.
    When we talked about the five C's--the character, capital, 
capacity, collateral, and conditions--we did pretty well, and 
we actually empowered people in this industry, our bankers to 
evaluate their clients with sound standards to make good loans. 
That actually did work.
    Now, we have taken all of the discretion out of banking and 
really we can get rid of all of our bankers. You can just go 
fill out a form online and submit it and it can be approved or 
denied based on the very rigid standards that we have with the 
QM rule, and that is one of my concerns with how rigid this is.
    And I also have a concern that many of the loans that have 
been made over the last several years wouldn't fit this 
definition--many of our mortgages wouldn't fit this definition. 
Has the CFPB done a study to look at the mortgages that have 
been made and what percentage of them would fit within the QM 
rule that has been drafted and the percentage that would not 
fit within your rule?
    Mr. Carroll. Yes, Congressman, we did do that study as part 
of our cost-benefit analysis within our rulemaking. We did size 
the market, and by our numbers, we got our general definition 
of a 43 percent debt-to-income ratio, and by our calculations, 
that is roughly three-quarters of the market of recent vintages 
that is covered. And that--
    Mr. Duffy. So three-quarters of the mortgages you analyzed 
would have fit within your QM--
    Mr. Carroll. Within the Qualified Mortgage definition we 
have laid out. Our objective with the rulemaking was to get 
closer to 100 percent, which was why we created this temporary 
definition for loans that are eligible for insurance or 
purchase by the GSE's or FHA. When we size that in, we get 
closer to 100 percent of recent year loans.
    Ms. Cochran. If I might add to that, on two aspects.
    First, with regard to the analysis we did, the one area 
where we could not model was with regard to the 3 percent 
points and fees cap because we did not have the data for that.
    We were able to consider the loan features and other 
underwriting requirements, so we were able to build that in and 
model it. And as the chairman mentioned, there have been, I 
think, other analyses of these that have come to different 
percentages. We believe that our percentage and analysis was in 
fact correct and that the overall number is above 90 percent.
    One of the things that I wanted to mention about the 
flexibility point is--and I discussed this in my original 
testimony--we thought very hard about that issue and we really 
did not believe that a one-size-fits-all approach makes sense.
    So for instance, the ability-to-repay requirements provide 
a fair amount of coverage with regard to using reasonable, 
reliable, third-party methods, but even there, we provided 
flexibility for lenders to use reasonable sources.
    Also, the statute provides specific rules with regard to 
how you calculate the monthly payments so that negative 
amortization loans and so on are treated consistently.
    But when it comes to considering underwriting criteria such 
as how much you weigh debt-to-income ratio versus credit score 
versus other features, the rule requires that it be considered, 
but it does not dictate underwriting models.
    We felt that it was extremely important to leave room for 
reasonable underwriting practices in a range of models that are 
being used today. So we were very carefully balancing it both 
on the ability-to-repay side and through the different types of 
Qualified Mortgages.
    Mr. Duffy. And I don't know that the committee has received 
that study--have you seen it, Madam Chairwoman?
    Chairwoman Capito. I do not have that study.
    Mr. Duffy. Would you mind providing your analysis to the 
committee so we could take a look at what you have done?
    Ms. Cochran. Absolutely. It is part of our Federal Register 
notice on the final rule, but we can excerpt it and provide it 
to the committee.
    Mr. Duffy. Thank you, and I just want to make one other 
point in my last 15 seconds.
    There is a great concern in the part of the country where I 
live, in rural Wisconsin, and the definition that allows for 
our rural balloon mortgages.
    I have a rural Wisconsin map here on the northwest corner, 
and if you are driving between Chippewa and Taylor County or 
Rusk and Chip or Dunn and Barron and Lincoln, listen, there is 
no difference.
    It is farms as far as the eye can see for 30 miles on 
either side of the county line. And it creates some real 
problems and disadvantages within my community the way the rule 
is written.
    Hopefully, we can consider some different standards on how 
we are doing our balloon mortgages. I yield back.
    Chairwoman Capito. Thank you. Mr. Watt?
    Mr. Watt. Thank you, Madam Chairwoman, and Ranking Member 
Meeks for convening this very important hearing.
    I want to start by expressing my appreciation to the CFPB 
for what I think is a very good effort in a very, very 
difficult terrain and reminding the committee that one of the 
reasons that we punted this responsibility to somebody other 
than this committee or the Senate Banking Committee or the 
conference committee was because of the difficulty of 
addressing all of these are very delicate nuances.
    We were operating in a period where obviously the pendulum 
had swung way too far in the direction of allowing loans that 
shouldn't have been allowed to be made and there was concern 
that we were going to swing the pendulum back too far in the 
opposite direction.
    And so our desire under this bill, of which Representative 
Miller and I were the primary sponsors, initially at least, was 
to try to find a new balance without constraining credit 
unduly, at least credit to people who were worthy of getting 
credit, and still not allow the kinds of abuses that had taken 
place in the marketplace.
    So a lot of the the detail of this was really punted to the 
CFPB and the Federal Reserve initially and then to the CFPB to 
work out these nuances and the CFPB was very responsive in 
listening to a whole range of people, including those of us who 
had advocated aggressively for constraints on the market to 
clean it up back in the opposite direction to define what a 
Qualified Mortgage was.
    And I think we really got to a pretty good balance as an 
initial proposition. Obviously, there are always going to be 
people second-guessing whether you got the correct balance. 
Probably the people we would prefer to see doing this wouldn't 
be Members of Congress sitting on this committee trying to do 
this.
    I do want to ask about this 3 percent cap. I know the 3 
percent cap is in the law itself. You said you couldn't model 
the 3 percent cap because you didn't have sufficient 
information.
    What would it take to do that model, because there are a 
lot of questions being raised now about whether the 3 percent 
cap itself, which is statutory, not something that the CFPB 
did, is an appropriate cap? What would it take to model that?
    Mr. Carroll. Thank you, Congressman.
    It is a terrific question. I think what we would need is a 
representative sample of affiliate fees across the country that 
would represent just an ordinary course of typical mortgage 
transactions--
    Mr. Watt. Okay, so you could undertake that study and help 
of the committee going forward if the committee decided to look 
more closely at where the 3 percent ought to be 3.25 percent or 
3.5 percent?
    Mr. Carroll. We would be very happy to provide technical 
assistance, yes.
    Mr. Watt. Okay.
    The second thing is that when we introduced the bill, Mr. 
Clay on our side on this committee offered an amendment that 
struck this differentiation between affiliated and unaffiliated 
title insurance companies.
    We actually supported Mr. Clay's amendment and the bill we 
reported out did not have this affiliated/unaffiliated 
dichotomy. You have looked at that. Do you think that the 
affiliated/nonaffiliated distinction serves a useful purpose at 
this point?
    Mr. Carroll. With regards to affiliated title?
    Mr. Watt. Yes.
    Mr. Carroll. We have heard many comments, Congressman, 
about affiliated title versus non-affiliated title. 
Specifically, in that particular sector there could be 
safeguards in place that should be considered, and that there 
is generally State oversight of the premiums charged around 
affiliate title. We did hear those comments during the 
rulemaking process and--
    Mr. Watt. My time is up, but could you just submit to the 
committee some of the alternative approaches you think might be 
considered to address this affiliated/unaffiliated title issue?
    Mr. Carroll. I would be happy to follow up, Congressman.
    Mr. Watt. Thank you so much.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Miller, for 5 minutes.
    Mr. Miller. Am I safe in saying that you are hearing 
bipartisan unhappiness with your rule? If it is not--I think we 
can all raise our hands saying we are on happy to begin with.
    It appears to me that the rule is much more restrictive 
than the legislation that enabled you to do what you are doing 
and I can't believe you can't make this work without us having 
to pass a new law to clarify a law that should have given you 
flexibility to make it work.
    So I think we are trying to tell you that we have a problem 
with what we are hearing out there and you said you used--they 
said three-quarters of the loans you reviewed met the QM rule. 
What year were those loans made?
    Mr. Carroll. That was looking at 2011 loans.
    Mr. Miller. Okay, so half of them in 2010, CoreLogic says 
would not meet your QM rule. Three-quarters in 2011 don't meet 
the QM rule, and everybody, Freddie Mac and Fannie Mae, 
everybody is saying that loans made in 2010 are performing very 
well. FHA's are performing very well.
    So, that is problematic. It raises a big flag saying, hey 
guys, let's go back and see what we can do out there. You are 
going to get us a copy of the study you used to make your 
determination, is that correct? I heard you say that. Okay.
    Recently, you gave a 7-year exemption to Freddie and Fannie 
to implement the QM rule. Is that correct?
    Mr. Carroll. Yes, Congressman.
    Mr. Miller. That raises a huge concern on my part of why 
would you give them 7 years if it is a good rule and then they 
are coming back saying no, we are going to implement it 
immediately, which is even more bothersome.
    Can you please address that?
    Ms. Cochran. If I might explain. We, as I mentioned, 
created multiple definitions of Qualified Mortgage under the 
rule. The first definition of Qualified Mortgage, the general 
definition, uses a 43 percent debt-to-income ratio. We did that 
because we received extensive comment from industry saying they 
needed bright lines to determine exactly what was a Qualified 
Mortgage and what was not.
    This threshold, 43 percent, is the historical threshold 
that has been used by the Federal Housing Administration and is 
familiar to lenders. It is a relatively broad threshold 
compared to certain other ones that are used and we felt it was 
an appropriate and familiar threshold to use.
    At the same time, we realized there was concern that 
responsible, creditworthy borrowers over 43 percent would have 
a difficult time in the first few years after the regulation 
took effect--
    Mr. Miller. That is a concern right there.
    Ms. Cochran. --in getting--
    Mr. Miller. And right on that point, we are in a very 
moderate recovery, very moderate.
    Ms. Cochran. We were very concerned about that.
    Mr. Miller. Very sensitive. I am really concerned about it 
and they are saying, FHA is saying no, we are going to 
implement it day one. That has to create some concern for you 
because your study obviously said we need to allow this more 
time.
    So I am saying based on their decision to implement 
immediately, I am asking you I think you are hearing the 
concern on both sides to go back and look at it and say maybe 
we need to do something a little differently than we have 
because every lender I am talking to, everybody says we are not 
making any loans that do not meet the QM rule.
    Ms. Cochran. Right.
    Mr. Miller. That is a recipe for immediate disaster come--
this coming January, in my opinion. I am looking at a 
marketplace that has been devastated for years. Now we are 
looking at--I would say near the third quarter of last year you 
started to see it get a little healthier.
    This year, you are even seeing a little better marketplace. 
Peoples' home values are starting to come back up a little bit. 
Should we decide to implement a rule that devastates the 
lending industry overall, those values are going to go right 
back down. I am not mad--I am concerned.
    Please don't take my comments as a personal criticism. I am 
saying that I am hearing both sides of this saying, ``We have a 
huge concern.'' I am hearing the private sector saying, ``We 
have a major concern because we are not going to do anything 
that puts us outside of the QM rule,'' and based on that, I 
think you need to do something and also I heard a comment on 
the 3 percent cap on points and fees--none of those were used 
in your study because they weren't implemented in so that 
didn't even apply.
    And I am not sure you knew what was supposed to be even put 
into the 3 percent when you implemented the rule. 
Legislatively, it was kind of--it allowed you a broad area to 
review before you implemented that, and I am not certain that 
it is not critical that you did that.
    So I think that needs to absolutely be revisited. Mr. Watt 
also said the same thing. We don't have to go rewrite a law to 
give you leeway that you already have, but I have a lot of 
questions and I am not going to get to them because I am really 
concerned about the comments you made because they are very 
enlightening and they are not negative, they are just 
enlightening and the comments that you are hearing us up here, 
we are very concerned and if we don't do something to modify 
this rule before January, I think you see the same recipe 
coming that I see and it is not healthy. It is not good and I 
would strongly encourage you to not force us to legislatively 
change the rule to be more flexible in the rule.
    I yield back the balance of my time.
    Chairwoman Capito. Thank you
    Mr. Green, for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman.
    Please permit me to extend to Mr. Cordray my best wishes, 
and let him know that I am looking forward to a future meeting 
with him.
    Madam Chairwoman, I would like to, if I may, call to our 
attention an article in the New York Times entitled, ``U.S. 
Consumer Watchdog to Issue Mortgage Rules.'' This article calls 
to our attention the following: ``Mortgage bankers generally 
applaud the new regulations saying they clear up uncertainty 
that has hung over the home-lending business since the 
financial crisis.''
    It goes on to say, ``These rules offer protection for 
consumers and a clear, safe environment for banks to do 
business. I understand that you have not created a perfect 
rule. But I also understand that we cannot allow the perfect to 
become an enemy of the good,'' something we often say here.
    So I am going to segue now to something else that I call to 
your attention because I am concerned about servicemembers and 
I am concerned that too many of them are still falling victims 
to scams.
    Some might ask, how many is too many? One is too many, and 
here are some of the things that cause me a good deal of 
consternation. I understand that the postdated check scam still 
looms large.
    Car titles are being utilized, too, as a part of scams. 
They have businesses located just outside of military bases 
because they can't engage in on-base solicitation.
    We still have retirement benefits that may be a part of 
scams. They are being reassigned. Some of these scams originate 
in foreign countries. So could you just tell me quickly, are we 
looking at the scams that are being perpetrated upon our 
military personnel?
    Ms. Cochran. Obviously, our Office of Servicemember Affairs 
is taking the lead for the agency in working on all these 
issues. They coordinate very closely with other parts of the 
Federal Government and are trying to bring greater transparency 
and awareness to all sorts of issues, including scams.
    I believe that they have been aware and gathering 
information about all of these issues, and we would be happy to 
relay your question and provide more specifics. I don't think 
either of us can speak to the details of what they have 
learned.
    Mr. Green. Thank you. I think that is a fair answer, 
because I know what you came prepared to discuss today. I just 
could not pass up the opportunity to speak up for 
servicepeople.
    Ms. Cochran. It is something we take very seriously. We 
appreciate it.
    Mr. Green. Thank you very much.
    Let's move quickly to another topic that we brought up, 
community banks versus small banks. I appreciate greatly the 
question that the ranking member posed and I thought you gave 
an answer that was acceptable, but could you kindly give me a 
quick indication as to whether or not you are making a 
distinction between a community bank and a small bank, and if 
so, what is that distinction?
    Ms. Cochran. We have looked at the impact on small 
creditors throughout the Dodd-Frank Act mortgage rulemakings, 
and in a number of places we have made accommodations or 
changes in the way the rules apply to smaller institutions.
    But we have done that in a context-specific setting. So we 
are not applying a single definition in all circumstances. 
Instead, we are looking at the particular activities at issue.
    So for instance, in the Qualified Mortgage and escrow 
rulemakings, we looked at a definition of small creditor that 
was focused on what types of creditors might have difficulty in 
escrowing and providing adjustable rate mortgages as compared 
to balloon mortgages.
    So we set one threshold there for those provisions and we 
are proposing to continue that threshold with regard to the new 
category of Qualified Mortgage. In the--
    Mr. Green. If I may intercede just quickly, are you 
focusing more on a small institution as opposed to a community 
bank?
    Ms. Cochran. We are looking at a number of factors when we 
set those thresholds. What we set as a threshold was $2 billion 
in assets and that the institution along with its affiliates 
was originating no more than 500 first lien mortgages a year.
    We were doing that because we were looking for institutions 
that are using relationship-based lending that are accountable 
to a specific community, so not only are they holding these 
loans in portfolio, but because of the nature of their lending 
practice, they have very strong incentives and very strong 
practices to protect consumers.
    In the servicing context, we also looked at and exempted 
small servicers from certain parts of those rules.
    Mr. Green. Let me intercede quickly to ask--
    Ms. Cochran. But we put a different definition there--
    Mr. Green. --because I have 3 seconds--
    Ms. Cochran. --based on--
    Mr. Green. --quickly, I must ask, when will this new rule 
be available for us to visit with you about?
    Ms. Cochran. We are working to implement it as quickly as 
we can. We will issue it shortly because we want to get it 
finished. We know it is extremely important as people are 
working towards implementation.
    Mr. Green. It is, and I thank you very much.
    I yield back, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Just one question, out of curiosity. Has either one of you 
ever worked in the private sector and made a housing loan?
    Mr. Carroll. Congressman, I have worked in the private 
sector serving banks.
    Mr. Luetkemeyer. Serving? What do you mean? Have you ever 
made a house loan?
    Mr. Carroll. No. No, Congressman.
    Mr. Luetkemeyer. Ms. Cochran?
    Ms. Cochran. I was in private practice mostly for financial 
institution clients prior to going into government.
    Mr. Luetkemeyer. But you never made a loan?
    Ms. Cochran. No.
    Mr. Luetkemeyer. Okay.
    Just out of curiosity--one of the things you are working 
through this morning is the results of the low-doc loans. We 
went in and we thought we were really bright. We wanted to 
start to make it all quick and easy and available. The system 
was working and now all of a sudden we have low-doc loans and 
now it is all messed up and now we are trying to fix it. Is 
that roughly right?
    Ms. Cochran. That was certainly one of the concerns--
    Mr. Luetkemeyer. One of the problems we have? Okay.
    So as we try and fix this, you now have been directed by 
the law that Congress passed to try to figure out how Qualified 
Mortgage--to come up with a standard.
    I guess the question is--and I have this difficulty 
sometimes with a lot of individuals who serve in the 
bureaucracy from the standpoint of interpreting those laws 
sometimes can be difficult and the intent of Congress.
    And when they make a rule, suddenly they believe that is 
the only way that this rule can be made and they become very 
inflexible.
    Do you have enough flexibility that you believe with the 
way this rule was or the law was propagated, the law was put 
before you that you have the flexibility to be able to make the 
changes that can accommodate the things we are talking about 
this morning?
    Ms. Cochran. We structured the rule in a way that 
specifically provided for flexibility. As--
    Mr. Luetkemeyer. I am not talking about the lenders. I am 
talking about you.
    Ms. Cochran. Yes.
    Mr. Luetkemeyer. Do you have enough flexibility to go back 
and make the changes we are talking about this morning?
    Because we have talked about a lot of things. We talked 
about--Mr. Watt talked about the 3 percent, Mr. Miller talked 
about a lot of things with regard to this. Somebody else, I 
think it was Mr. Duffy, talked about the rural definition here. 
There are a lot of things that need to be worked on. Do you 
have enough flexibility to make those changes and are you 
willing to do that?
    Ms. Cochran. We have created a structure that we believe 
will be helpful in considering where further adjustments are 
necessary in the rulemaking. One of the things that we did, in 
addition to creating the main definition of Qualified Mortgage 
and the temporary definition of Qualified Mortgage, which is 
not an exemption for Fannie and Freddie--
    Mr. Luetkemeyer. You are not answering my question. All due 
respect, Ms. Cochran, you are not answering my question.
    It is very simple. Do you have the flexibility and are you 
willing to use it to make the changes we are requesting this 
morning and discussing? Yes or no?
    Ms. Cochran. We made the best decisions that we could in 
the rulemaking process--
    Mr. Luetkemeyer. Okay. I will grant you have done--you have 
made your decision. Now are you willing to go back and take a 
look at changing it based on the things we are discussing this 
morning?
    Ms. Cochran. We are continuing to consider a number of the 
issues that were discussed this morning in the context of the 
concurrent proposal, and as I discussed we want to tie that off 
as quickly as possible.
    We do believe that we have flexibility there and we 
proposed those changes to make sure that we address some of the 
concerns that have been raised.
    We have also structured the rules so that as the 7 years 
progresses and the temporary category of Qualified Mortgage 
would come to a close, we would have the ability to look at the 
market, how it is developing, if it is developing as we 
predicted, and make adjustments to the rule at that time, if 
necessary.
    Mr. Luetkemeyer. Okay, so is there enough flexibility in 
the rule then to allow you to do that? Or in the law? You feel 
you have enough flexibility then apparently, is that right?
    Ms. Cochran. We believe that we have flexibility to make 
important decisions and that we are continuing to use that 
appropriately, yes.
    [laughter]
    Mr. Luetkemeyer. Okay. Well, no wonder we can't get 
anything done here. We can't get a straight answer.
    Okay, with regards to the level of participation you 
anticipate by the different groups, agencies, you broke it down 
to different banks, small lenders, big banks, mortgage lenders, 
and we have had two different, three or four different numbers 
around here this morning with regards to participation.
    It would seem to me by the definition of a Qualified 
Mortgage and the Safe Harbor that it provides that those loans 
that are made outside that Safe Harbor would then have an 
inordinate amount of liability risk for the lender, will they 
not?
    Do you not believe that will be the inference from 
protecting and having Safe Harbor loans that are made that way 
and those obviously that are not? Wouldn't you believe that 
would be the case?
    Mr. Carroll. Congressman, that is a very good question.
    We calculated what we believe the litigation risk might be 
in our 1022 analysis for nonqualified mortgages and then the 
lesser amount of litigation risk for Qualified Mortgages that 
carry rebuttable presumption of compliance.
    Mr. Luetkemeyer. Where I am going with this is if there is 
more risk, inherent risk with those mortgages that are made 
outside that, and the lenders then are less willing to do that, 
there is going to be an access to credit problem.
    If you have an access to credit problem, where are they 
going to go? Some will go to agencies like FHA, which is making 
loans according to this testimony we have heard in this 
committee, before that are kind of like Freddie and Fannie were 
making, that are kind of beyond the scope.
    Now, we are going to wind up forcing them into a government 
agency that is already in trouble. So, this is a self-
fulfilling problem with the way we are structuring this.
    And I see I am out of time, I appreciate the indulgence of 
the chairman.
    Thank you.
    Chairwoman Capito. Thank you.
    I would like to state that without objection, members of 
the full committee who are not members of this subcommittee may 
sit on the dais and participate in today's hearing.
    I would also like to submit statements for the record from 
the American Land Title Association; the Credit Union National 
Association; the Independent Community Bankers of America; the 
National Association of Federal Credit Unions; the National 
Association of REALTORS; and the West Virginia Bankers 
Association.
    Without objection, it is so ordered.
    Mr. Ellison is recognized for 5 minutes.
    Mr. Ellison. Thank you, Madam Chairwoman, and Ranking 
Member Meeks.
    Please do convey my appreciation to Mr. Cordray. I hope he 
does get confirmed. I think it will be for the benefit of the 
country.
    I would like to ask a question. There has been some 
discussion about mortgages that may or may not be made that are 
outside of the QM. I wonder if you could talk about those a 
little bit and what the last several years has taught us about, 
I don't know, no job, no income, no money down-type loans, 
prepayment penalties, balloon payments, 2-28s, 3-27s.
    There is a reason that you guys have focused on certain 
types of loans, to say these would be considered the safe ones, 
and there is a reason why some are not.
    I wonder if you could elaborate on that, and I also wonder 
if you could even discuss this question. The point has been 
made there may be fewer loans made, some loans that were made 
may not be made.
    Is that necessarily a bad thing given some of the 
difficulties that we have seen over the last several years with 
loans that probably should have never been made? Would you care 
to elaborate on that, please?
    Mr. Carroll. Thank you, Congressman.
    When we were creating the Qualified Mortgage definition, we 
were working with a few kind of core principles.
    At its core, it is an Ability-to-Repay rule where the 
objective of the rulemaking is to eliminate some of the 
practices that were problematic during the financial crisis.
    So eliminating no-doc lending was an important part. Making 
sure that when creditors do a debt-to-income ratio calculation 
they are using the fully indexed rate, the actual rate, not the 
introductory or teaser rates. It is just some basic practices 
that creditors do today and have been doing for a long time.
    We did hear very broadly, in the midst of the rulemaking 
process, that a broad Qualified Mortgage definition was 
important because, since the crisis, there has been a lot of 
concern about risks of all shapes and sizes, whether they would 
be operational, credit, interest rate, compliance-related, 
litigation-related.
    And so, we did hear very broadly that a broad Qualified 
Mortgage was important particularly in this stage of the 
market's recovery. We have endeavored to try to do that and 
create a broad Qualified Mortgage space, but we did also in the 
course of our work, try to analyze what we think the risks 
would be in the nonqualified mortgage space.
    And when we run numbers, we find that in a normal market 
environment, that should be a fairly manageable risk that 
lenders should be able to account for and really what it 
relates back to is that when we draw a Qualified Mortgage 
space, we want to try to draw standards that we think are 
reasonable.
    So what is a reasonable debt-to-income threshold if we are 
going to provide clarity and bright lines to industry? We 
locked onto 43 percent. We felt that was a standard that has 
served consumers in the past.
    It has represented an outer boundary of risk that the FHA 
has used for a number of years and we felt that, as a core 
definition, did cover a pretty broad set with about three-
quarters.
    We were challenged in the short term to try to find a 
mechanism that would get us closer to 100 percent. That is why 
we did decide to look to the standards of FHA and the GSEs to 
accomplish that, and this is an important point.
    We are talking about this extension definition. What we are 
really trying to accomplish is a way that we can, in this stage 
of the market's recovery, have a mechanism so creditors can 
extend beyond the 43 percent debt-to-income ratio. That was our 
objective with this rulemaking.
    Mr. Ellison. Thanks a lot. I guess the only point I am 
trying to make is I am glad my colleagues on both sides of the 
aisle are concerned about making sure there is credit 
availability, but I hope we all also can agree that we believe 
there was a bunch of loans that were done that probably never 
should have been done.
    And I hope that we keep that in mind, too. Because we can 
go back to the Wild West and that won't be good either, so 
let's keep the balance concept in mind.
    Also too, last month the CFPB fined 4 private mortgage 
insurers about $15 million for illegal kickbacks. There have 
been other problems with inflated appraisals in other ways 
consumers overpaid. Do you think a 3 percent cap on points and 
fees will make loans more affordable and fair to borrowers?
    Ms. Cochran. As we mentioned, the 3 percent points and fees 
cap is in the statute itself. It does allow for up to two bona 
fide discount points in addition to that threshold depending on 
the rate of the loan.
    We believe that Congress was looking at the up-front costs 
to consumers and concerns that potentially, where up-front 
costs are very high, creditors and other participants in the 
process may not be as focused on the long-term performance of 
the loan but rather the up-front cost recovery.
    So we have implemented that as directed by the statute and 
we are continuing to consider some aspects of that rule in the 
concurrent proposal particularly as it relates to loan 
originator compensation.
    Chairwoman Capito. Thank you.
    Mr. McHenry, for 5 minutes.
    Mr. McHenry. Thank you, Chairwoman Capito.
    Now, it is interesting, because so many of us have looked 
at the Qualified Mortgage rule, the QM rule and realized that 
our community bankers and our community credit unions are 
telling us that they are not going to lend outside of the QM 
standard--and you are nodding your head.
    You have heard this as well, and I am sure you have heard 
it this morning but Citizen Cordray, Richard Cordray, I like to 
call him ``citizen'' rather than ``director'' based on the non-
Senate confirmed nature of his directorship, but Citizen 
Cordray said in front of CUNA, the Credit Union National 
Association, a short time ago, ``I know that complying with our 
new regulations is a worry for many of you, so allow me to make 
a few points clear. First, the criteria for Qualified Mortgages 
are intended to describe only the least risky loans that can be 
offered to consumers. But plenty of responsible lending remains 
available outside of the Qualified Mortgage space, and we 
encourage you to continue to offer mortgages to those borrowers 
you can evaluate as posing reasonable credit risk. Those that 
lend responsibly, like credit unions, have no reason to fear 
the Ability-to-Repay rule.''
    Now, it is not clear to me based on my conversations with 
community bankers and credit union leaders that that is in fact 
true.
    Right? So if Mr. Cordray claims that this question of the 
ability to repay is all right, you are not going to be subject 
to it if you lend outside of it. So why did the CFPB create the 
Qualified Mortgage so narrowly, Mr. Carroll, if in fact the 
intent was to have lending well beyond?
    Mr. Carroll. Thank you, Congressman, for the question. I 
think our objective was to try to make it broad, and it sounds 
like there is some disagreement today if we have succeeded in 
doing that.
    Our intention in developing the rule was to build a broad 
Qualified Mortgage and it sounds like there has been some 
concern about that.
    Mr. McHenry. Okay. So we will just disagree on that.
    Let me ask you a separate question. Do you believe that 
lenders are going to originate nonqualified mortgages?
    Mr. Carroll. We see it happening today--
    Mr. McHenry. No. It is happening today because is the QM 
rule imposed upon institutions?
    Mr. Carroll. No, not until January.
    Mr. McHenry. Okay. So therefore, you are talking about pre-
QM, and it is artful. It is a very artful, nice answer, but 
technically, you are correct. Post-QM, let me restate the 
question. Do you think the lenders are going to originate 
nonqualified mortgages?
    Mr. Carroll. We think some will, Congressman.
    Mr. McHenry. Some?
    Mr. Carroll. Yes.
    Mr. McHenry. Okay. Based on what belief?
    Mr. Carroll. We just believe that there will be lenders who 
are going to make loans or that are, where they understand the 
nature of the loans they are working with. For example, we have 
seen some interest-only jumbo products that we suspect will 
continue when the rule takes effect.
    Mr. McHenry. Which is how much of the marketplace?
    Mr. Carroll. It is not a very large--
    Mr. McHenry. Excessively small or incredibly small?
    Ms. Cochran, let me ask you this question about legal 
liability. If an institution offers a Qualified Mortgage, there 
are some liability protections, right? And if they do not offer 
a Qualified Mortgage, what are the penalties?
    Ms. Cochran. The statute provides a 3-year period during 
which a consumer could bring an affirmative claim. The 
penalties are up to 3 years of the finance charge within that 
phase.
    If the consumer goes into foreclosure, they can also raise 
a claim as an offset and again, penalties are limited to 3 
years. So it is less than what occurs under the current rule 
that is already in effect--
    Mr. McHenry. Let me ask you, if you have a box that gives 
legal protection and then people--you have institutions lending 
outside of that box, does that become a safety and soundness 
issue?
    Ms. Cochran. We believe that if people are doing 
responsible loans, this is manageable and appropriate. There is 
already an--
    Mr. McHenry. Does it go to safety and soundness for 
institutions?
    Ms. Cochran. There is already an ability-to-repay standard 
in effect for higher-priced mortgage loans. Institutions that 
are managing--
    Mr. McHenry. Higher-priced mortgage loans, okay.
    Ms. Cochran. Yes, and institutions are managing that risk--
    Mr. McHenry. So those mortgages are a large portion of the 
marketplace?
    Ms. Cochran. They are a smaller portion of the marketplace.
    Mr. McHenry. They are a very small portion of the 
marketplace. So your reference points are very small and you 
are being artful about your answers today.
    We have deep concerns about the impact this is going to 
have and the CFPB's mismanagement of a really overly burdensome 
rule.
    I yield back.
    Chairwoman Capito. Thank you.
    Ms. Velazquez?
    Ms. Velazquez. Thank you, Madam Chairwoman. Please bear 
with me. I am suffering from laryngitis.
    Most of my issues and concerns regarding this rule have 
been asked. Of course, I am very much concerned about the fact 
that the private capital has yet to reenter the mortgage market 
and we have to strike a balance between protecting consumers, 
and at the same time, keep access to capital and credit flowing 
into underserved communities.
    I have a question that I believe has not been asked, and I 
would like to address it to Mr. Carroll. CFPB's final rule 
applies the legal Safe Harbor to only low price loans whereas 
the high-priced loans are tied to the rebuttable presumption.
    Could you please explain the CFPB's reasoning for selecting 
this structure rather than instituting a single lender 
protection for QMs across-the-board?
    Mr. Carroll. I would be happy to. Thank you for the 
question, Congresswoman.
    The statute required us to define a level of protection the 
creditors would receive from the ability-to-repay liabilities 
if they make a QM loan and so we had to navigate this question 
and we ended up coming up with this bifurcation that says if 
the loan is a prime loan, meaning the APR for the loan is 
within 150 basis points over the average prime operate, we 
would provide it Safe Harbor status.
    And if it is above that in the nonprime space, we would 
provide the creditor with a rebuttable presumption of 
compliance. The intent here was to say that if you are 
generally within the QM space and you are working in the prime 
segment, these are borrowers who have a little bit stronger 
credit profile, may not need as much protection as consumers 
who are higher-priced who are in the nonprime space, and so we 
thought it was appropriate to provide a little bit of extra 
protection for the consumers in that nonprime space so that 
they do have some remedies if the market is getting into some 
of the subprime issues that we saw during the crisis.
    Ms. Velazquez. Ms. Cochran, would you like to--
    Ms. Cochran. Yes, we wanted to provide a certainty for the 
market going forward. We wanted to provide strong incentives to 
provide safer loans, and we believe the rebuttable presumption 
Qualified Mortgage strikes that balance.
    It does provide incentives for lenders to provide Qualified 
Mortgages at the same time it preserves consumers' rights in 
the event that there is a problem. We think such problems would 
be extremely rare, but we thought it was important to preserve 
that flexibility.
    Ms. Velazquez. Thank you.
    Thank you, Madam Chairwoman. I yield back.
    Chairwoman Capito. Thank you.
    Mr. Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Madam Chairwoman.
    Thank you, Mr. Carroll and Ms. Cochran, for your testimony.
    I would like to pick up or where Congressman McHenry left 
off. Given that the FHA decision, that Fannie and Freddie would 
only lend or only buy QM mortgages, do you believe that the 
lenders will continue to lend given that they have to hold 
these loans on their balance sheet?
    Mr. Carroll. Congressman, I am sorry, which loans were you 
referring to? I couldn't hear; I apologize.
    Mr. Pittenger. Loans outside the Qualified Mortgages.
    Mr. Carroll. Outside the Qualified Mortgages. Particularly 
in the short-term, we heard loud and clear from industry that 
nonqualified mortgages will be a smaller part of the market in 
the short term.
    That is precisely why we endeavor to create both the 
general definition for a Qualified Mortgage as well as this 
temporary extension. At least for the next few years, while the 
market is continuing its recovery, what we hear from most 
creditors is that they are going to want to stick to the 
Qualified Mortgage space while they get acclimated to the rules 
and get acclimated to the possible risks associated with doing 
non-QM loans.
    We do feel that over time, people will acclimate to that 
risk, which is why we created this temporary extension which 
covers, by our calculations, not including points and fees, 
roughly three-quarters of the market.
    So that would be a significant retrenchment from what we 
now think is the vast majority of the market, the three 
quarters of the market where we have a significant delta.
    We intend to monitor the market to make sure that the rule 
that we have constructed is operating as we expect it to, and 
it is something we need to keep tabs on as it moves forward, 
but we do think that over time, people will get acclimated with 
those risks and we will see a market for non-QM loans.
    Mr. Pittenger. You will assess that over time and make 
adjustments if needed?
    Ms. Cochran. Right. We expected that it would develop in 
niches and specific parts of the market over time as people get 
more comfortable and see specific business opportunities that 
make sense for their models.
    The thing that is helpful about the temporary category of 
Qualified Mortgage is that it is based on eligibility for 
purchase or guarantee or insurance by the designated entities.
    It does not actually have to be purchased by them. And we 
believe that provides a good balance that will allow people to 
get comfortable both with portfolio loans and securitized 
loans.
    So it is an important bridge and a mechanism for us to 
continue to assess how the market evolves. We know there are a 
number of other capital, regulatory, and economic conditions 
that are affecting the market causing uncertainty and this 
gives a bridging mechanism and breathing room for the market to 
evolve and for us to continue to assess as that temporary 
provision comes closer to--
    Mr. Pittenger. Okay.
    Let me move on to something else. Given the severity of the 
damages associated with violating the ability-to-repay 
requirement, in writing this rule, did you consider the effect 
on the safety and soundness of small banks and credit unions 
that hold nonqualified mortgages on their balance sheets?
    Ms. Cochran. The statute sets the remedies that are 
provided here, and as I started to say earlier, the remedies 
are actually more narrow than what is provided under existing 
rules today for higher-priced mortgage loans. Under those 
remedies, because of the way the rules were written, all 
finance charges are recoverable.
    In the Dodd-Frank Act, Congress specifically limited it to 
a 3-year period, which we thinks helps significantly in terms 
of being able to model litigation risk.
    So yes, that is obviously something that we looked at. We 
looked at litigation risks. We consulted with the prudential 
regulators and they are of course continuing to evaluate that 
issue as well.
    Mr. Pittenger. But you do believe that this could lead to 
further deterioration of the community banks?
    Ms. Cochran. We are working very hard to structure the rule 
both in the final rule and the concurrent proposal to 
accommodate and recognize that small community banks provide 
critical access to credit and that their processes and 
practices are very responsible and should be accommodated 
within the scope of the regulation. So, we are working very 
hard to make sure that it does work for small banks as well as 
other types of lenders.
    Mr. Pittenger. I hope you will continue to talk to them, 
especially the ones I talk to.
    Thank you. I yield back the balance of my time.
    Chairwoman Capito. The gentleman yields back.
    Mr. Hinojosa?
    Mr. Hinojosa. Thank you.
    Thank you, Chairwoman Capito and Ranking Member Meeks, for 
holding this important hearing.
    And thank you to the distinguished panel members for 
sharing your insights this morning.
    We cannot forget how the housing market bubble happened. 
Shortly, let me say that unaffordable and balloon mortgages 
were sold to families who were not fully aware of the terms. We 
also saw agents targeting communities of color to push their 
most predatory mortgage products.
    Fast-forward to 4 million foreclosures and the housing 
market meltdown, and we are now faced with ensuring that these 
unsafe practices never happen again.
    With the mortgage rules written by the CFBP, including the 
Qualified Mortgage rule discussed today, we begin the long 
process of creating a healthy housing market for the long term. 
There is a thin line between too little regulation and too 
much. It seems to me that the QM rule released by the CFBP 
comes close to that line.
    My first question is for Mr. Carroll. Some of us have 
constituents in rural areas such as in my congressional 
district in deep south Texas or places where there just aren't 
that many institutions that are able to extend credit to worthy 
borrowers.
    In our districts, it actually makes sense for borrowers to 
have terms like balloon payments or other specialized products 
they work out with their local banker. As the chairman of the 
rural housing caucus, I have been fighting for affordable 
quality housing in rural America for over a decade.
    What kind of exceptions exist in the Qualified Mortgage 
rule for small or rural lenders operating in these areas so 
that they can participate?
    Mr. Carroll. Thank you, Congressman, for the question.
    We do recognize that rural communities in particular have 
been hit hard by the financial crisis and that the creditors 
who serve them have also had a difficult run during the 
recovery.
    We have tried to do a few things in the rulemaking process 
to address smaller creditors operating in rural areas who have 
these challenges. One is, we have attempted to increase the 
coverage of designated rural areas for the purposes of treating 
balloon mortgages as Qualified Mortgages. My colleague, 
Assistant Director Cochran, mentioned this earlier.
    We also have proposed, as part of a concurrent proposed 
rule, an exemption for small creditors where, if you are within 
$2 billion in assets, you don't originate more than 500 loans a 
year, and you hold the loans in portfolios, as long as the loan 
meets the Qualified Mortgage features of a fixed-rate loan or 
an adjustable rate mortgage, and some of the other protections 
built into QM, they can have an easier method of getting 
Qualified Mortgage status, meaning they don't have to look 
specifically to the 43 percent DTI. They can use their own DTI 
measure and they have an easier access to the Safe Harbor; a 
little bit broader space in the pricing where we used 350 basis 
points over APOR rather than 150.
    And we think these are some methods for providing some 
relief to small creditors. We would be happy to hear from your 
office if you have views on it.
    Mr. Hinojosa. My second question will be directed to Ms. 
Kelly Cochran.
    I am going to give you a picture of a congressional 
district that I represent which is in deep south Texas, 250 
miles from San Antonio, South to McAllen Edinburg, and in the 
middle, the coastal bend has what they call the Eagle Ford 
Shale Oil and Gas Mine, which is bigger than Alaska's mines.
    In the last 2 years, the actual production has been twice 
as much as was estimated, so that of the 8 counties I 
represent, 4 of them only have plus or minus 10,000 people, and 
they have lots of banks because Karnes County, as an example, 
received $2 billion in royalties and they have 10,000 people.
    So the banks in that area have plenty of money, yet they 
are not lending money. Do we in Congress need to soften up the 
regulations because first, they said there wasn't enough money 
to meet the requirements. Now, they have lots of money, and 
they are still not lending money. So tell me, what do we have 
to do in Congress to open it up?
    Ms. Cochran. I think--obviously, I wouldn't purport to 
advise Congress on what it should do, but I can say some of the 
ways in which the Bureau is thinking about these issues.
    As Pete talked about, we have expanded the definition of 
rural and underserved under the regulation. The way it was 
proposed originally, it would have covered counties that only 
included 3 percent of the United States population.
    We increased that to 9 percent and we also made a number of 
other adjustments with regards to balloon payment loans to make 
it easier for these institutions to keep lending.
    As Pete mentioned, we also have a concurrent proposal which 
is looking at a number of issues with regard to small creditor 
impact and ways that we can accommodate them within the rule.
    In general, this is a very complicated area. We are very 
sensitive and thinking very hard about it. One issue that is 
difficult is that there are so many different ways to define 
``rural.''
    Different Federal agencies do it differently for many 
purposes. So, we know there are a number of issues here. We are 
working very hard and we will be happy to report back to you as 
we are tying off this concurrent proposal on what other 
measures we have adopted that may be helpful here.
    We would be happy to provide technical assistance.
    Mr. Hinojosa. My time has run out, and I yield back.
    Chairwoman Capito. Thank you.
    Mr. Pearce?
    Mr. Pearce. Thank you, Madam Chairwoman. I appreciate you 
holding this hearing.
    And I appreciate the participation of the witnesses today.
    The subject of the high-cost loans is something that I 
wonder about. What is the logic behind that? The logic behind 
the concept of high interest or high-cost loans and why we are 
going to regulate those?
    Ms. Cochran. High-cost loans--are you talking about under 
the--
    Mr. Pearce. Section 1431, I think.
    Ms. Cochran. With regard to high-cost mortgages under the 
Home Ownership and Equity Protection Act (HOEPA)? HOEPA is an 
existing regime that applies to certain lows depending on their 
points and fee--
    Mr. Pearce. Yes, just get down to the fine-tuning part of 
why is it there.
    Ms. Cochran. It was there because there were a number of 
practices with regards to refinancing that were problematic in 
prior decades. Congress enacted a law--
    Mr. Pearce. Okay, just trying to stop corruption from 
occurring, basically the high-cost people jacking up stuff. So 
who on your staff is a specialist on manufactured housing?
    Ms. Cochran. We have a number of people who have worked on 
manufactured housing--
    Mr. Pearce. No, who is a specialist? Who is the one that 
represents this loan type as you have these discussions? What 
is their name?
    Ms. Cochran. We had a team of people who were--
    Mr. Pearce. Now, do you lead that team?
    Ms. Cochran. They report to me. Yes.
    Mr. Pearce. Okay. So you understand the economics of 
originating loans? Basically, it costs the same thing to 
originate a $200,000 loan as a $20,000 loan?
    Ms. Cochran. We analyzed this question through other rules. 
We do understand, and we adjusted the thresholds for points and 
fees based on the size of the loan because we realize that was 
a concern.
    The Dodd-Frank Act changed the thresholds and changed the 
coverage for high-cost mortgages. We implemented the statute as 
directed and have made adjustments--
    Mr. Pearce. So you are telling me that the people who quit 
making trailer house loans are interpreting incorrectly? 
Because they are coming under the high-cost loans now because 
the cost of origination of the loan is the same.
    Whether it is $200,000 house or a $20,000 mobile home, that 
percentage then mathematically works out to be above the 
threshold and so a lot of the--most of the banks in New Mexico 
have quit making new loans for trailer houses.
    Fifty percent of the people in New Mexico live in trailer 
houses, so you have effectively shut off the mortgage market to 
basically half of New Mexico.
    We have an average income of $31,000 to $35,000, something 
in that range. So what you have is a de facto war on the poor, 
and I just wonder if anybody up there is thinking about it, and 
who is the person saying, we can't quite do this because they 
are shutting off these poor people who were making $20,000 and 
$30,000 loans, they are just in there trying to get into 
something.
    So who is it? Is that you, Ms. Cochran?
    Ms. Cochran. We looked at this issue intensively during the 
rulemaking for the high-cost mortgage loans, and I would be 
happy to talk to you about our analysis.
    Mr. Pearce. I would be happy for you to--
    Ms. Cochran. We made adjustments with regard to both the 
points and fees and the rates thresholds for high-cost 
mortgages to account for the fact that manufactured housing has 
certain unique features and also that smaller loans in general 
have certain costs to originate.
    It is something we thought a lot about, that we requested 
data on, and that we looked at very hard. We have heard from 
some people that they will cease to make loans if they are 
above the threshold.
    Mr. Pearce. I will just tell you that almost every bank in 
New Mexico, and in fact, the one bank who still does it, Texans 
are coming across trying to borrow money out of New Mexico. So 
across the State line, it is the same.
    The second--and by the way, I would gladly invite you to 
our office to discuss this because it is a serious problem for 
us.
    Ms. Cochran. We would welcome that. Thank you.
    Mr. Pearce. The second question is, so you have these QMs 
and then do you have a Director, with Mr. McHenry's footnote, 
who says, don't worry about it. Who is going to decide who 
should have worried about it?
    In other words, if people make nonqualified mortgages, who 
is going to decide whether or not they come up against some 
action or not. Is that the agency? Is that you all?
    Ms. Cochran. If there is a violation, it could be--
    Mr. Pearce. No, no, no. Mr. Cordray says, go ahead and do 
those loans outside the QM. We have created a little box here, 
but go ahead and feel free to step outside. Who is going to 
decide you shouldn't have stepped outside the box?
    The reason I am asking the question is we have an 
Administration that is willing to check your Internal Revenue 
Service returns. They are willing to subpoena all of the 
records for all of the AP, not just the one or two people, but 
everybody in the entire workroom. They have released 
information on the whistleblowers and ``Fast and Furious'' and 
tried to discredit them.
    And I wonder, is the same Administration going to be the 
one who decides who shouldn't have stepped outside the box and 
who should have stayed in the box?
    That is my question, but I think it is more rhetorical.
    Chairwoman Capito. Thank you.
    Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you very much, Madam Chairwoman.
    I am one of the cosponsors of H.R. 1077, and I am trying to 
work with this issue. Let me just ask you, why didn't you, the 
CFPB, address the issue of affiliate discrimination and the 
calculation of fees and points in the final QM rule?
    Ms. Cochran. The Dodd-Frank Act specifically requires that 
affiliate fees be counted towards the cap on up-front points 
and fees for qualified--
    Mr. Scott. Could you do me a favor and just move your 
microphone a little bit closer?
    Ms. Cochran. Yes, I'm sorry.
    The Dodd-Frank Act mandated treatment of affiliate fees 
with regard to the 3 percent threshold for Qualified Mortgages. 
There are a number of places in Dodd-Frank where Congress made 
a deliberate policy decision with regard to treatment of 
affiliates of creditors and brokers.
    Given that very clear policy choice had been made 
throughout the statute, we did not feel it was appropriate for 
us to vary from that. We implemented that provision as provided 
in the statute because Congress had made the decision.
    Mr. Scott. Do you think it doesn't make sense to 
discriminate against affiliates on the basis of these fees? To 
do so reduces the competition and the choice of title services 
and insurance providers. Can the CFPB do with this without 
repurposing the rule?
    Ms. Cochran. As Pete mentioned, we have received a great 
deal of comment on this issue on both sides. We recognize they 
are very strongly held views. We--as we said--believed, given 
the clear mandate from Congress, that it was our responsibility 
to implement that.
    Mr. Scott. So is it being considered?
    Ms. Cochran. No, it is not. We would certainly not be able 
to do it without a re-proposal as a matter of administrative 
law that simply--
    Mr. Scott. Wait a second. You would be able to do it if you 
received some help from Congress, is that right?
    Ms. Cochran. Congress made a very clear policy choice. If 
Congress changes that policy choice, we would implement it as 
directed.
    Mr. Scott. Okay, now let me ask you about Fannie and 
Freddie. What is the rationale of the CFPB for including Fannie 
and Freddie loan level price adjustments in the calculation of 
the fees and the points?
    Mr. Carroll. Thank you, Congressman. That is a good 
question. Loan level price adjustments is a topic that has come 
up during our Qualified Mortgage rulemaking--
    Mr. Scott. Maybe it is me, and I need to clean out my ears. 
If you will just talk louder; I can't quite hear you. Go ahead.
    Mr. Carroll. At the end of the day, loan level price 
adjustments are additional costs imposed based on the credit 
profile of the borrowers. The more credit risk posed by the 
consumer, the more fees will be charged whether they may be 
charged as an up-front fee to the consumer or may be factored 
into the interest rate.
    This was a tricky one for us, but when we look at these 
types of charges, we don't see them like bona fide third-party 
charges, which are just services like title or appraisal; we 
see them as charges that are fairly integral to the rate 
itself, to the product itself being offered to the consumer and 
these are ultimately costs that are borne by the consumer.
    They may manifest through, in this case, the GSE is 
charging a fee to the lender for their guarantee services, but 
that could just as easily be, in the private label space, an 
aggregator who also originates loans.
    We felt, given that these price adjusters are really 
specific to the consumer, that they are borne by the consumer 
and paid for by the consumer at origination, we thought it was 
appropriate to keep them in the rules so that the rule would 
function as we expected it to.
    Mr. Scott. Would you consider changing that policy?
    Mr. Carroll. We would always consider having a conversation 
with Members of Congress to understand your concerns and have a 
dialogue on that.
    Mr. Scott. Now, let me ask you about escrows. Would escrows 
for taxes and insurance ever be included in the calculation of 
fees and points?
    Ms. Cochran. No, we don't believe so.
    Mr. Scott. Why?
    Ms. Cochran. Because those are collections of charges to be 
paid along the life of the loan distinct from the up-front 
points and fees that are charged in connection with the 
origination of the loan.
    Mr. Scott. Okay.
    Thank you very much, Madam Chairwoman.
    Chairwoman Capito. Mr. Fitzpatrick?
    Mr. Fitzpatrick. I thank the Chair, and I very much 
appreciate the hearing.
    I hope we can all agree that small community banks did not 
cause the mortgage crisis of 2008. When I am back home in my 
district in Pennsylvania meeting with local lenders, they tell 
me that the QM rule is or will essentially and assuredly take 
away the judgment that they have and have always had as local 
lenders and will otherwise drive credit for qualified 
borrowers.
    One lender back home tells me that a main concern, and I 
think the CFPB has heard this several times, is that by 
branding a mortgage as ``qualified,'' you are essentially 
saying that all mortgages that don't meet that criteria are 
``unqualified.''
    Even if the intent is not to create categories of desirable 
or undesirable and not desirable mortgages, that is essentially 
what is happening. So the question is, who is going to want to 
have or to hold an ``unqualified'' mortgage?
    Community banks often have certain niche programs that are 
perfectly legal but serve small consumer bases because it is 
specifically tailored for those consumers' or customers' needs, 
and when the CFPB introduces qualified and unqualified 
Mortgages, they are disregarding the necessity of these 
programs and penalizing the local and community banks that know 
their customers, know them well, what they want, and what is in 
their best interest.
    So my question for either Mr. Carroll or Ms. Cochran is, 
was there any consideration for or would you be opposed to 
providing exemptions for small institutions that keep these 
mortgages in their own portfolios? And what is the chance that 
is going to happen?
    Ms. Cochran. If I could address that in a couple of ways.
    First of all, of course, Qualified Mortgage is the term 
used in the statute so we have continued to use that. I think 
there are important pieces of consumer education that will come 
with this rule as we get closer to implementation to make sure 
the consumers understand what a Qualified Mortgage is, and what 
it is not.
    In terms of small lender programs, there are three 
different types of Qualified Mortgages under the final rule and 
we have proposed a fourth category of Qualified Mortgage that 
is specifically for small creditor portfolio loans.
    Many of the loans that small institutions make will fall 
within the definition of Qualified Mortgage, and the reason we 
proposed a fourth category is that we believed it was 
appropriate to look at this, because we realized that 
relationship lenders, small community institutions, have many 
reasons and business models that are of great service to 
consumers.
    They provide critical access to credit and they have 
extremely low foreclosure rates, and typically very responsible 
lending practices. We wanted to make sure that we encouraged 
and accommodated that type of lending within the scope of the 
rule and so we have thought very hard to both, in the balloon 
payment context and with regard to this new proposal, which we 
are hoping to finalize as quickly as possible, to accommodate 
exactly those kinds of--
    Mr. Fitzpatrick. So, you have just described the community 
lenders in my area of southeastern Pennsylvania. Do you agree 
that those lenders did not contribute to or create the mortgage 
crisis of 2008? We agree on that, correct?
    Ms. Cochran. Exactly. And as I mentioned, their foreclosure 
rates, their lending, their profile of the data shows that they 
have generally very responsible models. We wanted to 
accommodate and recognize that within the course of the rule.
    Mr. Fitzpatrick. And those lenders most likely to hold the 
loans in their own portfolio, correct?
    Ms. Cochran. Right. Both of the Qualified Mortgage 
provisions for small creditors, both the balloon payment and 
the proposed new category, are specifically for portfolio 
loans.
    Mr. Fitzpatrick. So why not just exempt the small community 
bankers from the rule? Why not?
    Ms. Cochran. We believe that balance is important. This 
strikes the appropriate balance by providing greater 
protection, greater certainties for those creditors, 
recognizing their good models, and at the same time providing 
in the event that there is an abuse, that there is a small 
creditor that is not operating under those same practices, a 
consumer would have an ability to seek redress in such 
situations.
    Mr. Fitzpatrick. I yield back.
    Chairwoman Capito. Mr. Capuano?
    Mr. Capuano. Thank you, Madam Chairwoman.
    Mr. Carroll, Ms. Cochran, I have heard a lot of detail 
today and a lot of concern. I think some of it is legitimate. I 
am sure you share some of the same concerns. My first, and 
possibly my only question, is kind of simple.
    I am interested in the availability of credit. Several 
million people got mortgages last year.
    There is no doubt that a handful of them probably shouldn't 
have gotten a mortgage. They are going to get into trouble. My 
question is, have you made an internal judgment as to how many 
fewer loans will be made when this rule is adopted next year?
    How many people who got loans this year do you expect to 
not be able to qualify next year, not be able to get loans next 
year, I guess?
    Mr. Carroll. We think it will be small, Congressman.
    I think that we have tried to calibrate this rule so that 
again, going back to this notion of a broad QM, is to provide 
minimal disruption to the market in the short term while we are 
transitioning into this--
    Mr. Capuano. When you say small, can you give me--1 
percent, 10 percent, 20 percent?
    Mr. Carroll. The vast majority are covered in the Qualified 
Mortgage space. We expect those loans will continue to get 
made.
    There may be some loans on the margins that banks would 
have to do as a nonqualified mortgage and choose not to because 
they don't match our Qualified Mortgage--
    Ms. Cochran. Part of it is that the lending practices have 
changed so much from the height of the build-up to the crisis 
that we think things like no-doc loans--
    Mr. Capuano. I am not--that is why I asked about last year. 
I didn't ask about 2008. I can't imagine anybody in their right 
mind would want us to go back to the 2008 standard, and if they 
do, I think they should say so.
    So I am using last year because I am not sure we are at the 
right point yet but I am just trying to get an idea. I think 
most of us would see that last year was a pretty tight market 
and most mortgages being made are probably pretty conservative 
lately.
    And I guess I am just trying--the reason I ask is because 
there is one number out here that suggests 48 percent of the 
loans made in 2010 would no longer be made because banks will 
stop making them.
    If that is the number, obviously I think that should 
concern a lot of people and I am just wondering if you have a 
competitive number--I am not going to hold you to a specific 
number; a range, anything.
    Mr. Carroll. Yes, let me describe the distinction, I think, 
between our numbers and some of the other numbers that might be 
in the market. We put our core definition at roughly three-
quarters of the market being covered by QM and then adding this 
extension--
    Mr. Capuano. The explanation can come later. I am just 
looking for a relatively simple answer if there is one.
    Mr. Carroll. I--
    Mr. Capuano. Do you have a number, an estimated number, as 
to how many people who got loans in the last year or the year 
before, whatever your base your might be--how many of them 
would not be able to get loans next year? Either based on QM or 
because the people will not be making nonqualified mortgages.
    Mr. Carroll. Based on QM, we think it will be a small 
number. I would say though at the same time there is the 
potential for credit to continue to loosen in the market on the 
basis of factors that--
    Mr. Capuano. Good. I am glad you said that. I agree with 
you. When you say small, I need to get--is it less than 10 
percent? Less than 5 percent?
    Mr. Carroll. Yes, less than 10 percent. I would put the 
number in my office and our calculations around the 5 percent 
margin, at most.
    Mr. Capuano. That is good. Thank you for the answer. I 
guess the next question I have really is, what if you are 
wrong?
    What if this 48 percent number is right? And you find it 
out, after a period of adjustment all of a sudden come March of 
next year and mortgages given have plummeted, do you have the 
ability to make quick adjustments to your rules?
    And again, I know how long it takes to make a rule, have 
you allowed yourself a back door out of this rule to make an 
emergency declaration or whatever? What if you are wrong?
    I am not arguing that you are. I am not qualified to make 
that argument. What if they are right and you are wrong and all 
of a sudden most of America can no longer get a loan or if 
there is a hole--an unforeseen one for trailers or whatever it 
might be? Do you have the ability to make a quick, even if 
temporary, adjustment to your rule to address something that 
maybe your estimates were wrong on?
    Ms. Cochran. Yes, we would have to go through certain 
procedures to do a quick adjustment.
    We are in the process of making quick clarifications to the 
rule now as different interpretive issues come up and we can do 
some of these procedures in the event that there was a problem.
    I think a lot of the debate is really about what happens as 
the temporary provision expires. As we discussed, that is a 
longer-term question. We specifically set the outside threshold 
at 7 years because the Bureau is required to do a thorough--
    Mr. Capuano. When you say quick, could you again, give me a 
general idea, for the sake of discussion, come February 15th, 
all of a sudden the entire country agrees that okay, you have 
tightened up too much, 3 percent should be 4 percent or 
whatever it might be. If you decide February 1st that you 
agree, everybody agrees that it has to be changed, when can you 
change it? March 1st, June 1st, next January?
    Ms. Cochran. We would have to look at the specific 
circumstances. Generally, we have to provide a brief notice and 
comment period before we would change a rule.
    Mr. Capuano. How brief?
    Ms. Cochran. Obviously, there are different circumstances 
under which the Administrative Procedure Act can allow 
expedited process--
    Mr. Capuano. Yes, but you are not--I am a defender of the 
CFPB and I am concerned about some of the details and that is 
all well and good, but for me details--we will work out what we 
can do.
    What I am concerned with is okay, with all of the best 
interests at heart, with all of your best estimates, I am not 
qualified to say that your estimates are wrong. I mean, they 
are estimates. That is what they are based on. And you are just 
more qualified than I am.
    My concern is if you are wrong and it takes 9 months to 
adjust that problem, then we are possibly on the brink of 
another economic crisis that could be averted.
    All I am asking is, have you built in or will you build in 
a back door in case you are wrong? Not because I think you are 
wrong, but if you decide you are wrong, and say, ``Oh my God, 
the estimates were wrong,'' and it happens.
    On occasion, even I have made a mistake that I have wanted 
to correct, and I am simply asking, have you allowed yourself 
the opportunity to do that and if it is 6 months, I have a 
problem.
    Ms. Cochran. The circumstances depend on what happens, but 
we do have more flexibility than that--
    Mr. Capuano. That is not an answer.
    Ms. Cochran. --it would not be a matter of 9 months--
    Mr. Capuano. I appreciate--
    Chairwoman Capito. The gentleman's time has expired. Thank 
you.
    Mr. Capuano. Not good for a friend.
    Chairwoman Capito. Mr. Barr?
    Mr. Barr. Thank you, Madam Chairwoman.
    Mr. Carroll, Ms. Cochran, thanks for your testimony today.
    I think what you are hearing today is not any kind of 
objection to the idea that there was some response that was 
warranted to the mortgage subprime prices, but more concern 
that the overreaction involved here is something that is 
depriving the market, the mortgage marketplace of flexibility, 
depriving consumers of access to mortgage credit, which is what 
you all spoke to at the very beginning in terms of what you all 
want to avoid.
    But what I want to do is talk about, and I would encourage 
you to take back to the Bureau, some of the bipartisan concerns 
that have been expressed here today, and I would like to echo 
or follow on the comments from the gentleman from Texas, Mr. 
Hinojosa, in talking about the rural designation issue.
    My district in central and eastern Kentucky includes a 
number of counties that are manifestly rural, but fall outside 
of the rural designation under your QM rule.
    So my question would be to you all, obviously Kentucky 
bankers, bankers all across this country use balloon mortgages 
to mitigate interest risk, interest rate risk, balloon loans 
held in portfolio give consumers significant interest rate 
flexibility.
    With these rural communities--and in my case, Bath County, 
Kentucky, is a rural community but for whatever reason the CFPB 
does not recognize it as a rural community, a rural county.
    In light of this feedback that you are getting from both 
sides of the aisle, what is the CFPB doing to revisit this 
definition of rural? Are you thinking about changing the 
definition through maybe use of the rural housing loan program 
definition, or I have heard a process whereby interested 
parties could petition the Bureau to be considered rural? What 
are you doing to address this problem?
    Ms. Cochran. As we discussed, there is a concurrent 
proposal out right now that is looking at small creditor issues 
with regard to access to credit, not just in the question of 
rural balloons, but more broadly.
    We are looking at that and looking at our options and how 
then we can appropriately balance those considerations. We have 
heard a great deal of comment about the rural definition in 
particular.
    There are a lot of interesting ideas about different ways 
to define it, and over time, that is something I think that we 
want to continue to consider.
    We are looking holistically at this right now. We cannot 
talk about a pending proposal, but our goal is to get it out as 
quickly as possible. We are extremely sensitive to what we are 
hearing about consumers on this issue and we are working to 
strike an appropriate balance that will preserve access to 
credit.
    Mr. Barr. When you talk about regulatory straitjackets, 
this is what we are talking about. When you define Bath County, 
Kentucky, as nonrural, you are just flat out wrong. So please 
consider that and take that back to the Bureau.
    One quick additional question: I hear frequently from our 
bankers that they are receiving mixed signals from regulators, 
particularly with respect to the Community Reinvestment Act 
mandates and the QM rule. And so what I want to ask you all is 
what assurances can you give to Kentucky community banks that 
they will not receive a negative CRA audit if their mortgage 
lending decisions reflect compliance with your QM rule?
    Ms. Cochran. The Community Reinvestment Act is 
administrated by other agencies, not the CFPB. We have been 
working with the prudential regulators and other appropriate 
Federal regulators throughout our rulemaking process to 
coordinate and get their feedback on our QM rule and also as 
they think about implications of QM for their--
    Mr. Barr. Do you acknowledge that there is a conflict? Do 
you acknowledge that there is a conflict between the 
requirements of the CRA and your Qualified Mortgage rule?
    Ms. Cochran. I have not studied this issue in detail. I 
would not, at this point, be comfortable saying that there is a 
conflict. I can say that it is something we would be happy to 
take back as we continue our discussion with prudential 
regulators to continue to discuss and make sure that agency 
coordination is appropriate.
    In general, we think that is an important issue throughout 
the rulemaking. We would be happy to follow up with you about 
specifically what you are hearing on CRA.
    Mr. Barr. We are hearing it. We are hearing it very loud 
and clear, and what is really a problem is the contradictory 
messages that lenders are receiving from the regulators.
    My final question is on cost of compliance. Lenders are 
obviously going to be tasked in implementing the QM rule with 
systematically and comprehensively documenting that even though 
they have followed safe and sound practices, they have to prove 
that they followed the prescribed underwriting processes to 
determine that the borrower has the ability to repay.
    Have you all analyzed the cost of compliance of documenting 
following all of the requirements to achieve a Safe Harbor 
status, and what additional compliance costs that is going to 
impose on some of these small community banks that simply don't 
have the staffing that would be required to properly implement 
this rule?
    Ms. Cochran. Yes, we did consider, as Pete talked about 
earlier, the cost of compliance and other impacts of this 
regulation. Our sense is that, given how much underwriting 
practices have changed, this is not a significant deviation 
from what people are doing now.
    Obviously, there are always concerns when a new rule comes 
in and people need to calibrate and make sure that they are in 
compliance. That is why we are working so hard on the 
regulation implementation efforts, to make sure that we 
facilitate that process as much as we can.
    We are very sensitive to the concerns of small institutions 
on this, and that is why we are providing a compliance guidance 
and videos and all of the other things that Pete talked about.
    Mr. Barr. My time has expired. I yield back.
    Chairwoman Capito. Mr. Murphy?
    Mr. Murphy. Thank you, Madam Chairwoman. And thank you both 
for your testimony.
    Back to this 3 percent rule. It looks like originally the 
threshold was $75,000 and now it is $100,000. Number one, how 
did you come to raise it? What happened there?
    And then number two, did you think of tying this to an 
average cost for an area, considering that New York City might 
be different than a rural area in my district?
    Ms. Cochran. We looked at this issue and we received 
extensive comment on it. We did what analysis we could around 
the costs to try and calibrate properly. I don't know that we 
got a suggestion specifically about average costs in specific 
areas, so that might be something that would be helpful to 
follow up on.
    It certainly was a concern and we adjusted significantly 
from the proposal because we thought more flexibility was 
needed. We understand that there are certain costs in 
originating a loan that don't vary much based on the principal 
side and so we were trying to accommodate that rule in how we 
set the threshold. So it is something to which we are very 
sensitive.
    Mr. Murphy. Okay, so you would be open to perhaps tying it 
to an average rate for a market, because as was mentioned 
earlier, there are a certain amount of fixed costs that do go 
into issuing these mortgages?
    Ms. Cochran. We did the best analysis we could with the 
information we had. I would be very interested in talking to 
you about the idea. Obviously, it is something we have to look 
at.
    Mr. Murphy. Okay. One more question. With this Safe Harbor 
approach, the CFPB is giving lenders the ability to know and 
say that certain people meet this ability-to-repay standard. 
Does this create an implicit inability to repay for loans that 
are outside QM?
    Ms. Cochran. No, as we have discussed, we have really set 
the long-term threshold for Qualified Mortgage in a way that we 
believe was important to recognize and acknowledge that there 
are responsible good loans to be made outside of the Qualified 
Mortgage space.
    We believe it is appropriate for those loans to be 
considered on an individualized basis without a presumption 
that they automatically comply. We believe that there is 
significant responsible credit in that and, over time, 
creditors will see those opportunities and expand into that 
space.
    In the short term, while they are figuring that out and 
getting comfortable, we have also expanded the definition of 
Qualified Mortgage to provide the bridge as we discussed 
earlier.
    Mr. Murphy. So the complaints I am hearing from community 
bankers and credit unions, do you think they are temporary or 
do you think they are justified?
    Ms. Cochran. We know this is a difficult time. We know that 
there is uncertainty around this rule and a number of other 
conditions in the market. And we believe those concerns are 
real and they will affect business decisions in the short run.
    That is why we structured the rule to provide a transition 
mechanism over time. We do believe that, as conditions become 
more certain, as other pieces fall into place and people get 
more comfortable with the rule, they will feel more comfortable 
expanding into other parts of the market.
    We really tried hard to design a rule that would, in the 
long-term, provide accessible credit in all parts of the 
market. Obviously, that is a balancing act and it is a 
difficult process to manage over time with so many sources of 
uncertainty, but we believe this is a good framework for doing 
that.
    Mr. Murphy. Have you all sort of come up with some ideas 
and theories for what you can do if you do see in a year or 2 
years, kind of adding on to what Mr. Capuano said, that we can 
do to loosen up to ensure that the private sector does in fact 
enter the market if we see in a year that they are really not 
because of the cost?
    Ms. Cochran. We will continue to monitor the market on an 
ongoing basis. That is part of the Bureau's basic mission and 
also an important part of the accountability after any 
rulemaking. So we expect we will continue to monitor over time 
and specifically at the 5-year mark, when the Bureau is 
required to do a very extensive evaluation of significant 
rules. So we certainly expect that would happen before the 
expiration of the 7-year period for the temporary definition.
    We also expect to be doing this on an ongoing basis. This 
is a core part of our mission, and if we start to see things 
that are not developing as we expected, then obviously we would 
have to consider whether adjustments would be appropriate.
    Mr. Murphy. Okay, great. Thank you.
    Chairwoman Capito. Mr. Westmoreland?
    Mr. Westmoreland. Thank you. I think Mr. Luetkemeyer asked 
you both if you have ever made a loan and I think both of your 
answers were no. What experience professionally or just in life 
have you had to come up with what a qualified borrower was if 
you never made a loan? Have you ever made a loan to anybody in 
your family or to anybody?
    Mr. Carroll. No, Congressman, I have not made a loan to 
anybody.
    Mr. Westmoreland. Ms. Cochran?
    Ms. Cochran. No.
    Mr. Westmoreland. Okay. So how do you go about figuring out 
who is a qualified borrower?
    Mr. Carroll. First, we are working with the statute and 
when--
    Mr. Westmoreland. No, I am talking about--what if somebody 
came in, what makes them a qualified borrower? Is it how much 
he owes, what his credit history is, who his mom and dad are--
what gave you that insight to say, all right, this guy would be 
a qualified buyer, and this guy is not.
    Ms. Cochran. So, if I may address it. The statute set out 
and directed the Bureau to define what is a Qualified Mortgage. 
It did not tell us to define what is a qualified borrower. And 
as I talked about in my original opening testimony--
    Mr. Westmoreland. It is kind of the same thing. If you have 
somebody who fits the Qualified Mortgage, isn't he going to be 
a qualified buyer?
    Ms. Cochran. What we believed was important was to create 
flexibility. As I said in the beginning, we don't believe that 
by rule we can define every single instance of an affordable 
mortgage. Underwriting was too complex for that and it is too 
individualized.
    So what we were doing was defining a class of loans where 
it made sense to presume that the creditor had properly 
evaluated the ability to repay. Overall, that would provide 
flexibility so that creditors will make that determination 
using reasonable standards.
    Mr. Westmoreland. But you are creating the rules, right?
    Ms. Cochran. Yes. We are doing it the way Congress directed 
us to do in defining Qualified Mortgage, but we very 
specifically did not consider that to be defining the outer 
limits of what is a qualified borrower.
    We believe that is best left to the market. What we were 
trying to do was implement the statutory provisions in a way 
that provided certainty for the market so that they could go 
ahead and use reasonable practices to continue doing what they 
do best.
    Mr. Westmoreland. Okay.
    Now, Mr. Carroll, you had previously been at Overture. Is 
that correct?
    Mr. Carroll. Correct.
    Mr. Westmoreland. And when did you leave Overture?
    Mr. Carroll. 2011
    Mr. Westmoreland. 2011. Did Overture come up with a program 
or somebody at Overture come up with a program where Fannie Mae 
could reduce their approval time from say 30 days to 30 minutes 
or less?
    Mr. Carroll. The company, Overture Technologies, was 
involved in developing automated underwriting capabilities and 
credit risk models for a variety of different banks.
    Mr. Westmoreland. Okay. So you cut the time down from 30 
days processing to 30 minutes or less.
    Mr. Carroll. One of the features of automated underwriting 
is to create a more efficient underwriting--
    Mr. Westmoreland. Okay. So you can do a qualified borrower 
in less than 30 minutes. What kind of documentation did you 
have to get or how long did it take to fill out this online 
application to get this Qualified Mortgage or buyer or whatever 
you want to call it in less than 30 minutes? Was it like a no-
doc loan?
    Mr. Carroll. The underwriting programs that were used by 
the customers of the company ranged from full documentation 
programs to Alt-A programs and subprime programs.
    Mr. Westmoreland. So you could do a full documentation and 
have it approved in less than 30 minutes online? That is 
amazing.
    Mr. Carroll. Well, it just--
    Mr. Westmoreland. Great technology.
    Mr. Carroll. The technology was very good to do full 
documentation decisioning, but you still have to go and look at 
the paperwork after the fact.
    Mr. Westmoreland. Okay.
    Ms. Cochran, you previously worked at a law firm and did 
litigation, as far as I guess borrowers or consumers? What kind 
of lawsuits were you involved in or who did you sue?
    Ms. Cochran. Generally, my claims were financial 
institutions that were defending against lawsuits. I also did a 
fair amount of regulatory counseling and how to comply with 
Federal consumer financial law for those same clients as well 
as some other types of litigation that were not related to the 
financial sector.
    Mr. Westmoreland. So these consumer financial laws that you 
were defending--
    Ms. Cochran. I was generally working as a defense attorney 
for financial institutions which had been sued for violations 
of the Truth in Lending Act or other statutes and regulations, 
and working with them both in defense of the lawsuit and in 
counseling them in terms of ongoing compliance requirements 
under those regulations and statutes.
    Mr. Westmoreland. So you actually represented the 
institutions that were being sued by consumers?
    Ms. Cochran. Yes, in many cases I did.
    Mr. Westmoreland. So now you are on the other side of the 
fence.
    I yield back.
    Chairwoman Capito. Mr. Heck?
    Mr. Heck. Thank you.
    I think my question is most appropriately addressed to Ms. 
Cochran. I am trying to better understand that this issue of 
what happens to what is incentivized in the way of lending 
practices vis-a-vis QM and non-QM.
    And what I can't quite get my arms around is what the 
change will be next year for borrowers in terms of their rights 
of action under non-QM versus what it is today.
    Ms. Cochran. So, under the rules that were adopted by the 
Federal Reserve Board, the ability-to-repay requirement applies 
today to higher-priced mortgage loans. If there is a violation 
of that loan, the consumer can sue and recover all of their 
finance charges.
    The Dodd-Frank Act basically expands that requirement so it 
applies to the broader mortgage market, not just higher-priced 
mortgage loans, and it limits the remedies so that only up to 3 
years worth of finance charges will be recoverable in the event 
that there is a successful suit.
    As we have talked about before, there are different 
gradations here with regard to Qualified Mortgage, Safe Harbor, 
and rebuttable presumption, inability to repay, but that is the 
basic framework that applies to the statute.
    Mr. Heck. I didn't follow you.
    Ms. Cochran. Okay.
    Mr. Heck. I am trying to understand if I am a non-QM 
borrower next February--
    Ms. Cochran. Right.
    Mr. Heck. --on what kind of an expanded basis can I sue my 
lender versus today?
    Ms. Cochran. Today, the ability-to-repay requirements only 
apply to a higher-priced mortgage loan. After January, they 
would apply more broadly to the market in general. If the loan 
was not a Qualified Mortgage so it was originated under the 
general ability-to-repay standard, then in that case, the 
consumer remedies would be up to 3 years of finance charges in 
the event that the consumer was successful on the suit.
    Mr. Heck. And today they--
    Ms. Cochran. Today, they can recover the entire length of 
finance charges, so depending on when the suit was brought, 
that could actually be a larger amount of money. It depends on 
the circumstances of the case.
    Mr. Heck. Thank you, I think. I also want to ask about the 
loans and fees. First of all, quickly, did I understand you 
correctly that the 3 percent is actually specifically 
stipulated in Dodd-Frank?
    Ms. Cochran. It is. The statute provides for up to 2 bona 
fide discount points in addition to the 3 percent depending on 
the rate of the loan, but that is the general threshold.
    Mr. Heck. Part of what I don't understand is how we have 
over time allowed for increasing Federal regulation of title 
insurance and what I don't understand is how that relates to 
the foundational insurance regulation law, namely McCarran-
Ferguson.
    I don't understand how it is that we can say regulation of 
insurance is up to the States in exchange for which you are not 
subject to antitrust but then first I gather it was in HOEPA 
and now in this we effectively have intruded upon that 
territory. Do you follow me?
    Ms. Cochran. The statute provides that affiliate fees in 
certain circumstances count toward the threshold for Qualified 
Mortgage and the threshold for a high-cost mortgage.
    So in the case of title insurance that is affiliated with 
the creditor, that would count towards those thresholds. That 
was the decision that Congress made in the Dodd-Frank Act, with 
regard to Qualified Mortgages, and as we discussed earlier, we 
have implemented that as the statute directed us.
    Mr. Heck. Does that in any way compromise the underlying 
covenant of McCarran-Ferguson?
    Ms. Cochran. I am not sure that I am qualified to speak to 
that. I think it is a decision that Congress made in the Dodd-
Frank Act based on a number of policy parameters, and I don't 
know all that went into that decision. We have implemented the 
statute as directed.
    Mr. Heck. Thank you very much.
    Thank you, Madam Chairwoman. I yield back the balance of my 
time.
    Chairwoman Capito. Thank you. I believe that concludes our 
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 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    The hearing is now adjourned. And thank you both.
    [Whereupon, at 12:17 p.m., the hearing was adjourned.]


                            A P P E N D I X



                              May 21, 2013


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