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



 
                    EXAMINING HOW THE DODD-FRANK ACT
                         HAMPERS HOME OWNERSHIP

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

                                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

                               __________

                             JUNE 18, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-32

        EXAMINING HOW THE DODD-FRANK ACT HAMPERS HOME OWNERSHIP






                    EXAMINING HOW THE DODD-FRANK ACT
                         HAMPERS HOME OWNERSHIP

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

                                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

                               __________

                             JUNE 18, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-32


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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:
    June 18, 2013................................................     1
Appendix:
    June 18, 2013................................................    43

                               WITNESSES
                         Tuesday, June 18, 2013

Calhoun, Michael D., President, Center for Responsible Lending 
  (CRL)..........................................................    18
Gardill, James, Chairman of the Board, WesBanco, on behalf of the 
  American Bankers Association (ABA).............................    11
Reed, Jerry, Chief Lending Officer, Alaska USA Federal Credit 
  Union, on behalf of the Credit Union National Association 
  (CUNA).........................................................    13
Still, Debra W., CMB, Chairman, Mortgage Bankers Association 
  (MBA)..........................................................    14
Thomas, Gary, President, National Association of REALTORS (NAR).    16
Vice, Charles A., Commissioner, Kentucky Department of Financial 
  Institutions, on behalf of the Conference of State Bank 
  Supervisors (CSBS).............................................     9

                                APPENDIX

Prepared statements:
    Calhoun, Michael D...........................................    44
    Gardill, James...............................................    63
    Reed, Jerry..................................................    75
    Still, Debra W...............................................    87
    Thomas, Gary.................................................   104
    Vice, Charles A..............................................   109

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of the Community Associations Institute....   124
    Written statement of the Consumer Mortgage Coalition.........   128
    Written statement of the Independent Community Bankers of 
      America....................................................   265
    Written statement of the National Association of Federal 
      Credit Unions..............................................   341


                    EXAMINING HOW THE DODD-FRANK ACT
                         HAMPERS HOME OWNERSHIP

                              ----------                              


                         Tuesday, June 18, 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, Duffy, Miller, 
McHenry, Pearce, Fitzpatrick, Luetkemeyer, Pittenger, Barr, 
Cotton, Rothfus; Meeks, Maloney, Hinojosa, Scott, Green, 
Ellison, Velazquez, Lynch, Capuano, Murphy, and Heck.
    Ex officio present: Representatives Hensarling and Waters.
    Chairwoman Capito. The Subcommittee on Financial 
Institutions and Consumer Credit will come to order. Without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    I now yield myself 2\1/2\ minutes for my opening statement.
    This morning's hearing is the second installment in a 
series of hearings that this subcommittee is holding on the 
effect that the Consumer Financial Protection Bureau's (CFPB's) 
ability-to-repay rule will have on the availability of mortgage 
credit for consumers. During the last hearing, we heard from 
representatives from the CFPB about the status of the rule and 
the feedback that they were hearing. There was almost unanimous 
agreement from members of the subcommittee that the rule in its 
current form could lead to a constriction of credit when it 
goes into effect in January of 2014. The CFPB must give those 
concerns serious consideration and address them in order to 
avoid serious market disruption.
    In the last 6 weeks, the CFPB issued amendments to the rule 
addressing concerns that had already been raised. Although 
these revisions attempt to provide clarity to lenders, the need 
for these changes highlights the fundamental problem with the 
ability-to-repay rule.
    Mortgage lending can be a highly subjective business, 
especially in rural and underserved areas. This element of 
relationship-based decision-making is completely ignored by the 
premise of the rule. It will be nearly impossible for the CFPB 
to endlessly amend the rule to accommodate the ability of 
lenders to make these relationship-based loans. Unfortunately, 
the end result will be some consumers losing access to credit 
and the ability to own their own home.
    This morning, we will hear from mortgage professionals who 
are best able to determine the real effects of this rule and 
what effects it will have on the mortgage market. We are here 
today to not only learn about how this rule will affect the 
available mortgage credit, but also to begin discussion of 
better ways to preserve access to mortgage credit and protect 
consumers.
    I fear that without significant revision or repeal of this 
rule in its entirety, the consumers that proponents of the rule 
are attempting to protect will be the very consumers who are 
blocked out of the system. Without significant changes, 
consumers who live in rural areas with low property values will 
see a change in their availability of credit. The consequences 
of this rule, whether intended or unintended, will be very real 
to these communities. In fact, one of our witnesses today is 
concerned that the institution he represents may no longer be 
able to offer a charitable program for low-income borrowers. 
This program has been in existence since 1951 and has helped 
residents of Ohio County, West Virginia, who otherwise could 
not attain the goal of home ownership. This is exactly the type 
of case-by-case local lending that will be threatened by rigid 
Federal standards.
    I now yield to the ranking member of the subcommittee, Mr. 
Meeks, for the purpose of making an opening statement.
    Mr. Meeks. Thank you, Chairwoman Capito, for holding this 
important hearing. Let me start by reaffirming the need and the 
support for the Dodd-Frank Act. No bill that I have seen in my 
15 years here is perfect. But the 2008 financial crisis was a 
painful and regrettable demonstration of the need to reform our 
financial institutions, our capital markets, and our regulatory 
agencies, and to have laws to prevent the reoccurrence of the 
excessive behavior that got us here in the first place.
    That is why I have remained open-minded in my search for 
true bipartisan solutions to address some of the shortcomings 
of the bill, particularly those aspects of the law that affect 
the most vulnerable. We need to make sure that we help our 
local communities and our local banks, whose activities did not 
blow up the global financial system, but are facing real 
challenges in this modest economic recovery.
    I support a balanced, risk-sensitive Qualified Mortgage 
(QM) definition that protects consumers from predatory lending 
practices while also ensuring that we maintain a competitive, 
accessible, and liquid housing finance industry that serves all 
niches of the population.
    This is why I cosponsored H.R. 1077 to specifically address 
and support home ownership and financing opportunities by 
first-time home buyers and low- and moderate-income families. 
H.R. 1077 addresses major concerns on regulatory agencies' 
rulemaking on Qualified Mortgages as required by Dodd-Frank and 
focuses on the Consumer Financial Protection Bureau's ability-
to-repay rule, which sets the baseline for a Qualified 
Mortgage.
    I am concerned that the Qualified Mortgage's 3 percent cap 
on points and fees will especially affect first-time home 
buyers and low- and moderate-income consumers, especially in 
places like my hometown of New York, which has some of the 
highest closing costs in home mortgages. It is problematic to 
me to include some specific closing cost charges in the cap, 
such as title insurance premiums from affiliated providers, 
escrow charges for future payment of tax and insurance, and 
low-level pricing adjustments which allow borrowers with not-
so-perfect credit scores to qualify for affordable loans, and 
the double counting of loan officer compensation, which is 
unfair.
    With respect to title charges, we must be careful not to 
treat title insurance companies differently under the QM rules 
based on their business affiliations. The home purchase and 
settlement process is complex and difficult for most home 
buyers. If a buyer chooses the one-stop-shopping option by 
selecting an affiliated title company, he or she ought to be 
able to exercise that option without the penalty of extra 
points on their mortgage.
    To ensure that we have a thriving housing recovery that is 
far-reaching and sustainable, we need to make sure that we have 
a financial system that provides access to credit in 
underserved communities and affordable loans to low- and 
moderate-income households. Our financial regulations must, 
therefore, be balanced between the need to protect against 
excessive risk-taking and enabling a liquid, well-financed 
housing industry.
    Consistent with this balanced approach, I support risk-
retention rules as an important principle and risk-management 
tool in the securitization process. And risk retention would 
ensure that loan originators applied prudent underwriting 
standards at the critical initial stage of risk assessment.
    Under Dodd-Frank, securities-based Qualified Residential 
Mortgage (QRM) loans would be exempt from risk-retention rules, 
as these loans would have been vetted as having gone through 
prudential underwriting standards.
    The housing sector is vital to our economic recovery, and 
H.R. 1077 is an important step in ensuring that this sector 
remains vibrant and accessible to all niches of the population.
    Chairwoman Capito. Thank you.
    Mr. Duffy for 2 minutes.
    Mr. Duffy. First, I want to thank Chairwoman Capito for 
holding today's very important hearing, and I appreciate the 
panel coming in and sharing your views with us on our mortgage 
market.
    I think everyone on this panel agrees that after the 2008 
crisis, we have to have a review on what happened in regard to 
our underwriting standards with regard to our mortgages. I 
think it is fantastic that we have a bipartisan understanding 
that Dodd-Frank isn't perfect and that there is room to improve 
the law that was written a few years ago. I am hoping this can 
be one leading committee on bipartisan activity.
    One of my concerns is specifically the civil liability that 
is imposed on banks in regard to assessing a borrower's 
ability-to-repay, specifically in regard to those banks that 
originate and retain their mortgages on their books. They 
assume the traditional credit risk of that loan, but then now 
they also have a civil liability on top of the traditional 
credit risk. I am interested in the panel's views on how that 
will impact the industry's willingness to write mortgages in 
this new environment.
    Also, I have read most of the testimony, and a lot of you 
have talked about the safe harbor rule under QM, and I am 
interested in the panel's views on whether we can pierce--or an 
aggressive litigant can pierce that safe harbor rule and 
actually successfully litigate a positive outcome when our 
originators actually believe they were safely covered under the 
safe harbor rule.
    Listen, I come from a rural part of the country. It is 
moderate and low income. I am concerned on how the ability-to-
repay standard, as well as QM, is going to impact my 
constituents' ability to obtain mortgages as we move forward 
with these new rules. I look forward to the panel's testimony 
and our bipartisan work on this committee.
    I yield back.
    Chairwoman Capito. The gentleman yields back.
    I now yield 3 minutes to the ranking member of the full 
Financial Services Committee, Ms. Waters from California.
    Ms. Waters. Thank you very much, Madam Chairwoman.
    All of us on this committee know the 2008 financial crisis 
was a complicated event without a simple explanation, and I am 
sure there are differences of opinion on both sides of the 
aisle as to what led us into the greatest economic downturn 
since the Depression.
    We can all agree on at least one thing: Mortgage lenders 
were extending loans to people who couldn't afford to pay them 
back. Underwriting standards went out the window as lenders 
raced to push as many people into complicated loan products as 
possible. Many borrowers who were eligible for prime rates 
received subprime loans from unscrupulous lenders that were 
compensated by yield spread premiums. The mortgage market 
wasn't working for its customers at all and many homeowners are 
still struggling with their lingering problems in the housing 
market.
    In court documents released just last Friday, several 
employees of one of the Nation's largest mortgage servicers 
claimed that their managers encouraged them to pretend they had 
lost customer paperwork so the customers could be foreclosed 
upon. As it turns out, when the servicer doesn't own the loan 
it is servicing, it is cheaper to foreclose than to help a 
homeowner with a loan workout.
    This misalignment of economic incentives is what the CFPB's 
ability-to-repay rule is all about. Rather than banning any 
type of loan product or feature, the Dodd-Frank Act empowered 
the Federal Reserve and the CFPB to go after lenders who 
recklessly trapped borrowers in loans they couldn't afford and 
provided consumers with additional rights to pursue 
compensation for faulty loan products. But Congress also 
realized it would be unfair to make lenders bear all of the 
risk these new rules present, so we worked with the industry to 
craft a set of standards which a mortgage could meet in order 
to be automatically exempted from the penalty set up to catch 
bad actors.
    The CFPB has proposed a final rule on these so-called 
Qualified Mortgages, and I believe that rule has struck a very 
fair balance for the industry. The Qualified Mortgage rule 
incentivizes lenders to avoid complicated and risky loan 
structures with variable rates or features that allow borrowers 
to stay current while actually accruing more debt on their 
home, and it doesn't prevent them from doing so.
    It encourages lenders to really look into a potential 
borrower's income documentation and compare that to the real 
payments the loan will require, not the tiny payments 
associated with a short-term teaser rate, but it doesn't force 
them to. And the Bureau has also made several adjustments to 
that rule addressing industry concerns, and I hope they will 
continue to work closely with the industry to strike the right 
balance of protection, specifically for rural lenders where 
credit availability is already a concern.
    I believe that Director Cordray's establishment of the CFPB 
Office of Financial Institutions and Business Liaison will be 
very helpful to that effort.
    I yield back.
    Chairwoman Capito. Thank you.
    Mr. Miller for 2 minutes.
    Mr. Miller. I want to thank the Chair for holding this 
important hearing today. We are starting to see a rebound in 
the housing market, and that is really important to the 
economic recovery of this country and for job creation. But we 
need to be cautious that Federal policies don't have a negative 
impact on that. And the CFPB's ability-to-repay rule governs 
lending for the foreseeable future for all of us, without a 
doubt.
    But the rule contains Qualified Mortgage, called QM, and it 
is meant to protect consumers from subprime loans that are 
really predatory, but I have some real concerns with that. I 
have had a concern with the definition between subprime and 
predatory for years, and I am glad to see we are going to 
finally deal with it. But when you look at the concerns we have 
on that, the way it is written it could prevent creditworthy 
borrowers from being able to actually get a home and get a 
loan.
    Some studies that have been released lately, one done by 
CoreLogic, says that about half of the mortgages that 
originated in 2010 could not be issued under this rule. The 
problem I have with it is that the mortgages in 2010 are 
performing very well. So if there is a problem with those 
loans, I think we need to look at them, but from what I am 
seeing, there doesn't appear to be a problem.
    I have spoken with loan originators up and down the 
spectrum, from mortgage brokers to mortgage bankers to retail 
banks, and they all said basically the same thing: ``We will 
not originate a non-Qualified Mortgage; there is too much 
liability.'' The Administration doesn't seem to see a problem 
with this, but the marketplace does notice a huge problem.
    I support sound underwriting standards, but I am concerned 
the QM definition is basically too narrow and sometimes 
unclear. And there is an issue of a 3 percent point fee cap to 
determine someone's ability-to-repay a loan, and there are so 
many exclusions to that, it doesn't seem to make any sense. And 
the thing that I have problems with is you can't even drop that 
fee cap once you state what it is going to be in order to close 
a loan, even to the benefit of the buyer and the seller.
    So we need to look at that issue and say, is it going to 
work, is it not going to work? But our housing market, as I 
said, is finally showing signs of life and I am concerned that 
what we are doing here could have a negative impact.
    I yield back the balance of my time.
    Chairwoman Capito. The gentleman yields back.
    Mr. Ellison for 2 minutes.
    Mr. Ellison. Thank you. Thank you, Madam Chairwoman. Thank 
you, Madam Chairwoman and Mr. Ranking Member, for holding this 
important hearing.
    I was intrigued by the title, ``Examining How the Dodd-
Frank Act Hampers Home Ownership.'' I don't know a lot, but I 
do know that homeowners paying fees completely separate from 
the actual cost of the service they receive is a damper on home 
ownership. Appraisal fees, title insurance, private mortgage 
insurance, all manner of inflated fees raise the cost of a 
mortgage by thousands of dollars.
    I know that using language, or ethnic or religious 
affiliation to trick people into high-cost mortgages when they 
qualify for low-cost prime mortgages hampers home ownership. We 
have a lot of examples here of that. For example, Wells Fargo 
paid $175 million to settle accusations that it allegedly 
discriminated against African-American and Latino home buyers. 
An NAACP study found that African-American home buyers are 34 
percent more likely to receive a subprime loan than White 
borrowers even when other factors are equal.
    Of course, foreclosures don't help home ownership, either. 
We have had 4 million of them so far.
    So when I think about the title of this hearing, and it 
seems to imply that Dodd-Frank is the problem with home 
ownership, I think that a whole lot of things that led up to 
the establishment of Dodd-Frank actually are the real problem 
with home ownership.
    This isn't to say that we shouldn't look at how we can 
improve things and we shouldn't continue to refine the bill, 
but I do think that it is important to maintain some 
perspective on how we arrived at Dodd-Frank and what we are 
doing now, and I don't think that associating Dodd-Frank with 
being some barrier to home ownership is fair.
    The global financial crisis cost this economy $16 trillion 
in wealth. The Qualified Mortgage and other elements of the 
Dodd-Frank Reform and Consumer Protection Act are not hampering 
home ownership. Dodd-Frank enables sustainable home ownership. 
We don't want somebody to get into a home that they can't keep. 
That is not promoting home ownership. That is putting somebody 
in a situation where they are set up to fail.
    So I hope that despite today's title of this hearing, we 
can have some testimony that will actually show us how the 
Consumer Financial Protection Bureau is doing some good things 
and helping safeguard the American people's economic interest. 
Thank you.
    Chairwoman Capito. Thank you.
    Mr. Barr for 1 minute.
    Mr. Barr. Thank you, Chairwoman Capito, for holding this 
very important hearing to examine the consequences of Dodd-
Frank on home ownership.
    A theme that I consistently hear from the community bankers 
in Kentucky's Sixth Congressional District is that they no 
longer have the discretion and flexibility to serve their 
communities in the ways that they know best. Whereas individual 
business judgment and institutional knowledge of the community 
should be considered strengths, and strengths that are 
encouraged, these bankers tell me that rather than focusing on 
their core business, they instead have to devote an increasing 
amount of time to playing catchup with regulations from 
Washington.
    While each story is unique, the tale of the financial 
institution where personnel hiring in the compliance department 
dramatically outpaces hiring in the lending department is not 
unique. Some bankers have gone so far as to tell me that this 
new wave of regulations and lending rules in Dodd-Frank is 
leading them to seriously rethink their business model and 
whether they should get out of providing home mortgage services 
altogether.
    I am confident that many in this room have heard these same 
concerns, and so I look forward to the opportunity presented by 
today's hearing to further explore Dodd-Frank, the CFPB 
rulemaking, the QM rule, and whether it truly strikes the 
proper balance between safety and soundness of our financial 
system and making sure creditworthy borrowers have access to 
the mortgage credit they need to purchase a home.
    Chairwoman Capito. The gentleman's time has expired.
    The gentlelady from New York for 2 minutes.
    Mrs. Maloney. I thank the chairlady and the ranking member 
and all of the panelists for being here. It is no secret that 
leading up to the financial crisis, mortgage lending was 
literally out of control, with prudent underwriting taking a 
back seat to profit-seeking.
    The comment in New York was, if you can't afford to pay 
your rent, then go out and buy a home: no documents, no 
requirements, you can buy a home. And this hurt our economy, it 
hurt homeowners, it hurt our overall country, and it really 
alerted us to the need for greater standards and a minimum of 
safeguards for mortgage lending practices. That is what Dodd-
Frank tried to accomplish, to show that we learned from our 
mistakes and that basic underwriting standards to prevent this 
from happening again were needed.
    With the new QM rule, we will hopefully be able to assure 
borrowers that they are better protected from predatory lending 
practices. The debt-to-income ratio of 43 percent is one that 
the FHA has used for decades. I understand that the CFPB has 
granted an exception to that for community bankers to have 
their discretion with balloon loans to make appropriate loans 
that they feel are appropriate for that individual. But it does 
come forward with an overall standard, which I believe is 
necessary and that Dodd-Frank dictated.
    We have to start somewhere. We can't go backwards. I 
compliment the CFPB on their hard work and for giving us a 
document to work from. And I look forward to the testimony of 
the witnesses and your reaction to the proposed rule that the 
CFPB has put forward. Thank you for your hard work. Thank you 
for being here.
    Chairwoman Capito. Thank you.
    Mr. Pittenger for 1 minute.
    Mr. Pittenger. Thank you, Chairwoman Capito, for calling 
this important meeting and for allowing me to make an opening 
statement.
    We are here today to focus on the rules and regulations 
coming out of Dodd-Frank and out of these new policies that 
will affect home ownership across America, specifically 
regarding the ability-to-repay QM rule.
    However well-intentioned, it will end up restricting 
mortgage credit, making it more difficult to serve a diverse 
and creditworthy population. The definition of QM, which covers 
only a segment of loan products and underwriting standards and 
serves only a segment of well-qualified and relatively easy to 
document borrowers, could undermine the housing recovery and 
threaten the redevelopment of a sound mortgage market.
    The CFPB's QM rule has caused great concern among banks and 
credit unions, especially with the new exposure to litigation 
from borrowers not being able to repay the loan. During 
meetings back in the district, I have found the fears from 
banks, large and small, and credit unions that the regulators 
will view any loan outside the QM standards as a risky loan 
that will be used against the financial institutions as a 
safety and soundness issue.
    With these new policies set to take effect in January of 
next year, my fear, as well as that of other Members, is that 
these new regulations will ripple throughout the economy and 
could lead to further anemic economic growth. It is my goal 
from this hearing that the CFPB hears the--
    Chairwoman Capito. The gentleman's time has expired.
    Mr. Pittenger. --bipartisan calls of concern and addresses 
these issues. Thank you.
    Chairwoman Capito. And last, but not least, Mr. Fitzpatrick 
for 1 minute.
    Mr. Fitzpatrick. Thank you, Madam Chairwoman. And I 
appreciate the witnesses coming before the committee to discuss 
this really important issue.
    I meet on a regular basis with REALTORS, community banks, 
credit unions, and homebuilders in my district back home in 
Bucks and Montgomery Counties, Pennsylvania. We discuss ways to 
improve access to home ownership and to boost the housing 
market.
    And while we all support the CFPB's efforts to ensure that 
consumers are able to repay their loans, I continue to hear 
concerns that the Qualified Mortgage rule discriminates against 
small lenders, minimizes consumer choice in lending, restricts 
access to credit, and makes providing credit much more costly. 
As a result, the QM rule may significantly cut down the number 
of mortgages being made, and many small lenders have indicated 
a reluctance to provide any mortgages at all under the rule.
    This is a pretty tough economic market condition we find 
ourselves in. I believe Congress and the CFPB should instead be 
improving lending conditions so that individuals and families 
who have the ability-to-repay their loans have access to the 
affordable credit that they need. And so, we are all looking 
forward to the testimony here today.
    And I appreciate the hearing, Madam Chairwoman. I yield 
back.
    Chairwoman Capito. Thank you.
    And that concludes our opening statements. I would like to 
yield to the gentleman from Kentucky, Mr. Barr, to introduce 
our first witness.
    Mr. Barr. Thank you, Madam Chairwoman.
    I am very proud today to welcome Commissioner Charles Vice 
to the Financial Services Committee. A resident of Winchester, 
Kentucky, Commissioner Vice has earned an outstanding 
reputation in the area of financial institution supervision, 
and we look forward to him sharing his expertise with the 
committee today.
    Mr. Vice currently serves as the Commissioner of the 
Department of Financial Institutions for the Commonwealth of 
Kentucky, a position he was appointed to in August of 2008. In 
this role, Commissioner Vice has responsibility for the 
regulatory oversight of all State-chartered financial 
institutions in Kentucky, which includes examinations, 
licensing of financial professionals, registration of 
securities, and enforcement. It is a credit to Commissioner 
Vice that the financial institutions in my congressional 
district, which he interacts with on a regular basis, 
consistently tell me that he is knowledgeable, thoughtful, and 
fair in his role.
    Commissioner Vice is also well-regarded by his peer 
supervisors. He serves in a national leadership capacity 
through the Conference of State Bank Supervisors, where he has 
been a member of the Executive Committee. Commissioner Vice 
formerly served as treasurer and chairman-elect of the CSBS 
board, and in May 2013, he officially became chairman of the 
governing board.
    In addition to his service on a number of supervisory 
boards and committees aimed at improving examinations of 
financial institutions, Commissioner Vice previously worked for 
18 years as an employee of the FDIC. During his tenure with the 
FDIC, Commissioner Vice served in the Lexington, Kentucky, 
field office, where he was the office's expert on subprime 
lending and capital markets. In recognition of his outstanding 
work, he received the FDIC Chicago Region employee of the year 
award in 2007.
    And on a personal note, I just want to thank Commissioner 
Vice for his courtesy in being available to me and my staff, 
for answering our questions, and for sharing his considerable 
expertise and insights with us. I am honored to welcome 
Commissioner Vice to the committee, and we look forward him 
sharing his expertise on the impact of Dodd-Frank on home 
ownership.
    Chairwoman Capito. Thank you.
    Welcome, Commissioner Vice. You are recognized for 5 
minutes.
    And I would ask all the witnesses to please pull the 
microphones close to them, and make sure they are on, because 
sometimes it is difficult to hear, and we want to hear every 
single word.
    So, Commissioner Vice, you are recognized for 5 minutes.

STATEMENT OF CHARLES A. VICE, COMMISSIONER, KENTUCKY DEPARTMENT 
OF FINANCIAL INSTITUTIONS, ON BEHALF OF THE CONFERENCE OF STATE 
                    BANK SUPERVISORS (CSBS)

    Mr. Vice. Good morning, Chairwoman Capito, Ranking Member 
Meeks, and members of the subcommittee. Thank you, Congressman 
Barr, for your service to the Commonwealth of Kentucky and for 
your kind introduction today.
    My name is Charles Vice, and I am the commissioner for the 
Kentucky Department of Financial Institutions. I am also the 
chairman of the Conference of State Bank Supervisors. And I 
appreciate the opportunity to testify today.
    I have been a financial regulator, first with the FDIC, and 
now with the Commonwealth of Kentucky, for more than 20 years. 
During that time, I have observed a troubling trend. Federal 
regulators and policymakers seem to be taking a blanket 
approach to supervision, applying statutes and regulations to 
all banks regardless of size, location, ownership structure, 
complexity, or lending activities. This concerns me.
    While today's hearing focuses on the ability-to-pay rule on 
the Qualified Mortgage, the broader issue for State supervisors 
is a one-size-fits-all approach to supervision and regulation. 
State regulators are dedicated to understanding the impact of 
the current regulatory environment on community banks. CSBS has 
established a Community Banking Task Force to explore these 
issues. Additionally, CSBS is partnering with the Federal 
Reserve System to host an upcoming community bank research 
conference.
    State regulators have found that regulation and supervision 
needs to be more tailored to how community banks lend. 
Policymakers should not hinder portfolio lending; instead, they 
should ensure community banks are able to positively impact 
local and national economic conditions.
    As a basic tenet of responsible underwriting, I believe 
lenders should determine a borrower's ability-to-repay a loan; 
however, community banks that hold loans in portfolio are 
motivated to ensure the borrower can make their mortgage 
payment. As such, lenders that retain the full risk of a 
borrower's default by community banks that retain mortgage 
loans in their portfolio should be presumed to have determined 
a borrower's ability-to-repay.
    The CFPB has shown initiative by recognizing the portfolio 
lending business model. The small creditor QM creates a 
framework that supports retention of mortgages in portfolio by 
community banks. This right-sizing of regulation appropriately 
accounts for differences in community bank business model. 
Congress and Federal regulators should use the small creditor 
QM as an example for developing laws and regulations.
    The treatment of balloon loans is one case where a one-
size-fits-all approach falls short. Under the Dodd-Frank Act, 
balloon loans would only qualify for QM status if they 
originated in a rural or underserved area. When used 
responsibly, balloon loans are a useful source of credit for 
borrowers in all areas. This provision effectively limits a 
bank's flexibility to tailor products to the credit needs of 
the community. As a regulator, the banks under my purview and 
the consumers they serve benefit from having more products at 
their disposal. The CFPB has extended the timeframe before the 
balloon loan restriction takes place, potentially offering 
Congress the opportunity to act on this issue.
    Congress should amend the statute to grant QM status to all 
mortgage loans held in portfolio by community banks. This is a 
portfolio lending issue, not a rule or underserved issue.
    As a more immediate solution, and absent a legislative 
change, CSBS recommends a petition process to address 
inconsistencies for rule designations. The CFPB has the 
challenging task of providing an appropriate definition of 
rule. Unfortunately, the CFPB's approach has some illogical 
results. This is inevitable when local communities are defined 
by a formula developed in Washington, D.C. Therefore, the CFPB 
should adopt a petition process for interested parties to seek 
rural status for counties, a step that is within the CFPB's 
current authorities.
    State regulators stand ready to work with Members of 
Congress and our Federal counterparts to develop and implement 
a supervisory framework that recognizes the importance of our 
unique dual banking system.
    Thank you for the opportunity to testify today on this 
important topic.
    [The prepared statement of Commissioner Vice can be found 
on page 109 of the appendix.]
    Chairwoman Capito. Thank you, Commissioner.
    Next, I would like to recognize my fellow West Virginian, 
Mr. James C. Gardill, who is chairman of the board of WesBanco, 
Incorporated. He is testifying on behalf of the American 
Bankers Association. He has a distinguished career as a banker 
and an attorney in the northern panhandle of West Virginia.
    He and I have the distinction of being from Glen Dale, West 
Virginia, which we share that distinction with being the 
birthplace of Brad Paisley and the home of Lady Gaga's 
grandparents.
    With that, I would like to thank Jim for coming today, and 
I look forward to his 5-minute presentation. Thank you.

STATEMENT OF JAMES GARDILL, CHAIRMAN OF THE BOARD, WESBANCO, ON 
        BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA)

    Mr. Gardill. Chairwoman Capito, Ranking Member Meeks, my 
name is James Gardill, and I am chairman of the board of 
WesBanco, a $6.1 billion bank holding company headquartered in 
Wheeling, West Virginia. We are active mortgage lenders with a 
$1.3 billion mortgage portfolio. I appreciate the opportunity 
to be here to represent the ABA regarding the new ability-to-
repay and Qualified Mortgage rules.
    The mortgage market generates a substantial portion of the 
GDP and touches the lives of nearly every American household. 
The new ability-to-repay and Qualified Mortgage rules represent 
a fundamental change in this market. As such, it is critical 
that these rules make sense and do not end up hurting 
creditworthy Americans who strive to own a home.
    Unfortunately, the ability-to-repay and QM rule, however 
well-intentioned, will restrict mortgage credit, making it more 
difficult to serve a diverse and creditworthy population.
    Under the ability-to-repay rule, underwriters must consider 
a borrower's ability-to-repay a mortgage loan. Qualified 
mortgages are designed to offer a safe harbor within which 
loans are assumed to meet the ability-to-repay requirement. 
However, the QM rules create a narrowly defined box that 
consumers must fit in to qualify for a QM-covered loan. Banks 
are not likely to venture outside the bounds of the QM safe 
harbors because of the heightened penalties and liabilities 
applicable under the ability-to-repay rule.
    Since banks will make few, if any, loans outside of QM 
standards, many American families who are creditworthy but do 
not fit inside the QM box will be denied access to credit. In 
the short run, this could undermine the housing recovery.
    More fundamentally, this also likely means that less 
affluent communities may not be given the support they need to 
thrive. These rules may leave many communities largely 
underserved in the mortgage space.
    In particular, I am concerned that our bank will be unable 
to continue several loan programs targeting low- and moderate-
income borrowers and neighborhoods. Our CRA Freedom Series 
forums and a charitable plan we administer designed to promote 
home ownership for families, our Laughlin plan, provides 
financial aid to families who would otherwise not be able to 
own a home, in the form of interest-free loans and insurance. 
These loans would likely not qualify for QM status, with some 
failing to meet the ability-to-repay requirements, meaning we 
would not be able to make them at all.
    Even if banks choose to make only loans that fit within QM, 
they still face a number of risks. Higher-interest-rate loans 
still carry both higher credit risk and liability risk under 
QM's rebuttable presumption. This means banks will be hesitant 
to offer them, instead serving only the best qualified 
borrowers. The end result of this will be less credit available 
to some individuals and communities, creating conflict with 
fair lending rules and the goals of the Community Reinvestment 
Act.
    The rulemaking has left banks little time to comply with 
the QM regulations, despite the wide-ranging market 
implications and the tremendous amount of work which banks must 
undertake to comply with these rules. Currently, these and five 
other mortgage rules are scheduled to go into effect in January 
of 2014. Between now and then, banks must fully review all of 
the final rules, implement new systems, processes and forms, 
train staff, adapt vendor systems, and test these changes for 
quality assurance before bringing them online.
    Some institutions may simply stop all mortgage lending for 
some time because the consequences are too great if the 
implementation is not done correctly. I recently learned of a 
vendor that will not have the majority of its updates out until 
November 22nd, leaving its customers 7 weeks to customize, 
update, and train staff.
    These rules must be revised so that they help the economy 
and at the same time ensure that the largest number of 
creditworthy borrowers have access to safe, quality loan 
products. In order to do this, we need to extend the existing 
deadlines, as well as address these outstanding issues.
    Thank you very much. I am happy to answer any questions 
that you may have.
    [The prepared statement of Mr. Gardill can be found on page 
63 of the appendix.]
    Chairwoman Capito. Our next witness is Mr. Jerry Reed, 
chief lending officer, Alaska USA Federal Credit Union, on 
behalf of the Credit Union National Association. Welcome.

  STATEMENT OF JERRY REED, CHIEF LENDING OFFICER, ALASKA USA 
 FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT UNION NATIONAL 
                       ASSOCIATION (CUNA)

    Mr. Reed. Chairwoman Capito, Ranking Member Meeks, thank 
you for the opportunity to testify at today's hearing. I am 
Jerry Reed, chief lending officer of Alaska USA Federal Credit 
Union, which is based in Anchorage, Alaska. I am here today 
representing the Credit Union National Association. We greatly 
appreciate the attention this subcommittee has given to the 
Qualified Mortgage regulation issued by the CFPB. We also 
appreciate the consideration the Bureau has given credit unions 
in the rulemaking process. However, we have significant 
concerns with how the rule may be implemented.
    My written testimony describes our concerns in detail, and 
I want to discuss a few of them with you today: first, I want 
to explain why all credit unions should be fully exempted from 
the QM rule; second, I want to discuss the impact the rule will 
have on the secondary market; third, I want to discuss how our 
regulators may view non-QM loans that credit unions may wish to 
add to their portfolios in the future; and fourth, I want to 
discuss our concern that QM may result in unintended disparate 
impact on the ability of otherwise creditworthy borrowers to 
achieve the American dream.
    Recent revisions provide QM status to loans originated by 
institutions of $2 billion or less in assets that originate 500 
or fewer first lien mortgages. We believe this is a good start, 
but unfortunately it only covers about a quarter of credit 
union lending. Since loan losses are so minimal across all 
sizes of credit unions, it is clear the cooperative structure 
and purpose of credit unions, not their size, leads to quality 
loan decisions for the borrower and their ability and 
willingness to repay.
    Since the onset of the financial crisis, annual losses on 
the credit union first mortgages have averaged only 0.29 
percent, compared to 1.13 percent at banks.
    The structure of credit unions merits the exemption, 
because we are operationally conservative and already have been 
applying ability-to-repay standards for years in the normal 
course of business to minimize loan losses. Moreover, the 
Bureau has clear statutory authority to go further in exempting 
credit unions and deeming all credit union mortgages as QM 
loans.
    Given the recent announcement by the FHFA that Fannie Mae 
and Freddie Mac will not be able to purchase certain non-QM 
loans, credit unions are concerned about the long-term effect 
this rule and its application will have on the secondary market 
and what that means for credit unions and their members.
    We ask the committee to ensure that credit unions have a 
functioning secondary market to sell loans, even if they do not 
meet the QM definition, if they otherwise meet secondary market 
standards. Being unable to sell non-QM loans to the secondary 
market will make the management of assets at a credit union 
difficult.
    Prudent interest rate risk management requires being able 
to sell long-term fixed rate loans into an efficiently 
functioning secondary market. It is paramount that Congress and 
the Bureau work closely with prudential regulators to ensure 
that this instrument of consumer protection does not become an 
instrument of prudential regulation.
    Likewise, we have significant concerns that examiners will 
severely restrict the ability of credit unions to keep non-QM 
loans in their portfolio after the rule goes into effect. As 
well, the possibility exists that examiners will determine that 
non-QM mortgages are a safety and soundness concern, resulting 
in a downgrade in credit unions and their associate camel 
ratings.
    As the economy recovers, the credit union model continues 
to serve credit union members well, but the QM rule has the 
potential to fundamentally alter that relationship. In fact, 
had this rule been in effect during the crisis, it is very 
likely that as the economy worsened, NCUA examiners would have 
increasingly frowned on non-QM loans, making it that much more 
difficult for credit unions to continue to lend when other 
providers did not.
    Director Cordray has indicated his support of non-QM loans 
made by credit unions. It is essential that Congress direct 
other regulators to follow the lead of the Bureau in this 
matter so that non-QM loans and the availability of loans to 
creditworthy borrowers should be encouraged and not viewed 
negatively by examiners.
    As I have pointed out, the QM rule forces individuals into 
a one-size-fits-all box. Equally, this could result in the 
unintended consequence of disparate impact in residential 
mortgage lending. It would restrict the ability to sell those 
mortgages to the secondary market and hold them in portfolio. 
This would ultimately exclude borrowers with perfectly good 
abilities to repay, but who do not meet the specifics of the QM 
rule. This would make it more difficult for credit unions to 
fulfill their purpose of providing credit to all who could 
benefit from it and are able to repay it.
    Thank you again for the opportunity to testify at today's 
very important hearing.
    [The prepared statement of Mr. Reed can be found on page 75 
of the appendix.]
    Chairwoman Capito. Thank you, Mr. Reed. And, boy, you have 
really brought them to their feet out there.
    Our next witness is Ms. Debra Still, no stranger to the 
committee. Welcome back.
    Ms. Still. Thank you.
    Chairwoman Capito. She is the chairwoman of the Mortgage 
Bankers Association.
    Welcome.

 STATEMENT OF DEBRA W. STILL, CMB, CHAIRMAN, MORTGAGE BANKERS 
                       ASSOCIATION (MBA)

    Ms. Still. Thank you very much, Chairwoman Capito and 
Ranking Member Meeks.
    Since I last testified before your committee, the CFPB has 
finalized the ability-to-repay rule, including the definition 
of a Qualified Mortgage. Lenders are now fully focused on 
understanding and implementing this new rule by its effective 
date of January of next year. Of all of the Dodd-Frank rules, 
QM will have the single-most significant impact on consumer 
access to credit and a vibrant competitive marketplace.
    The industry applauds the CFPB for getting a lot right, 
using a deliberative and inclusive approach. Most notably, the 
CFPB established a safe harbor for most QM loans and a 
temporary QM, both critical provisions for borrowers. But there 
is still serious concern that certain aspects of the rule will 
be prohibitive to otherwise qualified consumers.
    QM takes effect at a time when credit is already overly 
tight and underwriting standards are well above industry norms. 
In the current form, this rule could cause unintentional harm 
to the very consumers it was designed to protect and make 
lenders even more cautious than they are today.
    In the foreseeable future, MBA believes that lending will 
be substantially limited to loans that meet the definition of a 
Qualified Mortgage with a safe harbor provision. QM loans with 
a rebuttable presumption and non-QM loans will have little 
market liquidity and, if available at all, will be more costly 
for borrowers.
    The element with the greatest potential for unintended 
consequences is the 3 percent cap on points and fees. The 
points and fees test is a threshold requirement for all QM 
loans. The calculation is highly complex and is based on 
criteria unrelated to credit quality, and penalizes both 
affiliate and wholesale lenders.
    This inconsistent treatment impairs a consumer's ability to 
shop and their choice in settlement service providers. Any 
negative impact will be on smaller loan amounts and fall most 
heavily on low- to moderate-income and first-time home buyers.
    I want to thank Congressman Huizenga for introducing H.R. 
1077, the Consumer Mortgage Choice Act, and also the many 
members of this subcommittee who have given this legislation 
the broad bipartisan support it currently enjoys. The ability-
to-repay rule must be centered on consistent consumer 
protection regardless of business model. H.R. 1077 will fix the 
points and fees calculation, leveling the playing field. By 
passing the bill before January 2014, Congress will ensure a 
vibrant, competitive marketplace for consumers.
    For the same reason, we also suggest that an additional way 
to reduce QM's impact would be to raise the small loan limit to 
$200,000, and increase the points and fees limit to 4 percent, 
and up to 8 percent for very small balance loans.
    The QM rule is so vital it is imperative that it be aligned 
with other Federal regulations. Lenders are seeking clear 
guidance on reconciling QM with other compliance obligations. 
Specifically, HUD's disparate impact rule makes lenders liable 
under the Fair Housing Act for mortgage lending practices if 
they have a disproportionate effect on protected classes of 
individuals, even if the practice is neutral and 
nondiscriminatory. If a lender limits its listing to QM loans 
only, the lender may face exposure under the disparate impact 
rule. Lenders must have more certainty that their decisions 
with respect to QM will not place them in jeopardy.
    Of equal significance is the need for clear alignment 
between QM and the definition of a Qualified Residential 
Mortgage within the pending risk retention rule. MBA believes 
that it is essential that QRM equals QM, particularly as it 
relates to the elimination of prohibitive downpayment 
requirements in QRM. Any variation between these two rules will 
increase the cost of credit, discourage private capital, and 
add to the complexity of mortgage finance for industry 
participants and consumers alike.
    Chairwoman Capito, I want to thank you and your colleagues 
for your continued focus on this highly complex QM rule. We all 
share the same goal: to strike the right balance between 
consumer protection and access to credit. If not appropriately 
modified, this well-intentioned rule may fail consumers in the 
most fundamental way.
    Access to safe and affordable credit is vital to the future 
growth of home ownership in America. In the months ahead, we 
urge you to encourage the CFPB to exercise its authority to 
make change and we ask for your support for speedy passage of 
H.R. 1077.
    Thank you.
    [The prepared statement of Ms. Still can be found on page 
87 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Gary Thomas, president of the 
National Association of REALTORS. Welcome.

 STATEMENT OF GARY THOMAS, PRESIDENT, NATIONAL ASSOCIATION OF 
                        REALTORS (NAR)

    Mr. Thomas. Thank you. Madam Chairwoman, Ranking Member 
Meeks, and members of the subcommittee, on behalf of the 1 
million members of the National Association of REALTORS, whose 
members practice in all areas of residential and commercial 
real estate, thank you for the opportunity to participate in 
this hearing.
    I am Gary Thomas, president of the National Association of 
REALTORS, from Orange County, California, and I have more than 
35 years experience in the real estate business. I am the 
broker-owner of Evergreen Realty in Villa Park, California.
    The Dodd-Frank Wall Street Reform Act established the 
Qualified Mortgage, or QM, as a primary means for mortgage 
lenders to satisfy its ability-to-repay requirements. However, 
Dodd-Frank also provides that a QM may not have points and fees 
in excess of 3 percent of the loan amount.
    As currently defined by Dodd-Frank and the Consumer 
Financial Protection Bureau's final regulation to implement the 
ability-to-repay requirements, points and fees include fees 
paid to affiliated title companies, amounts of homeowners 
insurance held in escrow, loan level price adjustments, and 
payments by lenders in wholesale transactions. Because of this 
problematic definition, many loans made by affiliates, 
particularly those made to low- and moderate-income borrowers, 
would not qualify as QMs. Consequently, these loans would be 
unlikely to be made or would only be available at higher rates 
due to the heightened liability risk. Consumers would lose the 
ability to choose to take advantage of convenience in market 
efficiencies offered by one-stop shopping.
    To correct unfairness in the fees and points calculation, 
the National Association of REALTORS supports H.R. 1077, the 
Consumer Mortgage Choice Act. The bill has been introduced by 
Representatives Huizenga, Bachus, Royce, Stivers, Scott, Meeks, 
Clay, and Peters. Similar legislation has been introduced by 
Senators Manchin and Johanns in the Senate.
    The legislation solves a problematic definition of points 
and fees in several distinct ways. First, it removes affiliated 
title insurance charges from the calculation of fees and 
points. The title industry is regulated at the State level and 
is competitive. It does not make sense to discriminate against 
affiliates on the basis of these fees. To do so only reduces 
competition and choice in providers of title services, to the 
detriment of consumers.
    Furthermore, owners of affiliated businesses can earn no 
more than a proportionate return on their investment under the 
Real Estate Settlement Procedures Act (RESPA). RESPA also 
prohibits referral fees or any compensation at all for the 
referral of settlement services. As a result, there is no 
steering incentive possible for individual settlement service 
providers such as mortgage brokers, loan officers, or real 
estate professionals.
    Consumers repeatedly have said that they want the 
convenience of one-stop shopping since buying a home is 
complicated, and for most buyers, they will only do it a couple 
of times in their lifetime. This legislation will continue to 
allow ease and accessibility offered through one-stop shopping. 
NAR believes legislative language is necessary to ensure that 
efficient business models are not unfairly discriminated 
against in the calculation of fees and points.
    Second, the legislation removes the calculation of fees and 
points Fannie Mae and Freddie Mac loan level price adjustments. 
This money is not retained by the lender. These adjustments are 
essentially risk-based pricing established by the GSEs and can 
sometimes exceed 3 points in and of themselves. Including these 
loan level price adjustments would limit access to affordable 
mortgage credit to many borrowers or force borrowers into more 
costly FHA or non-QM loans unnecessarily.
    Finally, the bill removes from the calculation of fees and 
points escrows held for taxes and insurance. The tax portion is 
a clarification of imprecise language in Dodd-Frank. In the 
case of insurance, these escrows are held to pay homeowners 
insurance and can be a large amount. They are not retained and 
cannot be retained by the lender since RESPA requires excess 
escrows to be refunded.
    Once again, NAR supports a legislative fix because it is 
the most certain way to avoid future confusion and legal risk.
    In conclusion, NAR believes H.R. 1077 is essential to 
maintain competition and consumer choice in mortgage 
origination. Without this legislation, research shows that up 
to one-half of the loans currently being originated would 
likely not be eligible for the QM safe harbor and would likely 
not be made by affiliated lenders. Instead, if loans are made 
at all, they would be concentrated among the largest retail 
lenders, whose business models are protected from the points 
and fees definition discrimination.
    It is for these reasons that NAR urges Congress to pass 
H.R. 1077 well before the ability-to-repay provisions take 
effect in January 2014, since lenders are likely to begin 
adjusting their systems in the fall of 2013.
    Thank you for the opportunity to share our thoughts. We 
look forward to working with Congress and the Administration on 
efforts to address the challenges still facing the Nation's 
housing markets.
    [The prepared statement of Mr. Thomas can be found on page 
104 of the appendix.]
    Chairwoman Capito. Thank you.
    Our final witness is Mr. Michael D. Calhoun, president of 
the Center for Responsible Lending.
    Welcome.

    STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR 
                   RESPONSIBLE LENDING (CRL)

    Mr. Calhoun. Thank you, Chairwoman Capito, Ranking Member 
Meeks, and members of the subcommittee for this opportunity to 
testify today.
    It is important to remember that unsustainable mortgages 
were at the heart of the financial crisis. Large fees were paid 
for originating unnecessarily risky mortgages. For example, a 
no-doc loan or an exploding ARM loan would pay twice as much in 
fees as a 30-year fixed-rate loan to the exact same borrower, 
and thus it is no surprise that those exotic products came to 
dominate the market. The response of the ability-to-repay 
provisions requires that lenders make loans based on the 
borrower's capacity to repay, and we are all better off for 
that.
    In my testimony, I am going to emphasize three points. 
First, excluding broker fees made by creditors from the points 
and fees tests would reinstate these incentives for risky 
lending. Second, lenders should not be rewarded with a 
competitive advantage by encouraging and steering borrowers to 
use their own service providers. And finally, existing 
exceptions to the QM points and fee tests already provide ample 
space for broad lending.
    On the first issue, one of Dodd-Frank's central mortgage 
reforms was including payments made by creditors to brokers in 
the points and fees. This followed the practice that had been 
tried successfully in a number of States around the country for 
many years. It is based on common sense and reflects the 
experience of the financial crisis.
    First, broker payments are generally included, and should 
be included in points and fees. The broker is supposed to be 
providing origination services that reduce the lender's costs 
that they would otherwise charge for. Brokers can be paid 
directly by the borrower. Everyone agrees those fees can be 
included. As an alternative, brokers can be paid by the 
creditor, and those are intended to be a direct substitute for 
the borrower fee and should likewise be included.
    Most important, these are essential to prevent steering. A 
broker could provide only high-priced loans with very high 
broker fees, and those would not violate the other anti-
steering provisions of Dodd-Frank. They would, though, provide 
a powerful incentive to steer borrowers to those loans. That 
steering is bad for all home buyers, and is particularly bad 
for families of color. The National Council of La Raza, NAACP, 
the Leadership Conference on Civil Rights, and other civil 
rights groups oppose H.R. 1077, which would bring back this 
tool of discrimination.
    On the second issue, affiliated services have been counted 
in points and fees under Federal law for nearly 2 decades, and 
it is especially important for title insurance. Title insurance 
is negotiated between the title insurer and a third-party 
agent, even though it is the consumer paying the fee. Not 
surprisingly, out of every dollar of title insurance, which can 
be $1,000 to $2,000 on a mid-sized loan, only 10 cents goes to 
actually paying claims; 75 cents of that dollar gets paid out 
as commissions. When affiliated title services are used, the 
lender captures part of the title charge, increasing its 
revenue on the loan. This should not be a competitive advantage 
and windfall for that lender, but rather should be reflected in 
lower fees elsewhere in the loan.
    Third, the points and fees test, and this is very 
important, has many provisions that already permit loans fees 
meet its test. First, third-party fees are not included. Legal 
fees, filing fees, insurance fees, and other items are 
explicitly excluded. Second, on top of the fee amounts, an 
additional 2 discount points can be charged and not counted in 
the points and fees test. Third, for smaller loans, they have 
higher fee thresholds, for example 5 points for a $60,000 loan 
and even 8 points for very small loans. Finally, lenders can 
recoup their costs by including them in the interest rate 
instead of charging upfront fees. This is what lenders have 
historically done.
    Fannie and Freddie report today, as of last week, that 
average lender fees are less than 1 point--1 point--and this 
aligns the interest of the borrower and the lender with both 
profiting from performance of the loan rather than from large 
feels at closing.
    In summary, H.R. 1077 as it is currently drafted would 
produce steering, higher fees for borrowers, and more 
concentration in the mortgage market as larger lenders are most 
able to take advantage of its provisions.
    Thank you again for the opportunity to testify, and I look 
forward to your questions.
    [The prepared statement of Mr. Calhoun can be found on page 
44 of the appendix.]
    Chairwoman Capito. Thank you.
    That concludes the testimony of our panel, and I will begin 
with questioning for 5 minutes. I want to thank you all before 
I begin that.
    Mr. Gardill, we have talked about the Laughlin program, 
which is the charitable program. Do you know approximately how 
many families have been assisted by that program in the life--I 
believe it began in 1951?
    Mr. Gardill. Several hundred, Chairwoman Capito. We 
currently have 100, roughly 100 active borrowers, but several 
hundred over the last several decades.
    Chairwoman Capito. Right.
    Mr. Gardill. Probably over 1,000 at this point.
    Chairwoman Capito. Right. You don't believe that you can 
continue this charitable program that really is the only way 
for these families to get into a home under your guidance. It 
has been very successful, I understand. You obviously have some 
underwriting standards that you put into effect that don't fit 
into the QM box. Is that the gist?
    Mr. Gardill. That is correct. We look at the individual 
credit, so we have flexibility in designing that opportunity 
for that customer. It applies to heads of households and single 
parents with two or more children. We don't fit in the box that 
they have designed.
    Chairwoman Capito. So you would discontinue writing those 
loans, then?
    Mr. Gardill. We would have to severely reduce it, maybe 
even have to discontinue it entirely.
    Chairwoman Capito. Okay. There has been a study looking at 
the mortgages of 2010 that only 52 percent of those mortgages 
that were made in 2010 would actually fit into the definition 
for the safest loans under the QM rule.
    As a banker in West Virginia, what happens to the other 48 
percent of those mortgages, in your opinion, once this rule 
goes into effect.
    Mr. Gardill. They probably won't be made.
    Chairwoman Capito. Will they be made at all by any other 
sort of institutions or any online lenders or--
    Mr. Gardill. I think the market is going to have to settle 
in. The problem is that period is going to create a severe 
restriction in lending. And it is going to hurt the most 
vulnerable the worst, and that will be the low to moderate 
income in the rural areas. We are in both large metropolitan 
areas and in rural areas and we see that impacting.
    Last year, about 38 percent of our loans were sold in the 
secondary market. So we originated the rest of those in 
portfolio. As a community-based lender, we lend to our 
communities and support our communities. We can't fit everybody 
within the box that has been created.
    Chairwoman Capito. Great. Thank you.
    Commissioner Vice, you mentioned in your testimony--or it 
was mentioned actually by several folks--that if somebody does 
write a non-QM loan, what effect as a regulator will that have 
on your evaluation of that institution's safety and soundness? 
I think you mentioned a little bit in your statement. How are 
you going to be able to evaluate those loans, if in fact they 
are actually written, which is dubious at this point?
    Mr. Vice. That is one thing the regulatory entities would 
have to determine, how to treat these going forward. First, 
there would probably have to be some kind of identification 
piece to it, some kind of monitoring piece to it.
    The one thing I would hope is that it would not be an 
automatic detraction for an examiner going in and looking at a 
portfolio. Again, it should be on an individualized lending 
basis and the loan should be looked at and graded on its credit 
quality. And I would hope that all the Federal regulators and 
my fellow State regulators would not see a non-QM loan to be a 
negative or to hold that against the bank. Again, it needs to 
be looked at on an individual basis, and the credit quality of 
that individual loan has to be assessed.
    Chairwoman Capito. Do you think there should be an 
exception from the ability-to-repay standards for loans that 
are held on portfolio?
    Mr. Vice. Yes, yes. If a small community bank does 
originate a loan and hold it in their portfolio, we believe 
that that should receive QM status in and of itself, simply 
because it is being held in portfolio.
    Chairwoman Capito. All right.
    Mr. Reed, your State is very rural and much like our State, 
but you are probably a billion times bigger in land mass, and 
you rely on relationships to be able to help your constituents. 
With the new definitions of ``rural,'' and some of the one-
size-fits-all definitions and ability-to-repay, what impact is 
that going to have on a State such as yours?
    Mr. Reed. Yes, the majority of our State is rural. You can 
fit three sizes of the State of Texas and the State of Alaska. 
So that kind of gives you an idea. A lot of that population is 
dispersed throughout that State in what we call the bush. And 
it is absolutely going to impact us.
    I have to agree with Mr. Vice, that is one of the reasons 
that we are seeking an exemption. It is going to impact us 
significantly and our membership.
    Chairwoman Capito. Thank you.
    Mr. Meeks?
    Mr. Meeks. Thank you, Madam Chairwoman.
    Let me go to Mr. Calhoun first. Clearly, no-doc loans, when 
you do no-doc loans you are saying that you are not looking at 
a person's ability to pay, whether they are creditworthy, et 
cetera, and just passing it on. And it seems to me that one of 
the biggest issues that we were confronted with in this crisis 
is that there was no risk retention by many of the banks; they 
would just no-doc, bundle them, sell them, get rid of them. 
Some would steer people, but steer people basically, as Mr. 
Ellison indicated, some by race, et cetera, not treating people 
equitably who would go to a subprime loan and who would get a 
prime loan, et cetera. So no one agrees with steering, et 
cetera.
    But are we talking about creating a situation where 
individuals who have less than perfect credit--and that is what 
I am concerned about--individuals now who have less than 
perfect credit, should they not have the opportunity to own a 
home? And what opportunity will be, what doors will be closed 
to them? Because I can tell you that, at least in the community 
that I was raised in, there were a lot of individuals, if you 
document their employment and you document their income, that 
they paid their mortgage, but they did pay some other bills 
late, so they didn't have perfect credit.
    And so, I am concerned about those individuals getting 
locked out of this market and trying to figure out how they can 
be included so that they can enjoy what has been--because I 
still believe home ownership is the American dream, it is still 
the largest investment that most Americans will make in their 
lifetime, and it improves family and quality of life.
    Let me just ask this. For example--and one of the reasons I 
look at H.R. 1077, is it does call for loan-level price 
adjustments, so that individuals can qualify for a QM if they 
put up some upfront fees so that they will qualify, then they 
can go on. Now, they understand they made a mistake with some 
of their credit levels, so therefore they have to put these 
upfront fees. Had they not, then they wouldn't have had to. So 
tell me how can we make sure that those individuals are 
included so they can still have the opportunity to purchase and 
own a home?
    Mr. Calhoun. The Center for Responsible Lending strongly 
supports broad lending activities. Our parent organization, 
that has been its mission for the last 35 years, is how do you 
expand the boundaries of home ownership opportunities.
    I think a really important distinction, and I think there 
has been confusion on this today, is the QM rule--and there has 
been reference to the CoreLogic report, which included a 
provision that any loan eligible for insurance or purchase by 
any of the government agencies--FHA, VA, Rural Housing, the 
GSEs--is a QM loan. And as the CoreLogic report notes, when 
that is done, 95 percent of those loans qualify with no 
restructuring at all.
    So first, I want to clear up--and we have supported making 
that provision permanent. They have made it, I think, for the 
next 7 years. We think the CFPB should make that permanent. But 
at least for that time period, the box is much bigger than has 
been talked about here. So, for example, for FHA, GSEs, that is 
credit scores in the 500s, that is DTI, debt to income, up to 
50 percent, that is 50 percent of gross income before your 
taxes are paid, not a lot of left money there. Most people are 
criticizing FHA as being too loose with lending, not too tight.
    So we support a broad box, but I think when you look hard 
at the particulars of this rule, it created a broad box.
    Mr. Meeks. Let me just ask Ms. Still to respond to that.
    Ms. Still. Yes, I think certainly the temporary QM that the 
CFPB provided for will be helpful in the short run. But you 
can't just look at the credit quality. You have to look at the 
fees and points test, which will have a disparate impact on 
smaller loan amounts, which will hurt middle-class home buyers, 
first-time home buyers, and protected classes. So I think that 
is something that H.R. 1077 would address and fix.
    You also have to look at the notion of an APOR comparison 
and what that will do to certain consumers, and it will also 
disproportionately impact the first-time home buyer. And so 
with those two tests, you are going to not be able to take 
otherwise qualified borrowers and make a loan for them. You 
will either end up with a non-QM loan, in which there will be 
little liquidity for that product, or you will make a 
rebuttable presumption loan, which if there is a secondary 
market for that, it will be much smaller and it will be more 
costly.
    Chairwoman Capito. The gentlemen's time has expired.
    Mr. Duffy?
    Mr. Duffy. Thank you, Madam Chairwoman.
    I think we find ourselves in another unique situation where 
bureaucrats in Washington know far better how to run our 
community banks and our credit unions than our community banks 
and our credit unions do. And it concerns a lot of us up here, 
especially those of us, again, from small communities who have 
lower-income and more moderate-income individuals. And when I 
look at the ability-to-repay rule, and the QM standard, if you 
are wealthy and have great credit this works fantastic for you. 
But if you are from a lot of our districts, this is tough.
    As Mr. Meeks said, the American dream oftentimes is buying 
your own house. Home ownership is associated with the American 
dream, and so many more Americans aren't going to be able to 
access that dream because of these rules.
    Mr. Gardill, you indicated that through your analysis, 50 
percent of the loans that were written would not meet the QM 
standard. Is that correct?
    Mr. Gardill. It might be a little bit higher than that, 
Congressman Duffy.
    Mr. Duffy. So in regard to the 50 percent that don't meet 
the QM standard in your analysis, those folks who don't fall 
under QM, are they still creditworthy?
    Mr. Gardill. They are. We make loans to them every day. One 
of our problems, which I think Congressman Meeks spoke to, is 
that those with less than perfect credit, we have designed 
programs to meet their needs in our communities. This applies 
to banks regardless of size. And our hands are being tied, we 
are going to be restricted in what we can do. Our freedom 
series is designed for just that purpose. We would loan up to 
97 percent loan to value, but we structured the loans to meet 
their opportunities. We are not going to be able to do that 
under these rules.
    Mr. Duffy. And how well did those loans perform, Mr. 
Gardill?
    And, Ms. Still, if you want to answer that as well?
    Mr. Gardill. The flexibility that we have to design those, 
they have worked very well. We actually received the FDIC 
Chairman's Award in 2011 for that program.
    Mr. Duffy. Ms. Still?
    Ms. Still. I would like to make one observation. Whether my 
colleagues point out the problems with rural communities or 
community banks or credit unions or portfolio lenders, the MBA 
represents all business models, all constituents of real estate 
finance, and our concern is that this rule--we have to get this 
rule right and it has to be centered on consumers. And any 
consumer with the same interest rate, points, and fees should 
be treated equally.
    So while the problems that we are talking about and the 
request for exemption are relevant because the rules are not 
right yet, we need to get the rule right for every business 
model--and so that is just one thing I wanted to point out--
rather than a very complex rule where a borrower can't shop 
anymore because they don't know which business model will treat 
them more favorably under access.
    To answer your question, though, one of our concerns is now 
that the FHFA has chosen not to allow Fannie and Fannie to buy 
a non-QM loan, a loan that we would sell today based on 
acceptable credit quality to the GSEs, if it did not meet 3 
point rule would now not be eligible to be sold. And so, we 
have mitigated the secondary market for otherwise qualified 
borrowers and that is a concern.
    Mr. Duffy. Banks and credit unions are pretty good at 
pricing risk. And is it fair to say there is a new risk with 
the ability-to-pay rule in that you have new liability, and 
with that new liability is new risk, and isn't it fair to say 
that we are going to have increased prices to accommodate that 
risk?
    Ms. Still. There will be a base price for a QM with a safe 
harbor, then we will have a price for a QM with a rebuttable 
presumption. We may have a price for a QM with using Appendix 
Q, and then we will definitely have an escalated price for a 
non-QM. So, we now have four classifications of risk-based 
pricing.
    Mr. Duffy. Mr. Calhoun, you had talked about a lot of these 
outrageous products that were offered. And I agree with you, 
they were outrageous, people weren't treated fairly, and it was 
part of the cause of the crisis. We are on the same page. But 
weren't a lot of those no-doc loans, weren't they all floated? 
Those loans weren't actually kept on the books of the 
originators, were they?
    Mr. Calhoun. It was a combination. And let me be clear, I 
think people do share similar goals here in getting this rule, 
it is important and hard. But many of those loans we are 
working right now with a loan program done by a community bank 
in New York that did thousands of loans and they are having 
about a 50 percent default rate. They kept them on portfolio, 
but they are lending to people who have substantial home 
equity. And so they come out okay, they collect a high interest 
rate as long as the loan performs.
    And so we have to be very careful. What we saw in the 
crisis is--and to follow up on Deb's point there--what we saw 
in the crisis is, if you carve out--when you carve out 
exceptions--and we have strongly supported the provisions for 
the community banks in our filings with the CFPB and we work 
closely, particularly with the ICBA--but if you carve out 
blankets, the bad actors go to those places and try and use 
them.
    And it has to be a balance. We won't create a perfect rule 
that stops all predatory lending. That can't be the goal 
because it will cut down too much credit. But we need to 
realize the bad guys know how to exploit those exception 
provisions, and they have done it and are doing it today.
    Mr. Duffy. But if the bad actors retain that risk; I think 
you have a whole different scenario.
    Chairwoman Capito. The gentlemen's time has expired.
    Mr. Duffy. I yield back.
    Chairwoman Capito. Ms. Waters for 5 minutes.
    Ms. Waters. Thank you very much, Madam Chairwoman.
    Mr. Calhoun, the Consumer Financial Protection Bureau has 
been working very, very hard to make sure that they produce the 
regs, the rules to implement Dodd-Frank. On May 29th, the CFPB 
announced several amendments to the original ATR rule.
    The first amendment clarified that compensation paid from a 
mortgage originator that is a bank or brokerage firm to one of 
its employees would not be counted toward the 3 percent points 
fees cap.
    The second amendment exempted State housing finance 
agencies, nonprofits, and other community development groups 
from the QM rule if they make fewer than 200 loans per year and 
those loans are to moderate- or low-income consumers.
    The third amendment makes it easier for community banks and 
credit unions with less than $2 billion in assets to make QM 
loans. If they make fewer than 500 first lien loans per year, 
and hold those loans in portfolio, they are not required to 
comply with the 43 percent debt-to-income ratio under the rule. 
These same lenders have also been granted a 2-year reprieve on 
the ban of balloon loans while the CFPB studies the issue 
further. And I guess that would refer to the rules.
    Would you say that these amendments are an example of how 
hard the CFPB is working to make sure that we make good sense 
out of all of this? Do you think this is reasonable?
    Mr. Calhoun. Yes, we supported those. And I think what is 
important is those are a continuation of what they have done 
throughout this rulemaking process. Industry asked for a broad 
QM and some folks opposed that. The CFPB gave a broad QM 
definition. Industry asked for bright line rules. And I think 
this is important when you talk about what is going on with 
access to credit. If you look at surveys, even of the members 
here, the number one thing holding back credit, home credit, is 
buy-back claims, not borrower claims on ability-to-repay. Buy-
backs are when investors, whether they be the GSEs or private 
investors, force lenders to buy back the loans.
    And this is the real key. Under the law, they are entitled 
to force those buy-backs if there is any variation in the 
loans. They don't have to show that is the reason the loan went 
into default. There have literally been tens of billions of 
dollars of buy-back claims paid, not just brought. And that is 
really what is pushing. I know the FHA has announced that they 
are going to start rulemaking to reduce the buy-backs and to 
clarify that. The GSEs have done some work, but really need do 
a lot more, because that is the real steam right now that is 
pushing in credit so much. The QM rule isn't even in effect yet 
and hasn't been over the last year and a half.
    Ms. Waters. Thank you. One moment, Mr. Calhoun. I want to 
get to Mr. Gardill.
    Mr. Gardill, do you agree with these amendments that have 
been made by the Consumer Financial Protection Bureau?
    Mr. Gardill. I don't think the amendments cure the problem 
that we have.
    Ms. Waters. Would you like to go back to the way we were 
prior to the subprime meltdown and just leave you guys alone 
and not have a Qualified Mortgage rule at all? Is that what you 
want?
    Mr. Gardill. I am not asking for that.
    Ms. Waters. What were you asking for?
    Mr. Gardill. I think what we are asking for is that we be 
given the opportunity to provide flexible lending products to 
meet the needs of our customers as a community bank, and these 
rules don't give us that flexibility.
    Ms. Waters. You had that flexibility before the subprime 
meltdown and you almost brought this country to its knees--
    Mr. Gardill. No, I don't--
    Ms. Waters. --with a depression almost.
    The question becomes, with the Consumer Financial 
Protection Bureau working very hard, coming up with amendments, 
trying to make sure that they address your concerns, the 
question really is specifically what more do you want?
    Mr. Gardill. I think we need to look at the forest. To 
equate it to a forest, if we have a couple of bad trees, we 
don't want to burn the forest down to correct that.
    Ms. Waters. I don't want to talk about the forest and the 
trees, I want specificity.
    Mr. Gardill. And that is what we are trying to do. We are 
trying to provide some input here today in good faith to assist 
in the process. And I think the fact that we are having this 
meeting and this hearing indicates that there is so much 
uncertainty that we are going to affect, adversely affect the 
housing recovery, that we need to step back and give ourselves 
more time to evaluate the impact of the rule and work with the 
CFPB to come up with better rules that retain the flexibility--
    Ms. Waters. Let me submit to you, Mr. Gardill, that the 
Bureau is working very, very hard. And it appears that there 
are too many who are willing to go around the regulators and 
come here and try and convince Members of Congress that somehow 
our attempt to address those concerns that this country all 
faced with the subprime meltdown, somehow you want to not deal 
with that, you simply want no rules, no rules to deal with the 
problem. And you still have not been specific about what it 
is--
    Chairwoman Capito. The gentlewoman's time--
    Ms. Waters. --given these amendments, that you want to do. 
I yield back.
    Chairwoman Capito. Mr. McHenry?
    Mr. McHenry. I thank the chairwoman.
    Mr. Calhoun, in your previous question they asked about, 
you said you wanted a permanent Federal exemption for the GSEs 
under QM. Is that right.
    Mr. Calhoun. We believe that we--
    Mr. McHenry. Yes?
    Mr. Calhoun. We have supported lending above 43 percent--
    Mr. McHenry. No, no, no, but you said you wanted a 
permanent extension for GSEs. So then, a separate question just 
to get this on the record, do you support the permanent 
existence of Fannie and Freddie?
    Mr. Calhoun. When we say for GSEs, I mean for them or 
their, the various bills that are out that have some sort of--
    Mr. McHenry. Oh, okay, I just wanted to make sure we had 
that on the record just to understand, because some of us have 
concerns about keeping Fannie and Freddie around as they 
currently exist.
    Mr. Calhoun. Many of us do.
    Mr. McHenry. Thank you for answering that.
    But, Mr. Gardill, in your written testimony, to follow on 
to Chairwoman Capito's question, you mentioned that financial 
institutions are being encouraged to go into the non-QM space, 
right? And there are some concerns about liability. You 
reference that it would run counter, if you are held to the QM 
box as an institution, that would limit your ability to meet 
the Community Reinvestment Act obligations on institutions. Is 
that correct?
    Mr. Gardill. That is correct, Congressman.
    Mr. McHenry. So out of that there is some fear that 
examiners would have some problems with that and some 
difficulty reconciling the two. Can you explain?
    Mr. Gardill. As I mentioned, some of our CRA-related 
programs will not qualify under the QM rule. We add liability 
under the ability-to-repay rule, now we have a serious issue 
whether we can do those loans.
    I am also concerned about the regulatory impact of that, 
how are the regulators going to look at non-QM loans when you 
have liability? Do you have to establish reserves for those 
liabilities? So it creates a whole world of uncertainty.
    What we retain those portfolio loans, which we do on our 
CRA loans that we have in our communities, and we have targeted 
programs for low- to moderate-income borrowers, but also low- 
to moderate-income neighborhoods where we are trying to 
maintain housing quality, and that goes to income borrowers of 
all sizes. We are going to have an issue whether we can make 
those loans at all. Then we will have an issue as to whether or 
not we can meet the Community Reinvestment Act requirements. If 
we can't do the CRA loans, how will we meet those requirements? 
So it is a Catch-22 from a regulatory perspective for banks in 
compliance.
    And our purpose is to support our communities, that is what 
community banks do. Many banks provide community support. This 
straitjacket that we are being put in will limit our ability to 
design the programs necessary to meet the needs of our 
customers.
    Mr. McHenry. So the Federal Reserve, in their ability-to-
repay rule, didn't consider debt-to-income ratios as a very 
important predictor of the success of a consumer's ability-to-
repay, right?
    Mr. Gardill. That is correct. And it very clearly is not 
set out--
    Mr. McHenry. So what is the strongest metric for success in 
ensuring that a borrower can repay their mortgage?
    Mr. Gardill. It takes not only the ability-to-repay, but 
adequate collateral to support the loan; it is a two-sided 
equation. So there has to be value and there has to be the 
ability-to-repay, but we can't create a straitjacket in how to 
measure that ability-to-repay by arbitrary rules that narrow 
what you can consider. Banks do a balanced approach in 
measuring credit, and that is what we want to retain. The rules 
don't do that for us.
    Mr. McHenry. So, Mr. Reed, to that point, you mentioned in 
your testimony that you have credit unions that will lend with 
debt-to-income ratios of 45, 50, percent and their loan losses 
or mortgage losses remain very low. Why is that?
    Mr. Reed. Credit unions are very unique, as I mentioned 
earlier, in our structure and our purpose. But I would like to 
address that in a broader perspective.
    Mr. McHenry. I have 20 seconds for you.
    Mr. Reed. Yes, okay. So let me just say, I have 
underwritten loans, mortgage loans for 25 years. Let me tell 
you something fundamentally. The difference here is, we are 
focusing when we say, hey, we don't like this, because you are 
focusing on product features--no-doc loans, loans that weren't 
violating previous regulations that were already set by 
agencies which were underwriting guidelines.
    As already mentioned today, the FHA has a lot of leniency 
to address a lot of disparate impact issues and has been doing 
that very successfully for years. The people who were 
defaulting were the people being put into products that should 
have never been put into those products. That is the 
fundamental fee here.
    I think the CFPB has done an excellent job in eliminating 
those products that are not correct. But I don't think the CFPB 
is doing any of us or the country any good by restricting the 
underwriting criteria that put people who are creditworthy, for 
example, who want two or three jobs and can do it.
    Chairwoman Capito. I am going to have to stop you here. The 
gentleman's time has expired.
    Mrs. Maloney?
    Mrs. Maloney. I agree wholeheartedly with the point that 
many of you are making that we shouldn't have one-size-fits-all 
and every borrower should not fit into one box. But I can 
recall during the hearings the commonsense belief by many of us 
is that you shouldn't put someone into a loan they can't 
afford. It is going to hurt the banks, it is going to hurt the 
economy, and it is certainly going to hurt the homeowner. And I 
feel that is what the CFPB tried to do, is to really come up 
with some standard where people don't buy something they can't 
afford. And it would include all of the income that you 
mentioned. You can be working three or four jobs; many of my 
constituents work two jobs.
    But I do think that they tried to be flexible; they came up 
with three exceptions. The exception for compensation for 
mortgage originator is not included in the 3 percent points and 
fee cap, it exempted nonprofits from the QM rule if they have 
fewer than 200 loans, and lenders with less than $2 billion in 
assets may make the QM loans that do not meet the 43 percent 
debt-to-income ratio.
    And so, those are several of the exceptions that they have 
made. They may have made more. What other specific exception do 
you think should be made, Mr. Thomas and Ms. Still?
    Mr. Thomas. I am going to yield to Ms. Still because she is 
better prepared.
    Mrs. Maloney. Okay. Ms. Still?
    Ms. Still. Thank you. Yes, so in terms of underwriting, I 
think the CFPB has done a fine job providing for the temporary 
QM. I think, though, when you look at the 3 point rule and you 
look at some of the inclusions still in the 3 point rule that 
have nothing to do with the consumer's ability-to-repay, that 
is where it becomes prohibited, particularly to the smaller 
loan amounts. So affiliate fees should not be included in the 3 
point rule, nor should compensation paid to brokers.
    Again, for any consumer who is getting the same rate, 
points and fees, the business channel should not matter. And 
so, the exemption should be on behalf of the consumer and a 
level playing field for all lenders serving finance in the 
United States.
    Mrs. Maloney. In the terms of that, just taking for one 
example the title insurance that you mentioned, and I believe 
Mr. Thomas mentioned, and Mr. Calhoun, and if I recall, you 
said it was regulated by the States and very competitive, and I 
believe you testified that the title insurance would be more 
expensive under the CFPB rule. And I would like to ask Mr. 
Thomas and Ms. Still why it would be more expensive, because I 
don't quite understand why?
    And also, Mr. Calhoun, you talked about the affiliated 
title insurance and taking the position that it should be 
included in the points and fees, if I recall. So if all three 
of you could answer that on the title insurance, which is one 
example you all mentioned. Thank you.
    Ms. Still. As you did mention, title insurance is either 
regulated or promulgated by the State, therefore it is a very 
competitive environment in any given State. By eliminating or 
combining the affiliate fees, you eliminate the potential for 
competition, which is why the remainder of the market might get 
actually more expensive. There have been studies in the past, I 
believe there was one in Kansas about 6, 7 years ago that 
Kansas had tried to implement an affiliate fee, and the 
remaining competition actually raised prices.
    Mrs. Maloney. Okay. Mr. Calhoun, could you respond?
    Mr. Calhoun. This committee, just a few years ago, raised 
the issue of the problems in the title insurance industry and 
asked for a report that was put out in 2007 by the GAO finding 
it is a deeply troubled industry. As I indicated, whenever you 
have a situation where two parties are cutting the deal and the 
third party is paying the price, that third party, in this case 
the consumer, often comes out on the short end of things. And 
as I said, it works out well for the parties at the table. 
There is a big commission. Seventy-five cents out of every 
dollar is what the GAO found out goes to pay this commission, 
while only 10 cents goes to claims. In most insurance, that is 
80 to 90 percent. So this is just taking a broken system that 
needs reform and making it worse.
    Mr. Thomas. If I could, the problem is this is a State-
regulated institution, that being the title insurance, and it 
is very well-regulated, I can tell you, in California. At one 
time, there was a lot of money that was paid back to people as 
kickbacks and so on. Today, I can't even get a pen from a title 
company. It is so well-regulated that they have clamped down on 
everything. And if you open it up--or if you clamp down even 
more and say, okay, only the large title companies can do 
anything and you cannot have affiliated title companies, you 
are only going to open it up so that they can do whatever they 
want to do.
    Ms. Still. And I would argue that--
    Chairwoman Capito. Excuse me, the gentlelady's time has 
expired.
    We will go to Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    One of the things that is kind of concerning to me is the 
very nature of a QM, because it seems like it is perverting the 
very thing you are trying to do, from a standpoint that we are 
trying to provide a save harbor here for lenders who if they go 
with a certain criteria are limited from the amount of 
liability they could incur if they are doing things right.
    You would infer then that if those loans don't qualify for 
QM, suddenly now they would have more liability exposure, and 
if you have 50 percent of your loans that don't qualify for QM, 
now you have 50 percent of the loans on your books with 
problems.
    Mr. Vice, you are a supervisor, how do you look at that?
    Mr. Vice. That is a concern to us. We don't know exactly 
how that is going to be treated on examinations going forward. 
And that is one thing that the industry is kind of watching 
with bated breath to see. Once my first examination happens, if 
I have a non-QM on the books, how will regulators treat that?
    Again, as I stated before, it is my hope that we don't 
treat that adversely, that we look at that and look at it on an 
individual credit basis. And again, our whole hope and our 
whole desire here is to make sure that we have a diverse 
marketplace where several lenders have the opportunity to meet 
the legitimate credit needs of the individuals who are there 
and we have to have that flexibility. And that is why we are 
seeking and applaud this small creditor qualification to QM.
    Mr. Luetkemeyer. I think that we are looking also for an 
exemption for community banks and folks like that who work with 
small numbers of loans.
    Mr. Gardill, it would seem to me that if something doesn't 
qualify, it would really restrict the low- and moderate-income 
folks from the standpoint that they are the ones who are going 
to have probably the lowest credit ratings and have the most 
difficulty trying to prove that they can get into the QM box. 
It would logically seem to me that we are really restricting 
low- and moderate-income folks by doing this. What is your 
opinion on this?
    Mr. Gardill. Yes, I agree 100 percent. By extending 
liability to those under the ability-to-repay rule, it is going 
to greatly restrict our opportunity to do them at all. If the 
safe harbor applied to the ability-to-repay rule, it would be 
an improvement in the structure, because then you could safely 
make those loans. But the QM rule has a very narrow save 
harbor; it is not available under the ability-to-repay. And we 
are permitting borrowers to assert, back to your point about 
the QM, even challenge the QM qualification as to whether or 
not proper verification of debt to income was created. So, we 
create potential liability claim even under the QM rule.
    Mr. Luetkemeyer. It would seem to me that we are actually 
causing more risk here from the standpoint that the loans that 
are most risky, that have the poorer scores or have less 
ability to make--their income are less flexible, they are more 
on the edge, those are the ones that can't qualify for QM, yet 
those are the ones that, if you make the loan, you are going to 
have to hold them in your portfolio. It would seem to me to be 
a real problem.
    Mr. Gardill. And that is our principal concern, is serving 
our customers, and I am not sure these rules permit us to do 
that. That is really the issue, and that is why I think it 
deserves some time and study for us to evaluate this more 
carefully before we affect those most vulnerable in the 
communities that we serve.
    Mr. Luetkemeyer. I have about a minute and a half left. I 
live in a very rural area. I know that the chairwoman made a 
comment a while ago about the rural designation here. One of 
you made the comment a while ago, I think it was Mr. Vice, with 
regards to petitioning, have a petition process available so 
that we could get this rural designation fixed. I think each 
one of you in your testimony, most of you anyway, as I have 
gone through the testimony, seem to have pointed out inequities 
in the rural designation. Can you describe your petition 
process suggestion a little bit further, Mr. Vice?
    Mr. Vice. I think one of the concerns from my perspective 
that occurred so far with this rural designation is that it is 
applying a formula developed in Washington. As the commissioner 
for the Department of Financial--
    Mr. Luetkemeyer. That never works anywhere on anything, 
does it?
    Mr. Vice. --at the Department of Financial Institutions in 
Kentucky, I have not been asked what is a rural county in 
Kentucky. Same thing with the commissioner in West Virginia; 
they haven't been asked, either. So our petition process--and 
again this is the short-term fix, we think this actually 
requires a statutory fix to address this problem--but a short-
term fix would be to let the CFPB establish a process where 
local authorities could give input on what is a rural 
designation. Let the local authorities give various 
stakeholders the ability to have input in that process before 
we take it to the CFPB. And then also, as a third follow-up 
piece to that, have a review process to make sure we got it 
right at some future point in time.
    Mr. Luetkemeyer. Very good. I thank you for your testimony 
today.
    And I yield back. Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Chairwoman Capito and Ranking 
Member Meeks. And thank you to our witnesses today for sharing 
your valued testimony.
    As the Consumer Financial Protection Bureau has continued 
in the process of crafting the Qualified Mortgage rule, 
industry advocates have raised valid concerns and the Bureau 
has listened. For example, industry questioned why certain 
payments were double counted towards the points and fees cap, 
and the Bureau altered the rule accordingly. Additionally, 
manufactured home industry advocates found issue with the 3 
percent cap and it was modified as well.
    My first question is for Mr. Calhoun and Ms. Still. I would 
like to ask you about the lack of mortgage credit for rural 
areas. As chairman of the Rural Housing Caucus, I am very 
concerned that housing in rural America is becoming 
progressively more neglected. The USDA rural housing programs 
are critical to ensuring a quality housing stock in areas with 
high need, such as my district in deep south Texas. The Bureau 
recently wrote a rule granting exemptions for rural areas from 
the balloon payment prohibition. However, the definition 
excludes all of Hidalgo County, with a population of 850,000 
people, which is in my district and is home to more than 700 
Colonias, which is higher than any county in United States. 
Colonias, for those who don't know the word, are communities 
which lack basic infrastructure and often suffer from 
deplorable housing conditions.
    So, Mr. Calhoun and Ms. Still, do you feel that this rural 
definition is adequate, and does the Bureau need to do more to 
accommodate rural area lenders?
    Ms. Still. Yes. We would agree with you that the Bureau has 
been a good listener of the industry and has responded to 
feedback. I believe the Bureau just in the last couple of weeks 
has suggested that it needs to continue to study the definition 
of rural, very appropriately so, and the MBA looks forward to 
working with the Bureau on helping with that definition.
    In the meantime we certainly need clarity around that, and 
I would suggest that when you look at the challenges for rural, 
it centers largely on smaller loan amounts, it centers largely 
on the community lending that possibly small community lenders 
and brokers do. And so, we need to look at all of the issues 
that are making up the problems for rural housing and address 
that in the entire rule for every consumer.
    Mr. Hinojosa. Mr. Calhoun, would you answer that, also?
    Mr. Calhoun. Yes. We agree that the CFPB has been a good 
listener, it has responded and even used its exception 
authority for a number of those rules that you mentioned to 
expand it. We have supported a very broad rural definition and 
are glad to see that they are going to look at that further, 
and we are pretty optimistic and the indications are they know 
they need to do better on that.
    If I can quickly add, I think one point that has been lost 
here--people are acting as if we are going into this strange 
land and have no experience about what life would be like under 
these rules. We have a lot of experience. These rules are very 
similar to rules that have been in effect with similar fee 
limits at States for decades, and loans, including small loans, 
were made. As we sit here today--
    Mr. Hinojosa. Let me remind all of you that the farm bill 
has been debated here in the House, it is before us now in the 
House of Representatives, and they are not answering the 
question about the definition of the rule so as to help rural 
America appropriately. And you all need to step it up and help 
us get that definition to where it does address it.
    Mr. Calhoun. We agree.
    Mr. Hinojosa. My next question is for Gary Thomas and for 
Debra Still. My question is, in your testimony you note that 
title insurance is a competitive market, and that by putting 
affiliated title companies at a disadvantage, prices might 
increase for consumers. However, you also state that title 
insurance pricing is well-regulated by the individual States. 
If that is the case, why do you think title insurance would be 
more expensive under the current CFPB rule?
    Mr. Thomas. Once you eliminate competition, you come down 
to just a handful of players in any specific area. They can 
start going to the States and asking for higher rates and 
probably proving those up in the way they want to. And so, you 
have really restricted the number of players in the entire 
spectrum, you are going to have higher rights.
    Mr. Hinojosa. Ms. Still?
    Ms. Still. I would agree with that answer fully, this is 
the ability-to-pay rule, this is about a consumer's ability to 
repay. So when we talk about the title insurance business, this 
should not have anything to do with that industry. This should 
have to do with a level playing field for affiliates and the 
fact that consumers have lost their ability to shop if the 
affiliates are treated in a disparate fashion.
    Mr. Hinojosa. That answer justifies why REALTORS are so 
concerned, and I think we need to address that question.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Pittenger for 5 minutes.
    Mr. Pittenger. Thank you, Madam Chairwoman.
    In light of the concerns that have been expressed today 
regarding the ability-to-repay, the QM rule, as relates to the 
mortgage credit crisis that could evolve, what changes do you 
think should be made to the Dodd-Frank Act on the ability-to-
repay QM provisions that this committee should be considering? 
I will start with Mr. Gardill, but any if others want to 
respond, I would welcome that.
    Mr. Gardill. I think principally, we are looking for some 
flexibility of the verification rules. We want to work with the 
CFPB to get this right so that we don't adversely impact our 
customers or the recovery in the housing market that we are 
experiencing. I think we have to revisit the liability rule. 
The liability rule under the ability-to-repay is onerous. 
Permitting oral testimony after the fact, an unlimited statute 
of limitations, those things will restrict lending, they will 
restrict our ability to do that, they will affect our 
regulatory compliance. So that is for a start, I think.
    Ms. Still. I might suggest that the spirit of the bill is 
fundamentally sound. The fact that we should verify that the 
borrower has the ability-to-repay, fully doc loans, taking away 
some of the extraordinary loan programs of the past. But H.R. 
1077 fixes such an enormous amount of the problems with the 
ability-to-pay rule, and that would go such a long way.
    I also think we need to look at the hard stop 43 back ratio 
on jumbo loans, we need to look at the APOR index and the 
problems with that. And I think we need to look to Mr. 
Gardill's comments earlier on industry readiness, and if the 
industry isn't ready, will consumer lending stop or real estate 
finance stop in the short run and derail our housing recovery?
    Mr. Reed. I just would like to add, too, that I think, 
based on all of my colleagues' statements today, that we should 
make permanent and not be temporary the saleability of those 
loans to the GSEs. This is a huge issue and it is creating a 
tremendous amount of instability in the market presently 
because of this temporary period.
    Those regulations and those guidelines that were already 
established for years in the other agencies have served us well 
and it hasn't been the underwriting criteria per se as much as 
the product features where we were not documenting loans and we 
were not asking for assets, we were not verifying income.
    The CFPB has addressed those issues. And I agree with Ms. 
Still that the spirit of the bill is where it needs to be, but 
we need to tweak it in those areas and set up those guidelines 
or those metric points so that we can retain our flexibilities. 
And that is, I think, what we are really asking here, is we 
need to be able to retain the flexibilities we have enjoyed 
previously.
    Mr. Pittenger. Anyone else?
    Mr. Thomas. Yes, I would like to comment, too. What we are 
facing if we don't get this right is pretty much what we are 
facing right now, and that is the instability in the 
marketplace. As a street REALTOR, what we are facing right now 
is 30 to 40 percent of the purchases are all cash. Where is 
that all cash coming from? It is coming from investors and it 
is coming from offshore. If we don't get this right, you are 
shutting out the first-time home buyer and the underserved 
homeowners who want to get back into home ownership.
    And so, we are really talking about a severe sea change if 
we don't get this right. We are going to have more and more 
investors investing in the marketplace, turning what used to be 
homeowner properties into rentals, and you are going have a big 
change in the whole socioeconomic makeup of this country. So we 
have to get it right.
    Mr. Pittenger. Mr. Calhoun?
    Mr. Calhoun. If I may add, I would agree with Ms. Still 
that the basic statutory framework provides the necessary 
mechanisms and tools. We have a regulator who is data-based and 
who is listening.
    I think these oversight hearings are not just appropriate, 
but necessary as part of that process to raise concerns and to 
have the agency answer as to how they are addressing them.
    I would point out that those houses that are being bought 
today are houses that were foreclosed upon because there 
weren't protections in place, and that is how we ended up in 
this mess.
    Mr. Pittenger. I have 15 seconds. Mr. Vice, do you want to 
say something?
    Mr. Vice. The main thing I was going to say is if you are 
looking for a bright line of how do we change Dodd-Frank, I 
would make sure that it aligns with the business models. It is 
a completely different business model to originate a portfolio 
and sell it, and it is a completely lending aspect if you 
originate a loan and you are going to keep it in your portfolio 
because then the interest aligned between the borrower and the 
creditor. And there is a much different lending atmosphere. In 
Mr. Reed's written testimony, you will see that there is a lot 
less credit risk associated with loans that are held in 
portfolio.
    Mr. Pittenger. Thank you. I yield back my time.
    Chairwoman Capito. Thank you.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman.
    Mr. Calhoun earlier made a statement that I totally 
disagree with, and that is on his issue of the need for H.R. 
1077.
    Let me assure you, Mr. Calhoun, we desperately need H.R. 
1077. Some of the very people you were talking about, some of 
the lower-income African Americans, and not just them, but 
everybody--dealing with a home purchase in real estate is the 
most complex, most difficult transaction that 90 percent of the 
American people will ever go through. And you know what they 
need the most? Information. Information makes them powerful; it 
helps with the problems. That is why we have so much predatory 
lending.
    House Resolution 1077 does some essential things. First of 
all, it strengthens the Truth in Lending Act. It will require 
for the first time that customers and potential homeowners will 
receive information dealing with points, not maybe, not if, but 
they must be told information about points, about fees, about 
all of the loan modifications available to them.
    I represent Georgia and the suburbs of Georgia, at one time 
the leading part of this country with home foreclosures, and 
the number one problem they had was, ``I didn't know.'' Well 
now, under H.R. 1077, they will know. This is vital 
information. This is an important bill.
    Mr. Thomas, I would like for to you address that, and Ms. 
Still, as to why House Resolution 1077 is very important.
    Mr. Thomas. What it does is it levels the playing field. It 
makes it more open to more players in the marketplace. If my 
constituents, meaning other brokers, want to have a title 
company affiliation, if they want to have a mortgage 
affiliation, let me tell you, first of all, that the REALTORS 
in that firm don't necessarily flock to that title company or 
lender that the broker owns, because they are going to hold 
them to a higher standard. They want to make sure that their 
customer is best-served. And whether it is the in-house lender 
or it is somebody else, they want to make sure that their 
consumer is handled properly because they want to have future 
business that is a referral from them.
    And so, we want to make sure that we have as many players 
in the marketplace in a level playing field rather than just 
bringing it down to a few, which is what we would have if we 
don't pass H.R. 1077.
    Ms. Still. Competition is good for consumers and we need as 
much competition as possible. We also need consumers to be able 
to have a choice of their settlement service provider. And we 
also need transparency in shopping, to your point. It has to be 
a level playing field or the consumer is not going to know how 
to shop. The bill is critical to level the playing field, and 
thank you for cosponsoring it.
    Mr. Scott. Thank you very much.
    Chairwoman Capito. Thank you.
    Mr. Barr for 5 minutes.
    Mr. Barr. Thank you, Madam Chairwoman.
    Mr. Gardill, this is a question for you. You included in 
your written testimony the following statement, ``The QM box 
ironically may conflict with fair lending rules and goals of 
the Community Reinvestment Act. And it is quite the Catch-22 
when a bank attempts to limit its regulatory litigation and 
reputational risk by staying within government prescribed rules 
only to be subject to possible regulatory litigation and 
reputational risks for not straying outside those rules.''
    Do you think it is possible for financial institutions to 
meet their CRA obligations while issuing only QM loans?
    Mr. Gardill. No, I think it would be extremely difficult to 
do so.
    Mr. Barr. Would you view the QM rule as it is currently 
structured to be basically, in effect, a partial repeal of CRA?
    Mr. Gardill. It is going to impact the bank's ability to 
comply. The CRA is still there, we still have to meet that 
regulatory burden. Just for example, last year we did 203 
loans, CRA eligible, about $17 million, and not one of them 
would meet the QM rule.
    Mr. Barr. Ms. Still, a follow-up question for you on the 
same topic: What do you believe is the implication of QM on the 
disparate impact analysis?
    Ms. Still. The industry desperately needs clarification on 
how to comply with two rules that seemingly might bump up 
against each other. And so of course, the industry deplores 
discrimination in any fashion; it is very committed to 
complying with the disparate impact rule. But if the lender 
chooses only to lend on QM loans, it could be in violation of 
HUD's disparate impact rule. So we need the regulators to work 
together and help the industry understand how to negotiate that 
situation with which we are faced.
    Mr. Barr. I appreciate the testimony of both of you in 
highlighting what appears to be a dramatic contradictory 
mandate coming from the regulators, that you have a CRA 
obligation on the one hand, but, Mr. Gardill, as you pointed 
out, it is a Catch-22 for the lender in this situation when you 
all are obligated to originate QMs to obtain the safe harbor 
and then also expected to somehow satisfy this disparate impact 
analysis.
    I want to move now to Commissioner Vice and your testimony. 
And if staff could put up on the screen a picture of the 
Commonwealth of Kentucky?
    [slide]
    Mr. Barr. And this is kind of a follow-up to Mr. 
Luetkemeyer's question about the CFPB's rural designation. If 
you take a look at this screen, you can see a county-by-county 
map of Kentucky. And the counties in yellow, Commissioner Vice, 
are the counties that the CFPB recognizes as nonrural and the 
counties in blue are counties which the CFPB has classified as 
rural.
    This is obviously relevant to our hearing today because the 
CFPB has established a category of QMs with balloon payments 
that are originated by small creditors in rural or underserved 
areas.
    You will notice--and you are from Clark County, sir, so you 
are familiar with this geography--Bath County, which is just 
two counties over from you to the east. Can you share with the 
committee and with your colleagues on the panel, Bath County, 
and is it a proper designation to categorize Bath County as 
nonrural?
    Mr. Vice. I have actually had the distinct pleasure of 
being the examiner in charge of a couple of banks that are 
headquartered in Bath County. Everything about Bath County is 
rural and it should be considered rural. Even if you look at 
the population disbursement amongst the area, it should be 
considered a rural county.
    The community itself, there is a lot of ag-based businesses 
there. There is not a whole lot of industry in Bath County as 
well. So Bath County, out of any county in Kentucky, should be 
considered rural.
    Mr. Barr. So I think, Commissioner, this is exhibit A for 
your position that there needs to be some kind of petition 
process to fix the rural designation.
    A quick follow-up for you, Commissioner. Does the CFPB, in 
your judgment, have the statutory authority to do this or does 
Congress need to intervene here and give the CFPB the authority 
to implement this petition process you propose?
    Mr. Vice. It is our opinion that the CFPB currently does 
have the ability to do the petition process.
    Mr. Barr. If they continue to rely on the various 
government definitions of rural, would you recommend to this 
committee and to this Congress to statutorily implement a 
petition process?
    Mr. Vice. We would either like to see a statutory 
implementation of it or the Dodd-Frank Act be amended to move 
the reference to rural in the balloon loan category.
    Mr. Barr. Okay. And then I guess one final question, as my 
time is expiring. As a bank supervisor, Commissioner, could you 
just briefly amplify your testimony that Congress should create 
a general statutory small creditor QM and apply it to all loans 
held in portfolio?
    Mr. Vice. Yes. We think this is very important in that 
small community banks'--and again, their interests align when 
they are originating a loan--primary focus is to create, for 
lack of a better term, to borrow something from Steve Covey, a 
``win-win situation.'' What are the borrower's credit needs and 
how can we meet those to create a loan to meet those needs.
    Mr. Barr. Thank you
    Chairwoman Capito. Mr. Capuano?
    Mr. Capuano. Thank you, Madam Chairwoman.
    I want to thank the panel members for being here today.
    I just have a question for everybody. And, again, we are 
talking a lot of details here, and that is fine, but to me the 
generalities of how we get here is also important.
    Does anyone on the panel disagree with the statement that 
prior to 2008, there were a fair number of mortgages given in 
this country that should not have been given out? Does anyone 
disagree with that statement?
    I didn't think so. So, everybody agrees that prior to 2008 
there were a fair amount of mortgages that should not have been 
given. Fine.
    Mr. Gardill, on page 11, you make a statement that I agree 
with, but I wonder what it means. It says, ``These rules will 
restrict, rather than facilitate, credit to mortgage borrowers, 
particularly borrowers on the margins.''
    Isn't that the whole point, that borrowers on the margins 
are the ones who got those loans in 2006 and 2007 and 2008 that 
we should not have been giving, and therefore the borrowers on 
the margins are the ones who should not get mortgages in the 
future? Should we not be restricting some of those, or should 
all borrowers on the margins be given mortgages at all times?
    Mr. Gardill. I think we have to be careful how we 
generalize and preclude from our homeowner system in this 
country, otherwise qualified borrowers--
    Mr. Capuano. I understand--
    Mr. Gardill. --with the flexibility that they could own a 
home and we can successfully provide credit.
    Mr. Capuano. I fully understand that. As a matter of fact, 
the other side criticized people like me for pushing that for 
years, actually for generations, that I thought more people 
should be qualified, but now, in light of 2008, I realize there 
is a line somewhere. I am not sure exactly where that line is. 
But do you agree that there is a line that at some point a 
borrower should not get a mortgage?
    Mr. Gardill. And that is the reason I think we need some 
time; we are looking for an extra year here in order to make 
sure that we get it right.
    Mr. Capuano. I don't disagree. I want to get it right, too. 
I actually think that the comments that were made earlier on 
competition and choice and level playing field and coordination 
of regulators are all 100 percent correct. I am not looking for 
one mortgage originator, I am not looking for no choice, I am 
not looking for that one person to do it all. That would be 
wrong, and it wouldn't help anybody. So, I totally agree with 
those comments.
    I guess what I am trying get at is that we all seem to 
agree that there should be some restrictions. The question is, 
where should those lines be and exactly how does it all work? 
And we are all working on presumptions as to what they should 
be.
    I guess the question that I really have is, when everything 
is said and done, based on what you know--and I assume every 
one of you was active in this area before 2008--if there was 
100 percent of the people, 100 percent of the people who got 
mortgages in 2008, what percentage do you think should not get 
mortgages? Where should that line be? Should it be 100 percent? 
Should it be 110 percent? Should it be 70 percent? And I ask 
you because there is a study out there that suggests that the 
CFPB's proposal will cut out something like 48 percent of the 
mortgages, which I think anybody would agree that, if that is 
correct, it is too high.
    I guess I am asking, what would your goal be? And we may as 
well just start with you, Mr. Vice. What would your goal be, 
starting in 2008, if that is equal to 100, what would it be? 
Should it be 95 percent? Should it be 75? And, again, general, 
and I am not going to hold it to you. I am just trying to get a 
general idea.
    Mr. Vice. I would be hesitant to look at it that way, and 
the reason I would be is in 2008, let's take your example, 100 
percent of the population who got more mortgages, some of those 
people may have been able to afford a mortgage, just a lower 
amount, but they were given the ability through a product 
offering to get a mortgage that they couldn't afford, because 
it was too high.
    So I don't think we should be looking at this or asking the 
question, you don't deserve a mortgage, you shouldn't get one, 
and this percentage should not have gotten one. I think the 
question should be more of, how do we make sure we are aligning 
the interests between the borrower and the creditor to make 
sure that the correct credit decision is made for that 
borrower?
    Mr. Capuano. The only thing I am interested in is having no 
more taxpayer bailouts for people who give out mortgages.
    Mr. Vice. I agree.
    Mr. Capuano. That is my main category. And achieving the 
highest percentage of homeowners as possible with that as the 
knowledge. But you are telling me that everyone who got a 
mortgage in 2008, somehow, somewhere, could have been and 
should be qualified to get a mortgage today?
    Mr. Vice. No. I think--
    Mr. Capuano. So that there should be some percentage who 
shouldn't. And I understand you may not have a number.
    Mr. Gardill, how about you? Do you have a general idea, a 
range?
    Mr. Gardill. I think we have to look at the issues. I don't 
think you can arbitrarily set a bright standard or a bright 
line.
    Mr. Capuano. I am not asking for a bright line.
    Mr. Gardill. We had a rapid acceleration in value and a 
rapid deceleration in value, and what we are trying to do is 
avoid that--
    Mr. Capuano. So I guess I am not going to get an answer. 
Does anybody want to jump in with a number? I didn't think you 
would, but I figured I would ask anyway.
    And the reason I ask is because that is what we are here 
for; no one wants 48 percent of the mortgages to not get access 
to credit. That is not good for anybody. But there are some 
people who should not get a mortgage. And I guess for me the 
question is, what is that goal? Because what I am hearing in 
the general testimony is that these proposals will shut off 
credit to too many people. Fine. That scares me, as it should. 
How many will it shut off credit to? Go ahead.
    Ms. Still. But I think we need to be careful with context, 
because when you talk about the margins in 2006, 2007, and 
2008, it was a very different margin than in today's overly 
tight credit conditions. So when we talk about deserving 
borrowers in 2013 who may not get mortgages, it truly is a 
deserving borrower.
    I believe that the law, by prohibiting exotic loan 
programs, by mandating that lenders fully document income and 
assets, no more stated income loans, go an enormous way to 
helping the consumer make a good, well-informed decision with 
good counseling from a lender. So I just think we need to be 
very careful that it is not the same margin. Thank you.
    Mr. Capuano. I totally agree that we need to be careful, 
and that is what we are doing here.
    Madam Chairwoman, I know I am over my time. I apologize, 
and I appreciate your indulgence.
    Chairwoman Capito. Thank you.
    Mr. Miller?
    Mr. Miller. Thank you, Madam Chairwoman.
    I respect my good friend's concerns on making loans that 
are not predatory. In fact, in 2001 I started introducing 
amendments to bills and said, let's define subprime versus 
predatory. I think it got to the Senate 5 times, as you recall, 
and they never took it up, or we might not have had some of the 
problems we had.
    I guess the definition of margins would be when you apply 
them to. And I think if you go back to 2006, 2007, and 2008, 
the margins were not margins, they were just, could you sign 
your name, you are qualified. There were no underwriting 
standards.
    But my biggest concern is the CoreLogic study in 2010, 
because those loans were not being made in 2010. In fact, the 
CoreLogic study shows that the loans made in 2010 were very 
good loans. My good friend, the ranking member, Maxine Waters, 
brought up a concern she had that people were going to be 
limited from the marketplace. And I think, Mr. Calhoun, you 
said that based on the flexibility that is allowed through QM, 
the GSE would still provide the loan. So 95 percent of the 
loans that they said wouldn't be made would be made.
    The problem I have with that, and I am not impugning you, 
is that Secretary DeMarco came right before this committee, as 
all of you recall, and said that GSEs will not be allowed to go 
outside of a strict QM definition. So your response to defining 
the study that was given to us by CoreLogic would not be 
applicable based on his definitive comment to us, and that is 
where my concern comes from.
    If they are going to go strictly by the guidelines of QM 
and not be allowed flexibility, which he said without a doubt 
they are going to be required to do, half of those loans made 
in 2010 that are performing very well would not be allowed to 
be made today. That is what the debate is on today, not whether 
we made bad loans in 2006, 2007, and 2008, because we did. The 
underwriting standards then were just, especially through 
Countrywide, can you sign your name, you met the underwriting 
standards. That is how bad they were.
    But, Ms. Still and Mr. Gardill, what impact would this have 
on housing today, this strict requirement, especially by 
DeMarco and the GSEs, that they are going to have stay within 
QM? How much impact is it going to have on the market today?
    Ms. Still. I don't know an exact number for you.
    Mr. Miller. Does it drive more buyers to FHA, which we are 
trying to eliminate buyers from FHA, I guess is the other 
guideline.
    Ms. Still. Yes. Any borrower, because the points and fees 
test is a test that will determine QM or non-QM, any borrower 
who cannot meet the points and fees test will no longer now be 
eligible to be sold to a GSE.
    Mr. Miller. And they are going to go over to FHA, which is 
increasing the burden on FHA, which we are trying to decrease 
the burden on FHA? We are creating a--
    Ms. Still. The FHA program will be mandated to meet the 
points and fees test as well. So the points and fees tests have 
to be met regardless of the investor. It will be private 
capital that would choose to do that non-QM loan, and we don't 
think there will be a lot of private capital at all. And if 
there is, it will be only for the highest quality borrowers, 
not for the broad middle-class America.
    Mr. Miller. Whether you support GSEs or not, if they are 
out of the marketplace in this market, it could be devastating.
    And the ability-to-repay rule purpose, it is very clear to 
me, and it sets guidelines to approve a borrower's ability-to-
repay, but I don't know where the 3 percent cap on points and 
fees falls in that at all. The 3 percent cap in fee has nothing 
to do with the borrower's ability-to-repay. And I look at what 
is included in the caps, how does escrow insurance relate to 
the person's ability-to-repay? Some title insurance is 
included, but other title insurance is excluded depending on 
who pays for the policy. Mortgage origination fees are included 
when a mortgage broker is used, but not when a loan is 
originated at the bank or credit union. Nonprofit creditors are 
exempt from all the caps completely.
    So if there are so many exclusions and the exclusions are 
based on who you are, what does this do to the underlying issue 
of trying to create a safe and sound loan? I guess, Ms. Still, 
I would go back to you again to let you answer that if you can.
    Ms. Still. We would agree that the points and fees cap and 
some of the fees that are included in have nothing to do with 
the ability-to-repay. It has to do with a business channel. And 
we believe all of that should be a level playing field, which 
is why it is so important to pass H.R. 1077.
    Mr. Miller. It is beyond that. You are discriminating 
against certain groups. For an example, if you are a non-profit 
creditor, you are exempt completely. If you are a mortgage 
originator, you are included when a mortgage broker is used. So 
if you are a mortgage broker, you are going to be inclined not 
to use a mortgage broker, because I am penalized if I do. But 
when a loan is originated by a bank or credit union, well, I 
don't have to comply.
    So I am really bothered by anything we do that 
discriminates against anybody or any group or organization or 
it picks winners and losers. So you can say, really I can save 
myself some money and not be--not save money, but I could be 
exempt from all this if I just use a nonprofit; or if I don't 
use a mortgage broker, the loan can be through a bank or credit 
union, then I have no fees or caps.
    If you just look at that alone, you have to say something 
is seriously wrong with the structure when we pick winners and 
losers and we discriminate against some and not others. So I 
think that is something that we seriously need to look at.
    And I yield back the balance of my time.
    Chairwoman Capito. The gentleman yields back.
    I would like to ask for unanimous consent to insert into 
the record written statements from the Consumer Mortgage 
Coalition, the National Association of Federal Credit Unions, 
the Independent Community Bankers of America, the Community 
Associations Institute, and the American Land Title 
Association. Without objection, it is so ordered.
    Mr. Ellison?
    Mr. Ellison. Thank you, Madam Chairwoman. And thanks to the 
ranking member and all of the witnesses today. It is an 
important issue, and you all have helped us understand it 
better.
    Ms. Still, I wanted to ask you a question. I believe you 
recommended allowing higher fees for loans up to $200,000. What 
percentage of home sales and refinances for mortgages below 
$200,000? If we were to follow your idea, who will we be 
affecting?
    Ms. Still. I believe the right way to fix the points and 
fees problem is H.R. 1077, but another alternative way would be 
to raise the tolerance of the definition of a small loan from 
$100,000 to $200,000.
    And as I look at all of the loans that I made last year, 
which was to about 12,000 customers, I would tell you that the 
points and fees start tripping at about the $160,000 to 
$180,000. If we were to go to $200,000, we would probably solve 
about 90 percent of the problem, based on the data that I have 
looked at in my company. So it is another way to raise the 
definition of a small loan and more borrowers would be included 
in the QM definition.
    Mr. Ellison. Do you want to respond to that, Mr. Calhoun?
    Mr. Calhoun. Yes. First of all, I think it is important 
that people have asked, what do fees have to do with this? The 
Financial Crisis Commission found that high fee loans 
contributed to the crisis, because lenders are collecting their 
revenue at closing, not through the performance of the loan. It 
misaligns the borrower and the lender incentives there. The 
lender wins by charging the high fees at closing. This bill 
would far more than double the fees that could be charged and 
still be a QM loan.
    Mr. Ellison. Excuse me. When you say, ``this bill,'' you 
are referring to H.R. 1077?
    Mr. Calhoun. H.R. 1077.
    The other point is people are acting as if an ability-to-
repay rule is something new. All loans that have over 150 basis 
points of interest rate over APOR, which is significant ones, 
are currently subject and have been for the last several years 
to an ability-to-repay rule under the Federal Reserve rules 
with no safe harbor for any of the loans, and the sky didn't 
fall. I asked people, tell me of these lawsuits. No one can 
point to a single one, much less a flood of them.
    So Congress based this ability-to-repay rule off of what 
the Federal Reserve had done before Dodd-Frank was passed. We 
have experience under that. It worked. This rule has a lot more 
industry protections than the Federal Reserve rule did. It has 
a safe harbor for most of the loans. The Federal Reserve rule 
did not have a safe harbor for any of the loans.
    Mr. Ellison. Okay. Anybody else want to weigh in on that 
question I asked? You don't have to.
    Ms. Still. The only thing I was going to mention is my MBA 
colleagues behind me tell me that the average loan amount in 
America is $220,000, which is why the $200,000 is a relevant 
number.
    Mr. Ellison. All right. Thank you.
    Mr. Calhoun, I have a question for you. How would a 
consumer comparison shop for title insurance? How many title 
insurance firms are there nationwide? If you wanted to go for 
the lower price, could you do it, given current standards?
    Mr. Calhoun. As the GAO study found, there is virtually no 
shopping for title insurance. And I find that is true even when 
I ask financial and mortgage professionals did they shop for 
title insurance. They don't market to consumers; they market to 
other industry professionals, because those are the ones who 
select the service. And, in fact, there is little or no price 
competition. Everybody tries to charge the maximum rate.
    And lenders who are larger--Ms. Still's operation can have 
125 people who focus just on title insurance. That gives them 
an edge over those who can't do that. We already have five 
lenders who control more than half of all mortgages in this 
country. Now you want to hand the title insurance to them also 
and encourage that? That doesn't seem like it makes a more 
competitive market.
    Mr. Ellison. Do home buyers know that they are paying a 
commission?
    Mr. Calhoun. My experience has been virtually none do, much 
less that the commission is 75 percent of the premium. For a 
$500,000 loan here in the District, the insurance premium for 
just the bare-bones coverage is about $3,000. The commission 
part of that in the District is about $2,200 going to the 
person who picks the policy even though they charge you 
separately for the other title work.
    Those are the kinds of facts that led the GAO to raise 
grave concerns about the title insurance market. And as I said, 
instead of fixing it, this makes it worse.
    Chairwoman Capito. The gentleman's time has expired.
    I thank all of the witnesses, and I would like to thank the 
ranking member, as well, for his attention to this very 
important issue.
    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.
    This hearing is now adjourned. I would like to thank the 
witnesses for their testimony and for their responses to the 
questions. Thank you.
    [Whereupon, at 12:18 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             June 18, 2013


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