[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 U.S. GOVERNMENT PRINTING OFFICE 81-767 WASHINGTON : 2014 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected]. 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. 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