[Senate Hearing 114-49]
[From the U.S. Government Publishing Office]





                                                         S. Hrg. 114-49


            REGULATORY BURDENS TO OBTAINING MORTGAGE CREDIT

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                                   ON

  EXPLORING REGULATORY BURDENS THAT ARE RESTRICTING MORTGAGE CREDIT, 
           INCLUDING RECOMMENDATIONS TO ALLEVIATE THE BURDEN

                               __________

                             APRIL 16, 2015

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MIKE CRAPO, Idaho                    SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
JERRY MORAN, Kansas

           William D. Duhnke III, Staff Director and Counsel
                 Mark Powden, Democratic Staff Director
                    Dana Wade, Deputy Staff Director
                    Jelena McWilliams, Chief Counsel
                 Chad Davis, Professional Staff Member
            Laura Swanson, Democratic Deputy Staff Director
                Graham Steele, Democratic Chief Counsel
            Erin Barry, Democratic Professional Staff Member
                       Dawn Ratliff, Chief Clerk
                      Troy Cornell, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor

                                  (ii)


















                            C O N T E N T S

                              ----------                              

                        THURSDAY, APRIL 16, 2015

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2
    Senator Cotton...............................................     4

                               WITNESSES

Tom Woods, President, Woods Custom Homes, on behalf of the 
  National Association of Home Builders..........................     4
    Prepared statement...........................................    41
    Responses to written questions of:
        Senator Heller...........................................    91
        Senator Heitkamp.........................................    91
Chris Polychron, 2015 President, National Association of 
  REALTORS......................................................     6
    Prepared statement...........................................    49
J. David Motley, President of Banking and Mortgage Operations, 
  Colonial Savings, F.A., on behalf of the Mortgage Bankers 
  Association....................................................     7
    Prepared statement...........................................    56
    Responses to written questions of:
        Chairman Shelby..........................................    93
        Senator Vitter...........................................    94
        Senator Heller...........................................    95
        Senator Heitkamp.........................................    95
Julia Gordon, Senior Director of Housing and Consumer Finance, 
  Center for American Progress...................................     9
    Prepared statement...........................................    69

              Additional Material Supplied for the Record

Prepared statement of the American Land Title Association........    97
Prepared statement of Mark A. Calabria, Ph.D., Director, 
  Financial Regulation Studies, Cato Institute...................   109
Prepared statement of Paulina McGrath, the Community Mortgage 
  Lenders of America.............................................   114
Prepared statement of the Conference of State Bank Supervisors...   121
Letter to Committee from Habitat for Humanity....................   128
Prepared statement of the Housing Policy Council.................   131
Prepared statement of the Independent Community Bankers of 
  America........................................................   138
Prepared statement of Nathan Smith, Chairman, Manufactured 
  Housing Institute..............................................   149
Prepared statement of Gary Acosta, Co-founder and CEO, NAHREP....   154
Letter to Committee from Carrie R. Hunt, Senior Vice President of 
  Government Affairs and General Counsel, NAFCU..................   156
Prepared statement of the National Association of Mortgage 
  Brokers........................................................   160
Prepared statement of the American Financial Services Association   165
Prepared statement of John Taylor, President and CEO, the 
  National Community Reinvestment Coalition......................   167
Prepared statement of the Credit Union National Association......   174

                                 (iii)
 
            REGULATORY BURDENS TO OBTAINING MORTGAGE CREDIT

                              ----------                              


                        THURSDAY, APRIL 16, 2015

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Richard Shelby, Chairman of the 
Committee, presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    Months ago, this Committee began an examination of the 
regulatory landscape facing consumers, lenders, and other 
financial market participants. Our goal has been to identify 
existing laws and regulations that create unnecessary barriers 
to economic growth. Some of these may also inadvertently 
restrict the availability of consumer credit or increase its 
cost.
    Today, we turn our attention to mortgages. Our witnesses 
are involved in each stage of the home buying process, from the 
construction of the home to its selection in financing. We have 
asked them to discuss the state of housing markets across the 
country, including which lending laws and regulations are 
working and which can be improved.
    Five years after a sweeping new regulatory framework 
altered the mortgage market in unprecedented ways, I believe it 
is time to reexamine its effectiveness and its consequences. 
Dodd-Frank's stated intent is to protect consumers, but some of 
the regulations promulgated in response to the law have gone so 
far, they may actually prevent qualified consumers from owning 
a home. And, borrowers who are able to qualify for mortgages 
today may face an increased cost of credit due to these rules.
    I would hope that we can agree that laws and regulations 
that reduce mortgage availability or increase the cost of 
credit for those who do qualify are harming, not helping, 
consumers. While record low mortgage rates in recent years may 
have balanced out an increased cost of mortgage credit due to 
new regulatory requirements, this trend will not continue 
indefinitely. When interest rates rise, I believe that the 
impact of these new rules and regulations on home ownership 
will then be clear.
    Today, we will consider ways to refine current law so that 
it protects consumers while encouraging responsible home 
ownership. This should be an achievable bipartisan goal, 
because Members of this Committee on both sides of the aisle 
have introduced and supported legislation in this area.
    I encourage others to consider ways in which we can work 
together to make the new regulatory framework true to its 
legislative intent of protecting consumers while increasing 
responsible access to credit. This goal can be accomplished 
without returning to the pre-crisis standards of lax 
underwriting and access to mortgage loans for those who cannot 
afford to repay them.
    In other words, any changes to the law should not erode 
consumer protection or encourage irresponsible lending 
practices. They should address the issue of creditworthy 
customers being denied loans or charged more for them because 
of existing laws and regulations. If done properly, such 
changes could make our financial system safer by allowing 
regulators to direct their limited resources toward more 
efficient regulation and ensuring better management of risk.
    I look forward to hearing from our witnesses and hope that 
their perspectives will help this Committee identify specific 
issues that consumers face every day in purchasing homes and 
qualifying for credit.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. Thanks to the 
witnesses, the four of you, for joining us today.
    We know the mortgage market is vast, it is complex, and it 
is interconnected. Its impact extends from the finances of 
individual families in Alabama and Ohio to the stability of the 
global financial system.
    Go back to 2008 and the years before. Predatory, 
irresponsible lenders made dangerous subprime loans and often 
ignored a borrower's ability to repay. When the real estate 
bubble burst less than a decade ago, families had their wealth 
and their equity stripped from their homes, starting a chain of 
events that resulted in the financial crisis and subsequent 
economic devastation of the Great Recession.
    Dodd-Frank provided a common sense fix to the bad practices 
in mortgage lending that had been staring us in the face for 
years. Now, 5 years later, some are suggesting that we weaken 
some of these standards and we head back to there, where we 
started.
    In 2008, our country learned a painful lesson, that not all 
mortgage lending is created equal. Unscrupulous lenders offered 
loans that required no documentation, loans with teaser 
interest rates that later spiked and undermined a borrower's 
ability to repay, and loans where borrowers never paid down 
their principal. These practices had devastating results for 
families, for communities, for our economy. Borrowers with 
these higher-cost loans were foreclosed on at almost triple the 
rate of borrowers with conforming 30-year fixed-rate mortgages. 
Again, almost triple the rate of borrowers with conforming 30-
year fixed-rate mortgages.
    The crisis revealed a host of other harmful practices: 
Steering borrowers to affiliated companies, kickbacks for 
business referrals, inflated appraisals, loan officer 
compensation based on the loan product. These practices offered 
little benefit to the borrower. Even more troubling, as 
borrowers' cost increased, so did loan officers' compensation. 
Members of the organizations testifying before us today felt 
the impact of these practices firsthand.
    After the housing crash revealed the extent of the 
deterioration in mortgage lending standards, Congress stepped 
in to do what the market and regulators had refused to do. 
Dodd-Frank established a common sense rule that requires 
mortgage lenders to ensure that borrowers have the ability to 
repay their loans. This means that lenders can no longer make a 
loan based on the home's value instead of the borrower's 
ability to pay back the loan.
    It should be noted that many lenders did not follow this 
basic principle during the housing boom. At its peak, 27 
percent of loans in this country that were made were subprime 
products.
    At the risk of making matters even more complicated, we may 
be in danger of overlooking other factors that have tightened 
credit beyond what Dodd-Frank envisioned. In reaction to the 
housing crisis and their own financial positions, the GSEs and 
FHA each tightened lending standards and increased fees that 
are charged to borrowers. They announced small steps in the 
FHA's HAWK program, the GSEs' return to 3 percent downpayments 
to expand credit just this winter, but their loan profiles 
continue to represent higher FICA scores and downpayments than 
historical levels.
    Lender overlays, higher eligibility criteria than the GSEs 
or FHA, have also made mortgage credit difficult to obtain. 
While the Ability to Repay standard was intended to be the base 
standard, we heard in earlier hearings that lenders only want 
to make QM loans because they provide liability protection, an 
additional lender overlay. However, if we expand QM eligibility 
in order to protect lenders, we also limit the protections for 
a family buying a home.
    A mortgage is the largest financial transaction most people 
will make in their lifetime. As we have learned across a number 
of consumer financial products and services, ensuring that the 
mortgage process, servicers, and fees are transparent and 
understandable to borrowers is essential if they are to be 
successful home buyers and homeowners.
    Reviewing regulation for their impact on the market and 
possible duplication is important. But, if we do not address 
the other challenges that restrict credit, eliminating 
important home buyer protections under the cloak of access 
turns the clock back to a dangerous 2008.
    I look forward to having a conversation about all of the 
challenges today, all of the challenges that the housing market 
faces and the possible solutions. There is not a single answer 
to fix these complicated problems. But, we cannot return to the 
days--we cannot return to the days when unscrupulous lenders 
could make loans that undermined a borrower's ability to repay 
while charging excessive fees and, thus, putting our entire 
economy at risk again.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Brown.
    Without objection, I would like to enter at this time into 
the record statements from the Conference of State Bank 
Supervisors, the Housing Policy Council, Independent Community 
Bankers of America, National Association of Federal Credit 
Unions, the Credit Union National Association, Manufactured 
Housing Institute, the Community Mortgage Lenders of America, 
American Land Title Association, the National Association of 
Mortgage Brokers, and Habitat for Humanity.
    Chairman Shelby. Today, first, we will hear the testimony 
of Mr. Tom Woods, Chairman of the National Association of Home 
Builders. Mr. Woods is currently President of Woods Custom 
Homes.
    Senator Cotton, you are with us today and you have a 
friend. Would you like to introduce him?

                STATEMENT OF SENATOR TOM COTTON

    Senator Cotton. Yes. Thank you, Senator Shelby.
    Today, we have Chris Polychron, the President of the 
National Association of REALTORS. Chris is a REALTOR in Hot 
Springs. He has been in Hot Springs for 27 years as a leading 
REALTOR there, and while we all know him here in this room as 
President of the National Association, he has also been a 
leading REALTOR throughout Arkansas, serving on the Board of 
Directors for the Arkansas Realtors Association, President of 
the Arkansas Realtors Association, and President of the Hot 
Springs Realtors Association. Also, he has been a leader in the 
Hot Springs community and the local Chamber of Commerce, been 
President of his local church for almost 20 years, and Chris 
and I have known each other for almost 4 years, since our good 
friend, Smokey Campbell, introduced us.
    Chris, it is great to see you here in Washington, DC, 
although I know we both look forward to seeing each other in 
Hot Springs sometime soon.
    Chairman Shelby. Thank you, Senator Cotton.
    Then, we will hear from Mr. J. David Motley, President of 
Colonial Savings, who is here on behalf of the Mortgage Bankers 
Association.
    And, finally, we will hear from Ms. Julia Gordon, Senior 
Director of Housing and Consumer Finance at the Center for 
American Progress.
    Your written testimony, all of it, will be made part of the 
record. We are going to start voting in the Senate around 11, 
so you proceed as fast as you can with your statements.
    We will start with you, Mr. Woods.

   STATEMENT OF TOM WOODS, PRESIDENT, WOODS CUSTOM HOMES, ON 
      BEHALF OF THE NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Woods. Thank you. The Nation's economic growth depends 
on an efficient housing finance system to provide adequate and 
reliable credit to home buyers and home builders, at reasonable 
rates, and in all business conditions. Home buyers and builders 
continue to confront challenging credit conditions triggered by 
a zealous regulatory response to the Great Recession.
    In response to the crisis, Dodd-Frank mandated significant 
mortgage finance reforms and created the CFPB to implement and 
supervise many of the new requirements. FHFA, the Federal 
banking agencies, and FHA all have taken steps to ensure that 
the Nation will never again be at the vulnerability to risky 
mortgage lending.
    The collective regulatory actions, along with the increased 
compliance costs, has severely restricted the availability of 
mortgage credit to many creditworthy borrowers. NAHB is 
concerned about the effect of regulatory constraints on 
originating loans, particularly for small communities, first-
time home buyers, and other underserved market segments.
    Smaller banks and independent mortgage bankers are leaving 
the residential mortgage business or merging their banks as the 
burden of compliance has made it harder and more expensive to 
do business. This exodus will reduce competition and limit 
consumer choice. Congress must act now to eliminate some of the 
barriers to credit availability and support a stronger, more 
robust recovery of the housing and mortgage markets.
    As the mortgage industry deals with the ongoing issues 
associated with the implementation of the CFPB's Ability to 
Repay standard, we urge Congress to pass the Mortgage Choice 
Act. This common sense legislation would clarify the qualifying 
mortgage rules' definition of points and fees and ensure that 
consumers can choose the lender and title provider best suited 
to their needs.
    We also urge Congress to pass the Portfolio Lending and 
Mortgage Access Act. This legislation is intended to ease the 
ability to repay requirements for community lenders who may 
fear regulatory and legal consequences of originating a non-QM 
loan and, therefore, may limit access to credit for some home 
buyers.
    NAHB believes the Federal agencies can and should take 
actions to alleviate burdensome regulatory requirements to 
consumer access to mortgage credit. One issue that NAHB is 
watching closely is the implementation of the CFPB's new 
mortgage disclosure forms. The new forms are intended to help 
consumers make informed decisions and avoid costly surprises. 
NAHB is concerned that any confusion related to the new rules, 
compounded by the fear of aggressive enforcement actions, will 
negatively impact a buyer's ability to close on a house in a 
timely manner.
    In addition, lender overlays in the mortgage credit process 
have been a major factor in the difficulty that home buyers are 
having to obtain financing. Lenders are currently imposing 
credit understanding standards that are more restrictive than 
FHA, VA, and the housing GSEs require. NAHB encourages further 
efforts to increase certainty for mortgage lenders on the 
criteria for acceptable mortgage underwriting.
    Likewise, fees for Government-backed mortgages continue to 
be too high, given that the credit quality of the underlying 
loans has increased.
    NAHB urges action on two additional fronts that 
specifically impact the homebuilding industry, appraisals on 
new home construction and access to housing production credit. 
Improper appraisal practices, a shortage of experienced 
appraisers, and inadequate oversight of the appraisal system 
continues to restrict the flow of mortgage credit and impede 
the housing recovery. Despite signs of improvement in recent 
months, many homebuilders continue to deal with a significant 
adverse shift in terms and availability of loans for ground 
acquisition, land development, and home construction. Lenders 
are reluctant to extend new AD&C credit, citing regulatory 
requirements or examiner pressure on banks to shrink their AD&C 
portfolios.
    Finally, while regulatory barriers can be alleviated by the 
various regulators as well as by legislative reform, NAHB 
continues to support comprehensive housing finance reform. 
Comprehensive legislation would ensure that components of 
reform are not at cross-purposes.
    Thank you for your opportunity today.
    Chairman Shelby. Chris, go ahead.

    STATEMENT OF CHRIS POLYCHRON, 2015 PRESIDENT, NATIONAL 
                    ASSOCIATION OF REALTORS

    Mr. Polychron. Yes, sir. Chairman Shelby, Ranking Member 
Brown, and Members of the Committee, thank you for the 
opportunity to testify. My name is Chris Polychron. I am the 
2015 President of the National Association of REALTORS, as 
Senator Cotton said, from Hot Springs National Park, Arkansas. 
I am speaking to you today, however, on behalf of over one 
million members of NAR.
    In communities across the United States, REALTORS help 
citizens from every walk of life achieve the dream of home 
ownership. However, millions of home buyers are still on the 
outside looking in. The Nation's home ownership rate has fallen 
close to levels last seen in 1990, and the number of first-time 
home buyers entering the market is at its lowest point since 
1987, despite historically low mortgage rates.
    Since 2008, we have seen good intentioned but over-
corrected policies severely hamper the ability of millions of 
qualified buyers to purchase a home. We have yet to strike the 
right balance between regulation and opportunity. We see the 
need for reform in four areas, and I will briefly discuss each 
now.
    The first area relates to Consumer Financial Protection 
Bureau. The 3 percent cap on points and fees needs to be fixed. 
This cap leads to reduced choices for consumers and prevents 
lenders from making qualified, or QM, loans. We also believe 
that underwriting standards should not be so restrictive that 
they prevent smaller community banks from lending to their 
customers.
    The second area is specialty markets. Twenty percent of the 
home buyers live in rural areas or small towns. We strongly 
urge Congress to provide the Rural Housing Service with direct 
endorsement authority to accelerate loan processing for 
borrowers, and manufactured housing should be encouraged as an 
affordable housing opportunity. And, Senator Cotton and others 
here, thank you for S. 682.
    The third area is short sales and foreclosures. 
Streamlining the short sale process will reduce the time it 
takes to sell a property and reduce the number of foreclosures. 
We also urge Congress to extend the income tax exemption on 
mortgage debt forgiveness. On both counts, we would be 
protecting our communities from foreclosures, which ultimately 
result in seeing a lot of homes that are boarded up.
    And, the fourth area is lending policies. Condos are often 
the most affordable option for first-time home buyers, 
including minority and the elderly. However, both the Federal 
Housing Administration and the Government-Sponsored Enterprises 
need to address overly restrictive policies. In addition, high 
guaranteed fees, or G-fees, are dragging down the first-time 
home buyers. Prices should basically be in line with risk.
    In closing, let me leave you with this. The Urban Institute 
recently estimated that we prevented home loans to four million 
qualified buyers between 2009 and 2013. This would not have 
happened had we had credit standards similar to the ones we had 
in 2001, long before the housing bubble. Instead, four million 
families missed out on buying a home because we are taking 
protection to an unnecessary extreme. Mr. Chairman, that is the 
equivalent of 80 percent of the population of your home State 
of Alabama.
    No one wants to see the return to the unscrupulous 
predatory lending practices that caused the Great Recession. 
But, what we can do is balance the common sense regulations 
with increasing access to credit.
    Thank you for your time. I look forward to answering 
questions later.
    Chairman Shelby. Thank you, sir.
    Mr. Motley.

STATEMENT OF J. DAVID MOTLEY, PRESIDENT OF BANKING AND MORTGAGE 
 OPERATIONS, COLONIAL SAVINGS, F.A., ON BEHALF OF THE MORTGAGE 
                      BANKERS ASSOCIATION

    Mr. Motley. Thank you, sir. Chairman Shelby, Ranking Member 
Brown, and Members of the Committee, I appreciate the 
opportunity to testify today. I am currently President of 
Colonial Savings, a community bank headquartered in Fort Worth, 
Texas. I am a past member of MBA's Board of Directors and I 
currently serve on the Community Bank Advisory Council for the 
Consumer Financial Protection Bureau.
    As a four-decade veteran of the mortgage banking industry, 
I can tell you from experience that recently enacted laws have 
created commendable consumer protections and have made the 
market safer. However, new regulatory demands imposed under 
these laws have negatively affected the availability and the 
affordability of safe, sustainable mortgage credit. Qualified 
borrowers, including many first-time potential home buyers, 
continue to have difficulty accessing credit.
    MBA has consistently supported reasonable requirements to 
prevent the repetition of past excesses. However, MBA's data 
show that mortgage credit availability remains far below the 
levels seen in normal times prior to the mortgage crisis, and 
much of this constraint can be attributed to new regulatory 
demands on mortgage lenders.
    Although the CFPB did good work in developing the Ability 
to Repay rule and the qualified mortgage definition, MBA 
believes it is time to consider changes to the QM definition. 
This will mitigate the adverse impact that initial rule has had 
on access to credit for some qualified borrowers. Additional 
adjustments to the rule can expand access to sustainable 
mortgage credit and ensure that lenders can fully utilize all 
four corners of the QM credit box.
    MBA believes that changes to the QM should be made 
holistically and not based solely on charter type or business 
model. Expanded product choices under the QM should not be 
limited to certain providers, and the burden should not be on 
the consumer to determine which institutions offer particular 
types of loans. This will only cause unnecessary consumer 
confusion and reduce competition.
    To this end, we support several changes to the QM 
definition, including expanding the safe harbor, increasing the 
small loan definition, replacing the current patch for 
Government-backed loans, and expanding the QM to include 
certain loans held in portfolio.
    With regard to a portfolio exemption, we believe that any 
such expansion should apply both to banks and to nonbank 
lenders who originate loans for sale to banks or private 
institutions that plan to hold them in portfolio. However, in 
order to protect against the reemergence of loans with 
particularly risky features, such as pay option ARMs, or stated 
income loans, or NINJA loans, we believe some of the parameters 
of the standard QM definition should be retained for portfolio 
QM loans.
    We also strongly support legislation that would exclude 
title insurance fees paid to lender affiliate companies from 
the calculation of points and fees under QM.
    Beyond these changes to QM, there are several other areas 
that could be addressed to facilitate increased access to 
credit for qualified borrowers. First, we strongly believe that 
the CFPB should offer authoritative written guidance to 
accompany its rules. The absence of timely written guidance 
from the CFPB has resulted in confusion and slowed the 
implementation process of several important regulations. This 
is particularly important in light of the forthcoming TILA-
RESPA integrated disclosure rule that will take effect in 
August.
    Second, the cost to service mortgage loans has increased 
dramatically. This is due to new CFPB rules as well as the 
punishing treatment of mortgage servicing rights under the 
Basel III framework. Under that rule, banks are required to 
hold extraordinary amounts of capital to support the MSR asset, 
making it less likely for banks like mine to retain mortgage 
servicing. These increased costs directly impact consumer 
access to credit and make new mortgage production less 
attractive to lenders. To address this situation, MBA supports 
Congressional efforts to mandate a study into the effect of 
Basel III on mortgage servicing rights.
    Third, MBA believes that FHFA should direct the GSEs to 
adopt the latest validated credit scoring models on an 
expedited basis. The newer models help score borrowers with 
limited credit experience, including first-time home buyers. 
Using updated models, lenders will be able to extend loans to a 
greater number of qualified borrowers.
    Finally, in addition to addressing many of the regulatory 
hurdles currently facing the mortgage market, MBA believes that 
Congress should continue its work from last year to address 
comprehensive housing reform.
    Again, I am grateful for the opportunity to testify before 
you today. MBA commends your efforts to examine the regulatory 
hurdles preventing qualified consumers from accessing credit 
and we are eager to work with the Committee to improve the 
availability of sound mortgage credit for American consumers. I 
will take your questions whenever you are ready.
    Chairman Shelby. Thank you.
    Ms. Gordon.

   STATEMENT OF JULIA GORDON, SENIOR DIRECTOR OF HOUSING AND 
         CONSUMER FINANCE, CENTER FOR AMERICAN PROGRESS

    Ms. Gordon. Good morning, Chairman Shelby, Ranking Member 
Brown, and Members of the Committee. I direct the Housing and 
Consumer Finance Team at the Center for American Progress, a 
nonpartisan think tank dedicated to improving the lives of 
Americans through progressive ideas and action.
    The other witnesses have ably sketched a picture of today's 
mortgage market, so I thought I would spend a moment revisiting 
yesterday's, when toxic, risk-layered mortgage products 
proliferated. These were aggressively pushed on consumers who 
could have qualified for more stable and affordable products 
and perversely incentivized brokers and lenders to strip home 
equity through excessive and deceptive fees.
    In the capital markets, investors poured money into the 
private label securitization machine in search of yield, while 
financial innovations aimed at managing risk actually spread 
that risk to every corner of the system.
    When the bubble burst, millions of Americans lost their 
homes, many unnecessarily due to a thoroughly broken mortgage 
servicing system. And, tens of millions more lost jobs, 
retirement savings, and, maybe worst of all, trust in the 
financial system.
    In the wake of the crisis, Congress and the American public 
supported comprehensive financial reform legislation to realign 
incentives and strengthen oversight. Yet, now, less than a 
decade later, the mortgage industry tells us if only Congress 
will roll back some of these crucial reforms, they will lend 
more.
    Yet, more lending without the core Dodd-Frank protections 
in place is exactly the wrong medicine for today's ailing 
market. If these important guard rails are improved, the 
likelihood of seeing a return to predatory and unsustainable 
lending is high and any gains in home ownership would be 
temporary and possibly dangerous. There will be no true 
recovery until public confidence is restored, and a 
Congressional about-face on reform will set that effort back 
years.
    Now, make no mistake. The CLEAR Relief Act, for example, is 
no simple tweak to adjust a lending standard. It is an 
evisceration of Dodd-Frank's core principle, which says that a 
lender should not make a loan unless it has reasonably 
determined that the borrower can afford to pay the entire loan 
back.
    Note that the qualified mortgage definition, or QM 
definition, that this legislation seeks to extend is not 
actually an underwriting standard like Ability to Repay is. It 
is a liability standard. It designates a category of mortgages 
so inherently super-safe that lenders need not fear any legal 
accountability if the loan goes bad. It excludes riskier 
products, such as negatively amortizing or balloon mortgages. 
It requires underwriting to the maximum possible payment in the 
first 5 years of an adjustable-rate loan. It limits excessive 
points and fees. And, it excludes borrowers whose total debt-
to-income ratios exceed a certain threshold.
    The legislation would confer this same absolute legal 
immunity on loans with virtually any terms and features as long 
as they are held in portfolio for 3 years by a bank with less 
than $10 billion in assets. And, just note, that definition 
covers all but the largest 110 depository institutions in 
America and well over half of all mortgage loan originations.
    Proponents of this bill argue that because loans are held 
in portfolio, lenders have an incentive to ensure a borrower 
will succeed, and in the case of small community banks, that 
has often been true, which is why those banks have a whole list 
of significant exemptions from Dodd-Frank that I have detailed 
in my written testimony.
    But, larger institutions have a much more checkered past 
and far less of an ability to ensure quality underwriting from 
all their originators. You will recall that Washington Mutual 
was a portfolio lender and its collapse was due entirely to 
loans that could not have met current QM status.
    What is more, by only requiring 3 years in portfolio, this 
product could entice--this could entice lenders to create loans 
whose price or other features dramatically increase after the 
3-year deadline, just like the ones that brought down the 
system before.
    Some of these other roll-back efforts are equally misguided 
and I discuss them further in my written testimony.
    Instead of gutting Dodd-Frank, let us get to work together 
on finding more effective and less dangerous ways to increase 
access to safe, high-quality mortgage credit. Congress should 
complete comprehensive housing finance reform, extend the 
Mortgage Forgiveness Debt Relief Act, convert the mortgage 
interest deduction to a credit, and allow agencies to support 
housing counseling. FHFA and FHA should continue to provide 
better demarcation of responsibility, fix the broken servicer 
compensation system, and pilot more effective ways to reach 
underserved markets.
    As memories of the crisis fade, let us not open the doors 
to a new round of predatory unsustainable lending. Instead, let 
us work together to create a healthier and more equitable 
housing market that drives economic growth and promotes 
opportunity for America's families.
    Thank you.
    Chairman Shelby. I thank all of you. Thank you, Ms. Gordon.
    I am going to ask each of you to briefly respond to this 
question. What are the two top--two or three, I should say--two 
or three regulatory barriers that you have identified as 
constricting mortgage credit and how should they be fixed, just 
briefly? We will start with you again, Mr. Woods.
    Mr. Woods. The first, I would say, is it needs to address 
the points and the overall cost of the loan, depending--there 
is a bill that you have today that is out there to do that, and 
I think that would be helpful. It is having a tremendous 
effect.
    Chairman Shelby. Uh-huh.
    Mr. Woods. The second thing is I believe that the 
guidelines should always be in writing. We have a real problem 
today that many times, and particularly with the auditors and 
whatever, there are verbal instructions given as to how they 
are to treat a loan, but it is not in writing, so it leaves it 
to somewhat----
    Chairman Shelby. Is it ambiguous? I mean----
    Mr. Woods. It is somewhat ambiguous, and the real problem 
becomes, and I am going to speak to this more as a community 
banker, you are scared to death about your little bank. You 
really do not want to be written up. And, so, you are going to 
step back even farther from the line, and when you do that, 
that is going to limit the fact of your doing business or if 
you will do business.
    Chairman Shelby. Basically, you are talking about 
certainty, are you not?
    Mr. Woods. I am talking about certainty. You are exactly 
right. Just tell me what the rules are. I can play by the 
rules. But, I cannot play the game if I do not know what the 
rules are.
    And, then, just the cost of the compliance. And, again, I 
am talking mostly smaller community bankers. Certainly, in the 
big banks, they have less ability to spread that cost.
    Chairman Shelby. That is right.
    Mr. Woods. So, if you have to add personnel to a small 
community bank, they are not making billions of dollars. They 
are making thousands of dollars----
    Chairman Shelby. And they are not making loans----
    Mr. Woods.----and that one person makes them unprofitable.
    Chairman Shelby. And they are not making loans if they are 
not----
    Mr. Woods. They are not making loans.
    Chairman Shelby. Chris.
    Mr. Polychron. Chairman Shelby, I would say one area, and 
especially, like, in my market in Hot Springs National Park, 
Arkansas, FHA has made the restrictions on condo loans to where 
very few of our developments qualify for those loans. They are 
an excellent opportunity for first-time home buyers, elderly, 
minorities, as well----
    Chairman Shelby. Tell me why. Are they cheaper, basically, 
than a single detached home?
    Mr. Polychron. Yes, sir, they are cheaper, A, and they 
are--a lot of our young people are wanting to move to the 
downtown areas----
    Chairman Shelby. And what is the barrier, refusal to make 
the loan, or what is it?
    Mr. Polychron. Well, basically, the restrictions require 
100 percent or a high percent of the whole development before 
it can be done. They are usually run by private boards and 
those people are not qualified, and as a result, they just do 
not finish the process. We have been working with FHA to try to 
alleviate that and, hopefully, something will happen soon.
    I agree with Mr. Woods, second, that--take GE Finance. They 
recently announced they are going out of business because the 
cost to do business----
    Chairman Shelby. No, they are not going out of business. 
They are selling to somebody.
    Mr. Polychron. Well, they are selling their----
    Chairman Shelby. Yes.
    Mr. Polychron. They are going out of the finance business 
for us----
    Chairman Shelby. Right. Right. Right.
    Mr. Polychron.----and, you know, they listed compliance, 
regulations, cost of doing business.
    Chairman Shelby. Mr. Motley, one or two, your top ones.
    Mr. Motley. I think that one of my top points is the 
restrictive nature and the very prescriptive nature of the QM 
rules themselves, for instance, the 43 percent DTI ratio, and I 
will give you an example. Just last week, we had a self-
employed borrower that was making an application with our 
company. It was a jumbo loan, so we could not avail ourselves 
of the GSE patch. So, this was a jumbo loan. Our investor 
required that the loan be QM.
    In this particular case, this borrower had been self-
employed not quite 24 months, which is required under Appendix 
Q of the QM rule. So, even though we had great income history, 
we had a record of good credit, we had good downpayment, all of 
that, it did not meet the QM standard because he had--we could 
not justify or could not show that he had been self-employed at 
that level of income for 24 months, only 23. So, we could not 
make that loan.
    It did not matter that it was an 80 percent loan. It was 
not a high level, high LTV loan. But, that is the kind of one-
size-fits-all in Dodd-Frank that just does not work. We need 
some ability to exercise prudent judgment. We are not talking 
about going back to NINJA loans. We just want to have the 
ability to make prudent loans----
    Chairman Shelby. So, you think that is a literal 
interpretation of the 24-month deal----
    Mr. Motley. I do.
    Chairman Shelby.----rather than a little bit of 
flexibility, just a little. And, you thought that was a good 
loan, did you not?
    Mr. Motley. Yes, sir.
    Chairman Shelby. OK. Ms. Gordon.
    Ms. Gordon. I do agree regarding the uncertainty in a 
variety of areas, but I will mention a couple of other things. 
One is pricing and downpayment, and that is because we are 
suffering from a problem with income and wealth inequality in 
this country, especially for communities of color who represent 
the majority of home buyers of the future. I would strongly 
suggest that we do more risk pooling, particularly Fannie and 
Freddie, rather than really excessively tiering the pricing, 
but we----
    Chairman Shelby. Explain what you mean exactly. You are 
talking about----
    Ms. Gordon. So, Fannie and Freddie had historically--they 
created this national mortgage market so we were not that 
dependent on what happened in particular regions of the 
country, you know, if one region had a downturn, and they made 
mortgages really a commodity. So, there was basically a price 
most people in the country kind of knew what their mortgages 
would be.
    Because of the crisis, when Fannie and Freddie went into 
conservatorship, the conservator created this very steep grid 
of, you know, you pay a lot more for a mortgage, for example, 
if you are only able to afford a smaller downpayment----
    Chairman Shelby. OK.
    Ms. Gordon.----even though you still have to have Private 
Mortgage Insurance to cover that, and that has been a real 
problem, particularly for the folks who were hardest hit by the 
crisis and who may have less family wealth.
    I also hope that the whole mortgage industry can work 
together on the problems of wage stagnation and income 
inequality because that is just a big part of the market 
problem today, is affording a home.
    Chairman Shelby. Sure.
    I will address this to you, Chris. In your testimony, you 
express support for legislation allowing communities to appeal 
to the CFPB for consideration as a rural community. You know, 
the small towns and the rural areas of America make up a lot of 
America, as you testified. Would you elaborate on what could be 
at stake if otherwise rural communities are not technically 
recognized by the CFPB as rural and so forth? Go ahead.
    Mr. Polychron. I can even give you a personal example in my 
own State.
    Chairman Shelby. OK.
    Mr. Polychron. We recently had a State director make a 
ruling that one of our areas was no longer rural. We had no 
recourse but to go to her, and we ultimately convinced her----
    Chairman Shelby. But, you were not urban, though, were you?
    Mr. Polychron. No.
    Chairman Shelby. OK.
    [Laughter.]
    Mr. Polychron. And, we finally convinced her that it was 
rural. If we had not had the ability to bring that back up, 
those people would not have been afforded the opportunity to do 
a 502 through Rural Housing. So, I would tell you that other 
reasons--there are areas like, take Fayetteville, Arkansas, 
where the University of Arkansas is. A lot of that population 
is counted in the Census and it would make it look like that 
area is urban when it really is not.
    Chairman Shelby. It is a distortion, is it not?
    Mr. Polychron. It can be a distortion, yes, sir.
    Chairman Shelby. OK. I have a number of other questions I 
will submit for the record. We are into time constraints.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Ms. Gordon, I will start with you, and then I have a 
question for Mr. Motley. Working families trying to buy a home, 
as you pointed out, seem to have the deck stacked against them. 
Stagnant, slow wage growth, increasing student loan debt 
burdens, combined with the recent increase in home values can 
reduce a family's ability to save for a downpayment or reduce 
their other debts to qualify for a loan. What impact are 
these--we have heard about Government regulations as the major 
reason, or almost the only reason from other panelists. What 
impact are these economic factors having on the housing market?
    Ms. Gordon. So far, we have not actually seen any evidence 
that the problem in the housing market is the financial 
reforms. We have seen quite a lot of evidence that downpayment 
requirements and general tightness of the credit box are a 
problem, particularly since some of the biggest actors in the 
system still use old credit models that do not take new 
developments into account. And, we also have seen how a lot of 
the uncertainty, the uncertainty about the system generally, 
with Fannie and Freddie still in conservatorship, as well as 
uncertainty about repurchases, about default servicing costs 
and the like, that is really holding the market back.
    We really have seen no evidence so far, and there have been 
some studies and surveys on this, that QM is really making much 
of a difference, and particularly for smaller institutions who 
have a number of exemptions. By and large, community banks are 
lending the same way they always did.
    Senator Brown. Thank you.
    Mr. Motley, the title of today's hearing is about helping 
borrowers get access to mortgage credit. So far, we have heard 
a lot from the panel about what Congress could do to help 
lenders. Thank you for that insight and those thoughts.
    According to Bankrate.com, the interest rate on a 30-year 
mortgage averages around 3.8 percent, even with a 660 credit 
score and paying 5 percent down. That sounds like a pretty good 
deal by any historical standard.
    If the issue, therefore, is not the cost of a mortgage, 
what prevents you from making this kind of loan, and how does a 
proposal like allowing lenders to charge higher fees give 
homeowners--give potential homeowners, give borrowers more 
access to affordable credit?
    Mr. Motley. Let me answer your last question--I will answer 
your last question first. Low- to moderate-income borrowers 
typically are going to have smaller loans, smaller purchases. 
So, fees, closing costs, are often reflected in fixed amounts 
rather than a percentage of the loan. So, a smaller balance 
loan is going to hit that 3 percent points and fees cap sooner. 
So, if I cannot premium price the loan, raise the interest 
rate, to cover some of those fees through premium, then I am 
not going to be able to make that loan and stay within the 3 
percent points and fees cap and, therefore, a QM.
    Now, there is another regulator----
    Senator Brown. But, you could make the loan. You just could 
not get QM protection, correct?
    Mr. Motley. Right. That is correct. So, I have got to weigh 
the option of going with a rebuttable presumption risk as 
opposed to a safe harbor.
    Now, I can only raise the rate so far because there is 
another Governor on this protection for consumers. Currently, 
in order to stay in a QM state, I cannot go above 150 basis 
points above the average prime offer rate. Now, the average 
prime offer rate is a lookback. It is an index that was 
published, let us say, last week. So, in a rising rate 
environment, I am automatically squeezed when I look at that 
calculation. So, I need to have that APOR margin, the margin 
over APOR, increase so that I can counteract the effect of 
potentially rising interest rates.
    And you know that interest rates are historically low. They 
have been low for a long time. We all think, eventually, they 
are going to go up. They have not yet, but that would help, if 
we could have a 200 basis point spread over APOR and still 
retain QM status, as well as we could handle more small balance 
borrowers if we could increase the points and fees cap.
    Senator Brown. Well, I think it is--thank you for that 
response. I think it is important to remember these mortgage 
rules provide legal liability protection. Nothing prohibits you 
from making these loans if you think they are good quality 
loans and the chances of repayment are high. They really shift 
the burden to the borrower to show that a lender knew they 
could not pay back the loan.
    Obviously, that is the story of QM, understanding that 
lenders can go ahead. They can make that loan. They just do not 
have the legal liability protection afforded by QM. I think it 
is very important to make that point. The Government is not 
telling anyone they cannot make these loans. They just do not 
get the legal protection afforded by QM, so I think it is 
important to note that the lender here is making a business 
decision. Is this loan likely to be paid back?
    Let me ask one more question with Ms. Gordon. The CFPB 
released updated small and rural lender definitions earlier 
this year in response to concerns about the previous 
definition, as you know. How does the new proposal change the 
small and rural lenders that qualify for exemptions? Are there 
other exemptions that they already qualify for?
    Ms. Gordon. Well, like I said, in my written testimony, I 
actually provide a whole list of exemptions that smaller 
lenders already have, and the new proposals, I think, will also 
be helpful and, to me, really demonstrate how the CFPB is 
really trying to take into account the concerns of the mortgage 
industry.
    I should note on your previous question that there is also 
an exception from the 3 percent points and fees cap for loans 
under $100,000, which covers quite a lot of the loans that go 
to low- and moderate-income people around different parts of 
the country, though maybe not right here in Washington, DC.
    Another compromise that the CFPB created was as passed by 
Congress, there actually was no safe harbor. There was just 
something called a rebuttable presumption, which is lawyer talk 
for who has the burden of proving what. And, the industry went 
into CFPB and said, we really feel like we need this real legal 
immunity and they were given that extra that was above and 
beyond what the statute had said.
    So, there have been quite a lot of compromises with CFPB. I 
think in a number of them, consumer groups have worked with 
business groups very productively and, I think, will continue 
to do so at the CFPB. And, at this point, this is why I do not 
think on most of these things we really need Congressional 
rollbacks of the actual statute.
    Senator Brown. I think the point you make, and then I will 
yield, Mr. Chairman, about the cost of homes, you said the 
$100,000 figure. The median list price in the Midwest region, 
according to the National Association of REALTORS, for home 
sales is $152,000. And in the Cleveland area, 9,000 homes--so, 
it is not a small sample--it is $128,000. In Akron, it is 
$108,000. Across the border in Indiana, it is around that same 
price. So, that is a lot of homes, that is the median price.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Cotton.
    Senator Cotton. Thank you.
    I would like to discuss legislation I cosponsor with 
Senator Donnelly that Mr. Polychron mentioned earlier, S. 682, 
the Preserving Access to Manufactured Housing Act. Ms. Gordon, 
I would like to start my questions with you. Were mortgage 
loans a prime driver of the financial crisis in 2007, mortgage 
loans to manufactured housing owners?
    Ms. Gordon. So, actually, mortgage loans to manufactured 
housing owners have been a problem far longer than the 
financial crisis. You know, there are two different ways that 
those loans can be titled. They can be titled as real estate or 
as chattel, and the chattel loans have long had far fewer 
consumer protections, and those loans have always been a lot 
more expensive than loans for site-built homes.
    And, so, the many households who rely on manufactured 
housing, which is a really important, as you know--I mean, in 
your State--actually, I am looking around the room, in all of 
your States, manufactured housing plays a really important role 
in some communities. You know, that was in particular need of 
consumer protection even before some of the excesses that were 
associated with the Wall Street private label securities, 
because you are right, the manufactured housing did not really 
have that intersection.
    I think it is really important to help increase safe and 
affordable credit for manufactured housing and, in fact, have 
been urging the Federal Housing Finance Agency to include--to 
incentivize more and better manufactured housing loans through 
their Duty to Serve rulemaking by actually including chattel 
loans as well as real estate titled loans, and I think that is 
going to be a really important effort, and I have also been 
working with some business groups on that.
    I do not think the right way to go about solving the very 
real problem of credit for those loans is by removing consumer 
protections that attach to higher-cost credit.
    Senator Cotton. So, I infer the answer to my question is 
no, mortgage loans to manufactured housing owners were not a 
prime driver of the 2007 and 2008 financial crisis.
    Ms. Gordon. Well, they were not a prime driver of what 
happened on Wall Street, but they were very much a part of the 
lost wealth and foreclosures of families.
    Senator Cotton. Were those loans a primary part of 
collateralized debt obligations or credit default swaps that 
caused the problems that led to the financial crisis?
    Ms. Gordon. Absolutely not.
    Senator Cotton. You state in your written testimony that if 
our legislation passed, the Preserving Access to Manufactured 
Housing Act, quote, ``a lender could charge nearly 10 
percentage points higher than a prime mortgage rate,'' end 
quote. I infer that you think that that is a bad thing.
    Ms. Gordon. So, higher-cost loans are sometimes--I mean, 
there are a lot of reasons, a lot of good business reasons to 
charge higher rates under certain circumstances. But, studies 
have repeatedly shown that higher rates are actually in and of 
themselves an additional risk factor. So, if you are in a 
situation where those higher rates are important and necessary, 
giving consumers some extra protections against other predatory 
features is really important.
    Senator Cotton. Section 1431 of the Dodd-Frank Act empowers 
the Consumer Financial Protection Bureau to allow points and 
fees up to 10 percent on high-cost mortgages. Do you think that 
section of the Dodd-Frank Act is not sufficiently protective of 
consumers?
    Ms. Gordon. Well, one of--what Dodd-Frank did was they 
actually revisited the thresholds that had previously existed 
for HOEPA loans, which are the high-cost loans, and those 
thresholds had been established at a time where, generally, 
rates were really, really high for all mortgages, and they 
adjusted them downward to reflect the new rate environment.
    And, I should note that the CFPB actually has extremely 
broad exception authority to virtually everything in the 
statute, and working with the CFPB continues to make sense, and 
they have continued to balance interests pretty well. But, I do 
not think there is any reason to revisit the statute, no.
    Senator Cotton. So, I would note that our legislation 
simply acknowledges the economic fact that mortgage loans for 
manufactured housing are often a quarter of the cost of homes 
for site-built, or site-built homes, and the origination costs, 
though, do not always fall that low and, therefore, these fees 
can be somewhat higher.
    Mr. Polychron, would you like to describe the importance of 
manufactured housing in places like Hot Springs National Park, 
Garland County, in Arkansas?
    Mr. Polychron. Yes. Manufactured housing is a big part of 
it, especially for minorities, for people that cannot afford 
the higher-priced homes. I would submit that even if the cost 
was, say, ten basis points higher, a lot of times, that 
manufactured home buyer can still purchase a home and have 
payments less than he would with a higher-priced home, and I 
think that individual would like that option.
    Senator Cotton. Would it be fair to say that, sometimes, 
that can even be lower than what they might be paying for rent 
in places like Arkansas?
    Mr. Polychron. It would be by far. Rents have gone sky high 
in our State, mainly because the difficulty to get credit. I 
foresee renters at some point, hopefully soon, converting to 
home ownership again.
    Senator Cotton. Thank you.
    Chairman Shelby. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Chairman, I think about this topic and I go back to the 
time we were here, where mortgage lending was at the heart of 
the financial crisis and borrowers of modest means received 
risky subprime loans they could not afford as financial 
companies chased profits and left taxpayers on the hook for the 
downside. And, we know the damage that the crisis caused. 
Families lost their homes, their jobs, their savings. 
Businesses had to close their doors and communities were 
devastated by foreclosures.
    So, the crisis reminded us how important a healthy mortgage 
market is to our economy, not just to financial stability, but 
to families' ability to build wealth and strong communities. 
And, as our economy continues to recover, the pathway to home 
ownership, I believe, must remain open and affordable.
    Now, I understand no legislation is perfect, and in areas 
where regulations are an obstacle, we should look to improve 
them. At the same time, it can be tempting to blame regulation 
for broader market challenges or to use unrelated problems as a 
pretext for rolling back consumer or financial stability 
protections. So, I look forward to working with my colleagues 
on the Committee to find ways to improve access to credit, but 
to consider all the elements of that.
    In that context, Mr. Woods, in your testimony, you 
discussed the recent moves by Fannie and Freddie to back well 
underwritten loans with downpayments as low as 3 percent in 
cases where borrowers can demonstrate their ability to repay 
and other compensating factors. As, I think, almost everyone 
here knows, saving for a downpayment can be a significant 
obstacle for a family to purchase a home. Would you say that 
this decision by Fannie and Freddie represents a positive step 
by giving a greater number of creditworthy borrowers an 
opportunity to responsibly and affordably purchase a home?
    Mr. Woods. I think it is a very responsible--I am sorry. I 
would say it is a very positive step. There is one indicator 
out there that for years stands out when we talk about the 3 
percent, or 2, or wherever you are at. VA loans perform quite 
well, and they are zero down loans, and they have always 
performed, but they have some other guidelines within them that 
help that process. Plus, that individual has some training in 
responsibility.
    Senator Menendez. Mm-hmm. Do our other witnesses agree?
    Ms. Gordon. Absolutely. I think that the ability to get a 
home with a lower downpayment is absolutely critical for 
today's home buyers. And, I want to note that what is really 
important when you are thinking about lower downpayments is 
making sure you are not layering other risks in there. It was 
not low downpayment products that caused the crisis. It was the 
risk layering. And, so, that is why, especially when it is so 
important right now to have these low downpayment products, 
because families really do not have that much wealth, that is 
why it is absolutely not the time to ease up on the other 
protections.
    Mr. Motley. Senator, I agree with Ms. Gordon completely. As 
long as the 97 percent loan is prudently underwritten, we are 
not layering risks, I think it is a good step toward reviving 
the housing market.
    Senator Menendez. Mm-hmm.
    Mr. Polychron. And, Senator, I would concur. I would also 
add that the lowering of the FHA fees from 1.35 to 0.85, you 
know, on a $200,000 house made a difference of $90 a month, and 
it certainly brought more first-time home buyers into the 
market.
    Senator Menendez. Good. Now, let me ask you another 
question. Almost all of you discussed in your testimony how 
updated credit score models can improve loan underwriting and 
expand access to a broader population of potential buyers, 
particularly in underserved communities. The developers 
estimate these new models can provide scores for anywhere 
between 15 and 40 million previously unscored consumers.
    Can any of you share with me what are the biggest obstacles 
to widespread adoption of the newer, better models? Is it 
implementations by the GSEs or is it other factors?
    Mr. Motley. In my opinion, it is implementation by the 
GSEs. They just have not gotten around to technologically 
utilizing those models.
    Ms. Gordon. Well, there are some other obstacles, as well, 
which is that particularly rent reporting, which is a big part 
of the newer experiments with scoring more people, you are 
relying on a lot of private landlords, often mom-and-pop 
landlords, to do that reporting, and I think that is going to 
be a challenge to make sure it is done right. But, I think it 
is really important and will allow many more people to be 
scored.
    On scoring utilities, I think there are some special 
problems there that you have to really make sure you have 
consumer protection. Many folks benefit from utility subsidy 
programs, particularly in the colder States, and utility 
companies are well known for a lot of billing problems. So, 
this has to be done carefully, but I think both FICO in 
updating their models and VantageScore have been really working 
on this quite carefully and it is very important that Fannie 
and Freddie get contemporary with this.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Motley. And, I would just follow up with that, is that 
for years, we have used alternative credit like you are talking 
about with utilities, with a rent bill, something that is not 
reported to the credit bureau. But, being able to have this put 
into a system and actually graded will assist us in evaluating 
borrowers who have thin credit.
    Chairman Shelby. Thank you.
    Senator Sasse.
    Senator Sasse. Thank you, Mr. Chairman.
    Ms. Gordon, not to keep you in the crosshairs the whole 
time, but I appreciated some of your comments about PMI and 
mortgage insurance. I think that many of the comments that you 
have made, though, about the possibility of exemptions from 
Dodd-Frank, I wish we could have the time to take you to a 
small town in Nebraska and you could sit with some community 
bankers. And, so, I wonder if we could do that as a thought 
experiment.
    Many of these folks do not have any sense that they were a 
contributing factor to the fall of 2008. It is not entirely 
clear to me if you think they are guilty. They think that they 
are guilty in the eyes of Washington and lots of regulations 
that they cannot navigate. I will not bore you with all the 
technical archana, but in a lot of towns in Nebraska, the 
average mortgage is well under $100,000, and I have sat with 
these community bankers and it does not make economic sense for 
most of them to be writing mortgages at all. They do it as a 
community service, but it is not an economically viable 
business.
    Could you explain, in small town Nebraska, where a lot of 
mortgages are less than $100,000, do you think they did 
something wrong in the run-up to 2008, and if so, what?
    Ms. Gordon. I do not see small community banks as the root 
of the problem in 2008. I would love to work with you on a 
positive agenda for helping smaller institutions be 
competitive. I think it is important to note that smaller 
institutions have been declining for decades, long before the 
crisis, and a lot of that is because the economics of the 
business right now tend to, you know, push toward larger 
institutions where you can spread the fixed costs better.
    I think there is quite a lot that can be done in the area 
of technology to help bring down the costs of compliance, 
because, I mean, we could get rid of all of Dodd-Frank 
tomorrow, but there would still be myriad other regulations 
that banks would have to comply with and a lot of that is 
susceptible to technology. Some of the larger institutions have 
the resources to do that.
    And, I think it is really important, and that regulators 
should be involved in this, too, in trying to make sure we are 
developing the infrastructure of sort of off-the-shelf, cloud-
based resources that can be used.
    I have talked to a lot of small lenders. I know when they 
think about replacing their technology systems, that sounds 
almost insurmountable to them, and this is true in the small 
nonprofit sector, as well. Unfortunately, it just has to be 
done to keep current, and I would love to work on a positive 
agenda to help do that for that sector. I think that sector is 
very important.
    Mr. Motley. And, if I could follow up on that just a little 
bit----
    Senator Sasse. Please.
    Mr. Motley.----talking about the infrastructure necessary 
to incorporate and to build these regulatory requirements into 
our systems. You know, 2 years ago, we had three people in our 
compliance area. We had two workers and an administrative 
person. We now have 12 people in our compliance area.
    And, when you think about TRID, a 1,700-page document, 
well, my goodness, we had to hire all those people so they 
could read it, so they could figure out how to implement it and 
figure out how to--what does this mean to the business process 
every day. And, then we have to go train on it, and we have to 
make sure that our loan officers know how to do it.
    And, specifically with TRID, you have got this new waiting 
period between the time that you issue a closing disclosure and 
the time that you can actually close on the mortgage or 
consummate the mortgage. That means that real estate agents, 
builders, title people all have to be trained. So, this is a 
tremendously difficult task that we have in front of us to try 
to implement TRID.
    So, it is just to say what Ms. Gordon is saying, is that 
the training burden of implementing these regulations is really 
quite great. And, I would follow with that and say that we are 
hopeful that we can get the CFPB to delay via rule 
implementation of enforcement on this TRID rule, because we 
have really been inundated over the last 24 months with myriad 
new rules and we are up to here. We are choking. We are about 
to drown.
    Senator Sasse. That is helpful.
    I have got less than a minute left, so Ms. Gordon, could we 
go back to you just for a minute. So, then, go upstream one 
step. Give the 45-second--I think that is all the Chairman is 
going to let me have--give the 45-second answer to what was the 
contributing factor of the housing bubble for lower-income and 
middle-income families in rural places where housing is cheap. 
What regulatory problem was not being addressed that they 
contributed to that required any new regulation in 2008.
    Ms. Gordon. Well, here is what happened, and this is what 
is so important now, is those small community banks did not 
cause the crisis, but their larger brethren, in fact, did, and 
what we have seen during the lobbying before Dodd-Frank was 
passed, during Dodd-Frank, and after Dodd-Frank is, actually, 
you see a lot of institutions that are not the kind of banks 
that you are talking about kind of hiding behind the skirts of 
those banks and using them as an excuse to get out of the 
regulations that are really important for the institutions that 
were, in fact, involved in the shenanigans that ultimately led 
to the crisis.
    Senator Sasse. So, just to interrupt for a second, though, 
but, I think, in earlier questioning, you said there are 
potentials for exemptions from Dodd-Frank and from other 
regulatory regimes that could be applied to these people. Let 
us not talk about whether or not big banks did some--were bad 
actors and they are hiding behind the small banks. I am asking 
you, why was there new regulation necessary on mortgage 
products for $50,000 and $75,000, period? These exemptions 
could be used, but they are not being used. So, what was the 
problem that required these new rules to be applied to lower-
income and middle-income people in places where housing markets 
are cheap?
    Ms. Gordon. So, lower-income and middle-income people were 
the victims of this crisis and what we had to do was regulate 
the products. You know, the page six----
    Senator Sasse. And, so, those products are evaporating----
    Ms. Gordon. Page six has a list of the exemptions which 
were put in there because we know a lot of those community 
banks have a model where they make the 3- or 5-year balloons, 
right. They do--you know, they may service fewer than 5,000 
loans. They have a lot of exemptions here, but the fact is, 
when you regulate an industry, you have to regulate for the 
vast middle of the industry and this is--I think these 
exceptions are a very appropriate way, and if there is a reason 
that they are not using those exceptions or taking advantage of 
them, I think that is a training and education and regulatory 
issue we should work on.
    Senator Sasse. Yes. I do not think that is accurate. I 
think there were mortgage products that were available with 15 
to 20 pages of paperwork that are now hundreds of pages, and I 
think your answer is, regardless of whether or not there is a 
problem, let us empower bureaucrats, and then later you can 
come and supplicate before the bureaucrats and see whether or 
not you can get a carve-out. That is not what is happening, 
though. The access to mortgages is being reduced and eliminated 
in rural communities, and the argument is, you could go and ask 
for regulators to later give you the freedom to offer products 
that were not a part of the problem.
    Ms. Gordon. So, if you look at who is originating mortgages 
right now, actually, small institutions are originating more 
than ever and their profits on mortgages are increasing faster 
than the profits for any other sector of banks making 
mortgages. So, you know, I hear that there is an issue. Many of 
these exemptions were baked into Dodd-Frank. These were not 
just regulatory decisions. Others were regulatory decisions 
made after they heard from representatives of these small 
banks. But, I do not see why an exemption is different than not 
having the rule. The fact is, you do not have to do the rule if 
you have an exemption.
    Senator Sasse. I wish we had more time. Thank you.
    Chairman Shelby. Mr. Motley, let me pick up on something 
you said, then whatever you want to add, and then I will 
recognize Senator Warren. You said a minute ago, as I 
understood it, that you had to go from 2 people to 12 people on 
compliance, is that correct?
    Mr. Motley. Yes, sir.
    Chairman Shelby. That is six times the cost of personnel.
    Mr. Motley. Yes, sir.
    Chairman Shelby. Somebody has to pass that on or you go out 
of business, right? It is added to the cost of doing business.
    Mr. Motley. Yes, sir. It is added to the cost of doing 
business. I am not doing any more loans, but I have more 
compliance----
    Chairman Shelby. Is there not some way, picking up Senator 
Sasse's comments, to streamline these regulations and put them 
in plain, unambiguous English where people will know what is 
certain there and what is not? Could it be----
    Mr. Motley. Yes, sir----
    Chairman Shelby. It looks to me like----
    Mr. Motley.----I believe it is, and we support holistic 
fixes, not carve-outs for individual things.
    Chairman Shelby. No, no----
    Mr. Motley. We want some holistic fixes that allow lenders 
to have underwriting guidelines that are prudent.
    Chairman Shelby. When you say fixes, you mean certainty and 
guidelines?
    Mr. Motley. Yes, sir.
    Chairman Shelby. OK. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    You know, I agree with a lot of what has been said here 
today. Access to mortgages is painfully tight, especially for 
people who are not well to do, and we should find responsible 
ways to increase access to credit. I am there.
    But, once again, there are a lot of proposals that are 
being pitched as improving access to credit that are really 
about letting the mortgage industry dig deeper into consumers' 
pockets, and I think a good example of this is the Mortgage 
Choice Act. After the crisis, Congress decided that a lender 
could get the protection of the Qualified Mortgage Rule only if 
the points and fees on a mortgage were less than 3 percent of 
the loan amount. Now, if the lender is affiliated with the 
title company, the cost of title insurance through that 
affiliate counts toward the 3 percent cap, which makes sense 
because most of the cost of title insurance is commissions, and 
most of that revenue is going to find its way back into the 
lender's pocket.
    You know, the 3 percent cap is an important step toward 
fixing the broken noncompetitive market for title insurance. 
For other forms of insurance, not title insurance, where there 
is a competitive market, between 50 and 80 cents of every 
premium dollar goes to paying out claims. But, for title 
insurance, according to the GAO, it is five cents, one nickel 
out of every dollar that is collected.
    The GAO also reports that more than 70 cents on every 
dollar is pure commission for the title agents. Subjecting 
affiliated title insurance costs to the 3 percent cap should 
help bring some competition and lower these artificially 
inflated prices.
    Now, Mr. Motley, as you know, the Mortgage Choice Act would 
blow up the 3 percent cap by exempting the affiliated title 
fee. It says that you can separate it and get money from two 
different sources. In your testimony, you claim that applying 
the cap to affiliated title insurance fees has made, quote, 
``low-balance loans serving low- and moderate-income borrowers 
much costlier to originate and, consequently, less available to 
consumers.'' In other words, the cap--that is the part this 
part of your testimony is about--is making it harder for people 
to get low-dollar loans.
    Now, I care a lot about the question about access to low-
dollar loans, so I have looked closely at the data since the 3 
percent cap went into effect last year and I just cannot find 
any data to support that claim. I have also asked companies to 
give me some data to back up the claim, but so far, nobody has 
done that.
    So, I notice that you do not cite any data in your 
testimony and I would like to know what data you are looking at 
to support your claim.
    Mr. Motley. Senator, I am actually considering the 
combination of the affiliated title insurance--we had an 
affiliated title insurance company. With the new rule, as you 
have stated, we were required to include the title insurance 
premium, and I would disagree with you in the sense that the 
title insurance premium in Texas, anyway, is the vast majority 
of the total fees charged to a consumer. It is not a minority. 
It is the majority of those costs.
    Senator Warren. Well, all I can do is look at the 
Government Accountability Office report on this----
    Mr. Motley. OK.
    Senator Warren.----and that is that for title insurance, 
the amount that is paid out is a nickel for every dollar 
brought in. If you have got better data than the GAO, then 
please bring them in.
    Mr. Motley. OK. I will get back to you with that. But, with 
regard to the----
    Senator Warren. I would like you to.
    Mr. Motley. With regard to the affiliated title insurance 
question, I had a title insurance--we had an affiliated title 
insurance company for about 6 or 8 years. One of the reasons 
that we had that title insurance affiliated company is because 
we felt like we could provide better service to our mortgage 
customers, particularly in a refinance scenario, where I could 
actually meet or beat the costs of a competitor by using my 
affiliated title----
    Senator Warren. Mr. Motley, since we have very limited 
time, let me just stop you right there. I have no doubt that 
you can get revenue from your title insurance company and you 
can get revenue from your mortgage lending business. The 
question I am asking is what data you have to support your 
claim in your testimony in which you said specifically, low-
balance loans serving low- and moderate-income borrowers are 
much costlier to originate and, consequently, less available to 
consumers because of the 3 percent cap. I cannot find any data 
to support that and I just want to know what you are using.
    Mr. Motley. Thank you. Let me say that what happens is, 
with an affiliated title company, I have got to include those 
affiliated title charges in my loan origination cost, so that 
becomes part of my costs and fees. So, at a certain level, I go 
over those caps.
    Senator Warren. I understand that, that you are not going 
to get as much money. The question is, why does that stop you 
or raise the cost? Do you have any data to support----
    Mr. Motley. Well, it is not just that I may not make as 
much money. It is also a competitive issue, because when I look 
at my affiliated company and my disclosure to the borrower on 
my good faith estimate, my costs are going to be higher than if 
I used a non-affiliated company, or if someone else was 
comparing my disclosure to a non-affiliated company.
    Senator Warren. I am going to take that as you have no 
data, other than how you describe your business model on how 
you make money. Maybe I should just ask this----
    Mr. Motley. I will try to get--I will get back to you with 
some data.
    Senator Warren. I would be delighted to see that.
    Let me ask this another way. Data from both Fannie and 
Freddie Mac and the mortgage industry show that the average 
mortgage origination fees are under 1 percent of the loan 
amount. So, that means for a $100,000 loan, a lender can 
typically charge more than $2,000 for title insurance and still 
be under the cap. Since claims are only eating up about five 
cents of every premium dollar, that leaves about $1,900 in 
commissions before you hit the cap. Is that not enough?
    Mr. Motley. Senator, you are asking me about the commission 
structure with title insurance companies and I am not involved 
in that business anymore.
    Senator Warren. Well--thank you. I just want to say, the 
Mortgage Choice Act should not fool anyone. The CFPB has 
already exempted the vast majority of smaller lenders from the 
QM rule, including the points and fees cap, for any loan they 
hold on portfolio. So, this is really about bigger lenders. 
This is about trying to get bigger fees from consumers. It is 
about preserving a cash cow for the mortgage industry and not 
about access to credit and I urge my colleagues to oppose this 
bill.
    Chairman Shelby. Senator Corker.
    Senator Corker. Thank you. This is an interesting hearing.
    Mr. Motley, a large group of us on this Committee wrote a 
letter to FHFA about the Common Securitization Platform they 
are developing, asking to make sure we had enough outside 
advising, if you will, to make sure that it was not just 
crafted only for Fannie and Freddie's use. Do you think it 
would be appropriate for somebody from the mortgage industry to 
actually participate in that panel?
    Mr. Motley. Yes, sir, I do.
    Senator Corker. OK, and just for the record, I hope that is 
something that we will pursue.
    I want to follow up on Senator Warren's comments. What I 
see happening here is people, generally speaking, on my side of 
the aisle are trying to develop legislation to change the rules 
of Dodd-Frank to create better access to mortgages, if you 
will. What I see happening on the other side of the aisle is 
that Senators, instead of pursuing it that way, they are trying 
to create better access to mortgages by trying to get FHA and 
Fannie and Freddie and others to loosen up on the Government 
side. So, it is an interesting thing. Republicans are trying to 
write legislation to fix it, but what is happening is my 
friends on the left are trying to push the federally owned 
entities from getting them to do the same exact thing. So, both 
of us, if you look at it, really, both of us are trying to 
create access to credit. We are just doing it in different 
ways.
    And, I would just like to ask the question, would it not 
make more sense, instead of maybe us pursuing this route and 
then pursuing that route, would it make more sense for us just 
to go ahead and do comprehensive housing finance reform and 
create certainty and solve the problem once and for all? I 
would just like for the witnesses to potentially respond to 
that.
    Mr. Motley. It absolutely would.
    Mr. Woods. It would.
    Mr. Polychron. [Inaudible.]
    Ms. Gordon. I support comprehensive housing reform, as you 
know, but we would also still need the regulatory protections 
of Dodd-Frank.
    Senator Corker. Yes. Well, that was not the question, so--
--
    [Laughter.]
    Senator Corker. So, I think--really, as I hear this, 
really, it is pretty fascinating. I mean, I do not think my 
friends on the left would disagree that they are constantly 
urging Mel Watt and urging Fannie and Freddie and FHA to make 
access to credit more available by not using legislation. This 
side of the aisle is pursuing it the other way.
    And, I do not know. You know, we have heard this, it is 
often quoted--it is too often quoted--we seem to finally do the 
right thing after pursuing every other route. I just think we 
are kind of spinning our wheels and trying to avoid the essence 
of what needs to be done here, and that is housing finance 
reform done that creates certainty for all of you, right? I 
mean, this would sort of be over and done, and I hope that once 
we get through playing around, if you will, with the issue, 
dealing with the fringes, we can get to that, and with that, I 
have no other comments, unless you want to make one, Mr. 
Polychron.
    Mr. Polychron. I would, if I could, Senator Corker.
    Chairman Shelby. Go ahead.
    Mr. Polychron. The only thing as a practitioner that I 
would be caution--I would be fearful of tax reform is--and I 
know in your bill----
    Senator Corker. I did not say anything about tax reform.
    [Laughter.]
    Mr. Polychron. Well, house reform.
    Senator Corker. Well, housing and tax reform are very 
different.
    Mr. Polychron. I understand.
    Senator Corker. OK.
    Mr. Polychron. But, at the same time, anything that would 
impair a practitioner from a 30-year mortgage is a no-no. I 
mean, it is just going to hurt our business.
    Senator Corker. Well, I do not think anybody that I know of 
on this panel has seriously proposed any legislation that would 
do away with a 30-year mortgage.
    Mr. Polychron. Yet.
    Senator Corker. Has anybody up here done that?
    Mr. Polychron. Not yet. No, sir.
    Senator Corker. All right. Thanks a lot. I appreciate it.
    [Laughter.]
    Chairman Shelby. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman, and thank 
you to the panelists for your testimony. I apologize. There was 
a simultaneous hearing in the Armed Services Committee and I 
had to be there.
    Ms. Gordon, Dodd-Frank established numerous protections for 
borrowers, particularly middle-class borrowers, and the changes 
that are being proposed, if enacted, how would they affect sort 
of the middle-class borrower, in your view?
    Ms. Gordon. Well, a number of the changes we have talked 
about today would make mortgages both more expensive and more 
risky. I mean, just to go back to the Mortgage Choice Act for a 
second, or the so-called Mortgage Choice Act, affiliates were a 
big part of what was going on in the run-up to the crisis. 
There were kickbacks and upselling rampant throughout the 
system, which ends up making a mortgage more expensive than it 
has to be, and it is very anti-competitive. It is always 
interesting to me that that is not seen on all sides of this 
room.
    And, Dodd-Frank could have made the choice to simply ban 
these affiliate arrangements. It did not do that. It just said, 
if you want to be in that super safe category of QM mortgages, 
you cannot go above this points and fees cap, which seems to me 
to be a fairly minimal and very reasonable way of enabling 
affiliate relationships to continue, even though they could 
have gone another way.
    Particularly this question of all portfolio loans being QM, 
I think that is especially dangerous, just because with a QM 
loan, there is nothing anybody can do about it if it goes bad, 
and you do not want to kind of blow open this whole exception 
where any kind of loan, no matter how dangerous or risky it is, 
suddenly gets this special legal immunity. And, I think that is 
especially important for folks who are not going to have the 
money to hire a big fancy lawyer and for whom, really, every 
dollar out of their budget matters. We want to get them as 
fairly priced credit as we can.
    Senator Reed. Thank you.
    Let me just, to Mr. Polychron and Mr. Motley, ask a 
question, because we are all looking at, on both sides, access 
to credit for borrowers that are capable of sustaining the 
credit. And, one of the factors that I am hearing in Rhode 
Island, particularly for first-time young home buyers, is this 
extraordinary student debt. So, when they walk in to see you, 
they could have a job. They could be decent and hard working 
and we could have all these QM regulations, but you are just 
going to say, sorry, you owe $180,000. How much is student debt 
really squeezing the mortgage market or denying people a 
mortgage loan? Are you seeing it? Mr. Motley.
    Mr. Motley. Yes, sir, we are, and statistics, I think, from 
your organization, the REALTORS Association, show that the 
percentage of first-time home buyers in today's purchase money 
market is about 29 percent, whereas, typically, that is above 
40 percent. So, we are certainly seeing a smaller piece of the 
market being comprised of first-time home buyers. We are 
required--if there is a repayment on that student debt, we have 
got to include it.
    Senator Reed. Right.
    Mr. Motley. And, so, we are seeing it affect credit.
    Senator Reed. And Mr. Polychron.
    Mr. Polychron. And I would agree with that. In fact, it was 
into the 50s. It was 56 percent first-time home buyers at one 
time, and it has definitely affected it, as you would expect.
    Senator Reed. And, I would presume--you know, this goes to 
the access to credit. Legitimately, you cannot give loans to 
these young people, typically young people, although nowadays 
maybe not so young, because they just are carrying so much 
debt.
    So, one of the consequences in terms of your business, but 
also in terms of the opportunity to own a home, is not related 
directly to QM or anything else. It is this huge, staggering 
student loan debt, which Senator Warren and Senator--I am 
looking down on my colleagues on both sides are trying to deal 
with--and I think that is important to note.
    Again, I think we want to look carefully and listen to the 
issues that are arising, but I think we want to tread very 
carefully in terms of making changes that would disrupt the 
market.
    And, the other thing, too, is that, I hope, that over the 
last few years, despite all of these factors, my impression is 
that we are seeing fairly substantial profitability in the 
industry. Is that the case, Mr. Woods, with community banks, 
or----
    Mr. Woods. I think that community banks are struggling. I 
think they are doing better today than they were 4 years ago or 
5, but I do not know that they are doing better. But, if you 
look at a long historical line, that is true.
    I wanted to point out two other things with your question 
on the entry-level buyers and the credit.
    Senator Reed. Yes, sir.
    Mr. Woods. I want to point out to you how important that 
is. The truth of the matter is, if the entry-level piece of the 
market is not working, the rest of the market will not work, 
because the entry-level buyer, while he may buy my new house, 
he more likely will buy a used house----
    Senator Reed. Right.
    Mr. Woods.----and the owner of that used house will move up 
to another and another. Many times, we have transactions that 
have three and four transactions behind them. So, you cannot 
overlook how important that segment of the market is.
    I would like to point out one other thing that I think 
exacerbates the situation, and at least in the crash, if you 
want to call it that, was a big part of it. Back to community 
banks. In many cases, the regulators came in and simply told 
the community bank that they had to cut their portfolio of 
construction loans, whether they are model homes or spec homes 
or whatever. In many communities, that is the only loan that 
bank is making that makes any money. Their community is growing 
and they are trying to help that.
    You go in and all of a sudden you tell the builder, you 
have got to get rid of your specs. We will not renew the loan 
on the specs. You just dumped a bunch of things on the market 
and now our competition is going to drive down the prices of 
all the other houses.
    Second, when you take away the models, you have just put 
that builder out of business. That may have been one of the 
largest employment bases in that community, and the real 
problem is for the banker, when he tries to force that 
customer, he can only force his best customer out of the bank. 
It is the only one that might stand a chance of going and 
getting a loan at another bank. However, in this situation, 
that rule was for everybody. So, immediately, that whole access 
was cutoff, and I do not want that to go unnoticed.
    And, what I have seen as a homebuilder, and if you look at 
our testimony, the real problem is we cannot get loans today. 
So, we cannot start that engine back up.
    Senator Reed. My time has expired, but I want to thank you, 
Mr. Woods, for making that very important point. It is not just 
the fact that the young 25-year-old college graduate cannot get 
the loan to buy the first house. It is that that first house is 
stuck and they cannot move to the second bigger house and the 
third house, et cetera.
    Ironically, maybe the solution to this problem is not 
messing around with these rules but is making sure that people 
are not coming out of college with $180,000--or graduate school 
with $180,000 worth of debt.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Heller.
    Senator Heller. Mr. Chairman, thank you, and to you, the 
Ranking Member, and also to our expert panel that we have with 
us today. Thank you for taking time and being here with us.
    I want to comment, if I may, just a little bit on what 
Senator Corker said earlier, and emphasize that he has worked 
very hard on trying to get some comprehensive reform in the 
housing industry and it is something that I supported. I worked 
with him, with both sides, Warner, Tester, others seeing the 
necessity of this.
    And, I think that the key to all this happening and 
happening right is one thing that you said, Chris, and that is 
to ensure that every American, especially young families, have 
access to a 30-year mortgage. I think we all agreed on that. 
But, we also agreed that there needs to be a secondary market 
for a backstop. I think the committee, that group that was 
working together, also recognized the importance of a secondary 
market, making sure that these securities could be traded, but 
with the rules and regulations necessary to assure that we do 
not have 2008 all over again. No State was hurt harder in that 
recession than the State of Nevada, and I think that you are 
well aware of that.
    I want to go back to something that the Chairman and the 
Ranking Member discussed earlier in this, and I am just taking 
a look at the CFPB's rural and urban designation map. The CFPB 
has been trying, and, frankly, unsuccessfully, to define what 
rural and what urban is. In fact, at one point, CFPB even said 
that Yucca Mountain was in an urban area. Now, I will support 
that designation if that keeps nuclear waste out of the State 
of Nevada----
    [Laughter.]
    Senator Heller.----but I think they did reverse that 
particular decision.
    I am looking at this map and I am seeing communities like 
Pahrump, Mesquite, Moapa Valley, Fallon, I mean, these are very 
small, very small communities. Fernley, Yerington, Minden, you 
can go on and on, Dayton, they are all listed.
    Senator McConnell and I have introduced legislation similar 
to what the House did. In fact, the House passed legislation 
that would allow rural constituents to make an appeal and 
present information to the CFPB and challenge their rural and 
urban designation. That passed the House, I think with a 401 to 
1 vote.
    I would like to get from you, one, do you think there ought 
to be an appeals process, and number two, starting with you, 
Mr. Woods, whether or not you would support this legislation.
    Mr. Woods. I would, and I do believe there should be a 
process for appeal. There has to be. Mistakes are sometimes 
made and they need to be pointed out and a way to correct them.
    Senator Heller. Thank you.
    Chris.
    Mr. Polychron. And, I addressed this a little earlier in 
that I agree with you 100 percent. We actually had an incident 
in Arkansas that precipitated that. You know, the appeal does 
not mean that they are going to hear eight million appeals. I 
think the facts are going to speak for themselves, whether they 
qualify or do not qualify, and in many cases a decision will be 
able to be made quickly. So, I strongly believe in the appeal 
process.
    Senator Heller. I listed eight of them, so----
    [Laughter.]
    Senator Heller. Mr. Motley.
    Mr. Motley. I agree with the appeals process, and I would 
also urge you to emphasize that consumers will reap the most 
benefit from this Act if the types of loans identified by CFPB 
as being critical for meeting the credit needs in rural areas, 
including loans that do not meet the 43 percent debt-to-income 
ratio, are considered qualified mortgages if either they are 
held in portfolio or sold to a creditor that holds them in 
portfolio.
    Senator Heller. Thank you.
    Ms. Gordon, I would love to get your support.
    Ms. Gordon. Well, so we have not taken a position on that 
legislation. The whole issue of rural designation is, of 
course, one of those things that is rife with complexity among 
a variety of agencies administering a variety of programs that 
go well beyond just housing-related programs.
    I will note we have been very engaged with FHFA on their 
Duty to Serve rulemaking, where strengthening credit to rural 
communities is a really important part of what Congress asked 
them to do there. They are, in the process of that rulemaking, 
also looking at the question of rural designation, and I think 
that is a really important place to intervene, as well.
    Senator Heller. Thank you. Thank you.
    I know I am a broken record here, but about 25 percent of 
the homes--more than 25 percent of the homes still in Nevada 
are underwater. We have lost probably half of our community 
banks in the State, probably half of our credit unions, also, 
so you can imagine--in fact, I would say that I think the 
statistics show that about 8 percent of the homes sold in the 
State are short sells.
    Mr. Polychron, you are well aware of the Mortgage Debt 
Relief Act and the attempts of that. I call it ghost income, 
where the IRS is trying to tax individuals for income they have 
never seen. What would be the impact to the housing industry if 
the Mortgage Debt Relief Act were to expire at the end of the 
year?
    Mr. Polychron. It would be big, and I thank you for 
sponsoring that. You know, the thing I have never understood 
about that is that someone that has a home that he sells for a 
profit, or she sells for a profit, is not taxed, yet the 
individual that is underwater, that takes a loss on that home, 
does get taxed. I mean, where is the fairness in that? I have 
never understood that. But, it is there, and without it, those 
people are going to be renters again. So, I support your bill.
    Senator Heller. Mr. Polychron, thank you for your comment.
    Mr. Chairman, my time is up, but again, I want to thank the 
witnesses and for holding this hearing. Thank you, Mr. 
Chairman.
    Chairman Shelby. Thank you.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you all for your insights from your various professions and 
organizations.
    I do think that there is common cause on this Mortgage Debt 
Relief Act and the concern about short sale streamlining that 
was mentioned earlier.
    One issue that has not really been explored too much here 
today is the Preserving Access to Manufactured Housing Act. I 
gather a version of it passed in the House, so we may have more 
discussion here.
    In Oregon, we had, long before the 2008 crisis, a real 
challenge in our manufactured housing park industry, and the 
way it worked is people would buy a home, a new home, to be 
placed into a park. They would buy a park package. But, what 
they did not realize is the rent could be raised at any time 
and there was fairly much a shortage of supply in this park 
world, plus a lot of the parks would only allow a new home to 
be placed in their park.
    And, so, after someone had moved in, then the park would 
raise the rent or, alternatively, raise the utilities. And, for 
every $100 of rent or utilities per month that were raised, it 
diminished the value of the house by $20,000. You can imagine 
how quickly your new house was worth very little.
    So, therefore, the lenders who might lend for these 
particular homes were very nervous about it, so they wanted to 
do short-term loans. They wanted to do very high interest rate 
loans, which made a lot of sense because there was enormous 
risk embedded in this. People did not own the land and they did 
not control the rent and they did not control utilities.
    And, we looked at a number of ways to try to avoid this. 
What we heard time and time again from owners in these parks 
was, if I had understood how this works 6 months ago, I would 
never have bought this house. And, so, we had different 
proposals to--how could owners understand the deal they are 
getting into, the fact that the rent is not controlled, the 
utilities are not controlled, the fact that you cannot move 
your house to another park, the fact that moving your house, if 
you can find another park that would take it, would be 
extraordinarily expensive, because it is really operated as a 
predatory operation.
    And, then when a person had to sell their home because the 
rent had raised sufficiently, the only person who would buy it 
would be the park owner. The park owner would then lower the 
rents and sell the house to a new family.
    So, this is the type of predatory operations that do not 
serve low-income families well, and I can certainly understand 
why lenders would be very reluctant to enter into that world, 
or only at extraordinarily high terms, but then were charging 
much more. As the expression goes, it is expensive to be poor. 
You are paying far more in interest than an ordinary person.
    Should we be addressing any of these factors, and how does 
this affect this conversation about changing the terms of the 
loan parameters for lending on manufactured housing that is 
placed into a situation where you do not own the land or 
control the utility or rent costs? Would anyone like to comment 
on that?
    Mr. Polychron. Do you think some of these could be an 
exception, I mean, just maybe to Oregon? I am not singling out 
Oregon, but, I mean, you know, I have not experienced that in 
my own State, and I do not know if you all have experienced 
that, either.
    Mr. Woods. I do not have any experience in it, so I am 
afraid I am not a very good----
    Senator Merkley. OK. Very good.
    Ms. Gordon. I mean, I will be happy to speak to this. I do 
not think it is unique to Oregon that the folks in investor-
owned communities have problems with security of land tenure 
and with rising costs and all sorts of other rules, like if you 
want to sell your unit, you cannot put up a sign, or, you know, 
there are all kinds of rules that are very difficult.
    I think that is why you have seen a movement toward 
resident-owned communities, where the decisions are made with 
the best interest of the owner residents in mind, and that is--
it is particularly important now as FHFA writes this Duty to 
Serve rule that they use their market power, because Fannie and 
Freddie both do lend in this area and should be probably doing, 
or finance in this area, and should be doing more of that. It 
is important to use that power to make sure that there are 
better rules of the road for investor-owned communities and for 
chattel lending, as well, to make it much safer.
    It is very predatory. There was a discussion earlier about 
whether manufactured housing caused the 2008 financial crisis. 
But, manufactured housing has its own crises. You know, there 
was a statistic in a recent article that in the year 2000, 
75,000 manufactured homes were repossessed and that is 
something of an epidemic. We would not stand for that in site-
built housing.
    So, this is especially not the time to be removing more 
protections in that area. We should be thinking about what 
additional protections we can provide, because this is an 
important source of potentially affordable housing when it is 
done fairly.
    Senator Merkley. Yes. That is what I want to emphasize--is 
this really is an option for so many folks who are looking for 
a less-expensive house, but when that dream of owning your 
house turns into a nightmare, and particularly many seniors 
located into this situation and then discover, well, your rent 
is going to go up $200 this year. Well, there went $40,000 of 
equity, now you cannot sell the house, et cetera, it becomes--
then it does become a nightmare that really does not serve low-
income Americans well. So, I just wanted to draw attention to 
that as we consider how we might modify the financial 
strategies related to this.
    Mr. Motley. Senator, we at the MBA think it is a very 
important State issue and we would like to review it and review 
your concerns earlier.
    Senator Merkley. Thank you, and I look forward to working 
with you all. I think we all want the mortgages to be 
affordable but not predatory, so they become a form of wealth 
construction or addition in America, really part of the 
American dream, but not predatory wealth-stripping strategy.
    Thank you.
    Chairman Shelby. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman.
    Mr. Polychron, one of my experiences as a small business 
owner for a couple decades, it seems, maybe even a little 
longer in my lifetime, it appears the time with my gray hair 
that I had to cutoff----
    [Laughter.]
    Senator Scott. It is just not that funny, though. Anyway--
--
    [Laughter.]
    Senator Scott.----just a quick question for you, sir. As an 
insurance guy working in business, one of the things that I 
experienced with my couple thousand customers is most wanted 
customization. They wanted the ability to have a serious 
conversation about their set of needs and then to have a 
product designed for it. It appears to me that we are really 
heading in the exact opposite direction, where one size fits 
all. A case in point, the debt-to-income ratios of the 43 
percent rule.
    From my perspective, it just appears that, while well 
intended, the fact of the matter is that perhaps we are going 
to carve out a major segment of the population that would be 
creditworthy if they were able to consider more factors. The 
classic example from my life was when I started my business, I 
had to have a relationship loan from my lender, who took a 
chance. It appears to me, while that was a business loan 
experience, that allowed me or afforded me the opportunity to 
get a mortgage.
    The fact is that we are, through this trying to synchronize 
and harmonize and standardize everything, we are going to 
eliminate those very opportunities for worthy individuals who 
may not fit into the cookie cutter box that we think we are 
building on their behalf to actually have access to loans. Has 
that been your experience in the field?
    Mr. Polychron. Well, what you did not know about me is that 
I was a bank president in another life, and, you know, a lot--I 
do not think this has been discussed enough today. We had Mr. 
Cordray at a meeting with NAR earlier last year and one of the 
things that I kept hearing was underwriting, and I will tell 
you that when I was a banker, Underwriting 101 was basically 
the ability to repay. And, I do not think what we are doing 
enough of is good underwriting, and I still think that was the 
primary cause of the bubble. It was not necessarily some of the 
rules and regulations that have come forward, but truly the 
fact that, you are right, we need more opportunity for the 
millennials, et cetera, who are the primary borrowers, or 
buyers of homes right now. We have to open that up, and I think 
good underwriting would take care of a lot of it.
    Senator Scott. Mr. Motley, I see you shaking your head.
    Mr. Motley. Senator Scott, I would like to just follow up 
on that, and I gave an example earlier about the restrictive 
one-size-fits-all nature of the 43 percent back-end ratio. It 
does not fit for everybody and we should not rely on it as the 
only source of underwriting. Instead, we need to be able to 
make holistic changes to the QM rule that will allow us to 
exercise prudent judgment in making good, sound underwriting 
decisions. That does not mean that we go back to the days of 
stated income, stated asset type loans at all. It just means 
that we have a little bit more flexibility to evaluate the very 
situation that you discussed earlier.
    Senator Scott. It appears our rush toward the one-size-
fits-all for a State like South Carolina, which so much of my 
State being rural areas, where manufactured homes in the rural 
areas, or throughout, frankly, the State of South Carolina are 
consistent, and yet many of the rules that we are seeing 
promulgated would restrict access to capital. And, when you 
look at the challenge of growing wealth in this Nation, there 
is a great disparity, primarily because of the value of the 
home and the value of that home ends up on a calculation on 
your net worth. So, from my perspective, the rural communities 
are being impacted negatively by the direction that we are 
heading.
    One final question before we get to the other witnesses. It 
seems to me that the impact on minorities and their ability to 
be a part of the qualified mortgage conversation is very 
strong. It is as if we prevent minorities from getting 
mortgages because of Dodd-Frank. Then the Government comes in 
to bankers and says, why are you not doing more lending? And 
then you get penalized for that, and then the Government 
creates another set of rules forcing you to do something that 
seems to be in great contradiction to the very Dodd-Frank 
standards that we are setting.
    Mr. Woods.
    Mr. Woods. I think your comment is right on, and I think 
that is one of the cases where we look at the fact that the 
rules or the regulations are not in--in misalignment, if you 
will, the fact that there are a lot of unintended consequences. 
The rule itself was for a good reason----
    Senator Scott. Yes.
    Mr. Woods.----but nobody looked beyond that to start to 
say, yes, but it will not work in these kind of communities, or 
it will not work under these kinds of loans.
    You know, back to the community banker, and I have a great 
respect for them, one of the things that the community banker 
has as an advantage, if he is a true community banker--be 
careful, there are a lot of people calling themselves community 
bankers that are not, OK--the true community banker knows his 
community. He is involved in the school board and the Chamber 
and he has a reason to have his bank be successful and the 
community be successful, because it is going to make his bank 
more successful.
    And there is no--and there is nothing in all of these that 
allows for that insight. You cannot put that insight on a loan 
form, where he knows the individual.
    Senator Scott. Exactly.
    Mr. Woods. He made that relationship loan.
    Senator Scott. Hence the relationship lending experience 
that I have had.
    I know my time is up, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Scott. That is a good 
point.
    Senator Donnelly, you have been very, very patient.
    Senator Donnelly. Thank you, Mr. Chairman. In this seat, 
you have to be.
    [Laughter.]
    Chairman Shelby. I have been in that seat.
    [Laughter.]
    Senator Donnelly. Before he leaves, I want to mention, Mr. 
Scott has real world experience working in small business and 
trying to make markets go.
    I used to serve, Mr. Woods, on a school board, which can 
occasionally be a challenging endeavor, as they say. But, for 
the State I am from, Indiana, manufactured housing is really 
important. It is important in a number of ways, for the people 
who want to live there, and then we have over the years 
traditionally had a great history of being one of the producers 
of the product. I have toured the plants. I have been with the 
workers, spent time with them. And, the goal is, how do we 
provide affordable housing to families who, you know, they are 
not going to be building the McMansions on the Potomac River. 
These are our families who work hard every day and have the 
same American dreams, though, that everybody else has. And, so, 
access to credit in a responsible way is obviously a key.
    I have been a sponsor of a bill, Preserving Access to 
Manufactured Housing, and so the question is, how do we do this 
in the most responsible way, that nobody wants to open up a can 
of worms again. I voted for Dodd-Frank, but I voted for it to 
provide safety and stability, not to make it impossible for 
certain markets to have loans.
    You know, what we have seen, or what I have seen and what I 
have heard from folks, they are small--you know, the companies 
that I deal with in my home State are usually small, family-
owned enterprises that are building these homes. There has been 
a dry-up of small dollar loans on these kind of things.
    And, so, as we look at this, Mr. Polychron, I want to ask 
you, could you tell us why it is important to ensure consumers 
have more affordable access to manufactured housing, if you 
would?
    Mr. Polychron. And I would even suggest a way maybe we get 
there, if that is OK.
    Senator Donnelly. That would be terrific. We have no magic 
answers here. We are looking for----
    Mr. Polychron. Arkansas, too, is a lot like Indiana, and a 
large percentage, especially in our rural areas, depend on 
manufactured housing. I think Ms. Gordon mentioned earlier, we 
had a symposium on credit access recently at the National 
Association of REALTORS, and one of the subjects we have 
touched on a little bit today were different credit scoring 
systems, such as FICO 09, VantageScore, which take into account 
rents paid, utilities paid, and can actually raise a person's 
credit score to where they could qualify for these type loans. 
I think it is an area we certainly need to research more and 
explore.
    Senator Donnelly. Because the thing we do not want to do is 
we do not want to put folks in a box with a payment that cannot 
be made. That does not help----
    Mr. Polychron. Good underwriting, again.
    Senator Donnelly. It does not help any families. It does 
not help the home companies. So, what we are trying to do is 
thread the needle of, in effect, how do we do this. And, I am 
not willing to say, and I know the Chairman is not, that small, 
you know, relatively small compared to some others, you know, 
loans of $30,000, $40,000, that they should not be made, 
because those people have the same hopes and dreams, and, then, 
so, how do we do this in an affordable way.
    Mr. Woods, do you believe Congress can have lending 
restrictions that make sense on this while still protecting 
consumers and the economy from the dangerous practices we ran 
into?
    Mr. Woods. I think it is possible. I think--again, I do not 
know that much about that piece of it, but I can----
    Senator Donnelly. Well----
    Mr. Woods.----some of the comments before. The good rules 
can be made. They need to be made with common sense and they 
need a lot of input and we need to look at all the aspects.
    Senator Donnelly. Mr. Polychron, to that same question. Do 
you feel this needle can be threaded so that we have 
regulations that make sense, that provide appropriate 
restrictions and also make a profit for the people who have to 
write the papers?
    Mr. Polychron. My opening comments were about balance and 
finding that in the middle, and I think, with enough work, we 
can reach that balance. Yes, sir, I do.
    Mr. Motley. Senator, we agree. MBA would welcome the 
opportunity to figure out a way to thread that needle.
    Senator Donnelly. OK. And, Ms. Gordon, I know there are 
certain parts of the bill that you do not support, and I 
understand that from your written testimony. The FHFA, the Duty 
to Serve rule required by the Housing and Economic Recovery Act 
of 2008, can you talk a little bit about how the Duty to Serve 
will enhance accessibility and affordability of manufactured 
housing.
    Ms. Gordon. Well, what I hope it will do is make sure that 
both Fannie and Freddie have an obligation to ramp up their 
work in this area so that there are more ways to access safe 
and affordable financing for manufactured homes and for 
community owners that run responsible communities.
    I think what is important and what FHFA can do is they can 
sort of set a best practices standard, if you will, to ensure 
that where they are putting their backstop, their guarantee, is 
on the type of lending that has the features that people need 
to be successful, you know, security of land tenure, adequate 
notice before rent increases, the ability to sell their unit if 
they need to move. You know, there is a whole variety, and I 
would be happy to work with your office on the list that we 
have provided to FHFA on this.
    You know, if I could wave my magic consumer protection 
wand, of course, I would make most of these loans titled as 
real estate. But, for some reason, not everybody seems to be 
planning to listen to me on that, and so I think it is 
extremely important that we not just completely write chattel 
loans out of this rule, but that we use the market power that 
Fannie and Freddie have to establish this safer standard of 
those loans so that people in this situation are able to access 
responsible credit.
    And the reason--the dispute I have with some of the 
provisions of the proposed legislation really just has to do 
with not wanting to strip consumer protections from people who 
may have very, very high rate loans, because those can be 
dangerous and can be abusive and can put families in a 
situation that they do not expect. But, I would be very happy 
to work with you and your other colleagues on ways that we can 
open up that credit in a responsible way.
    Senator Donnelly. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    When I first purchased my home in Fort Pierre, South 
Dakota, it was just after I had left working as Governor for 8 
years. We were told that in the area that I purchased my home, 
there were no comps. The bank would have to hold my loan on 
their books. As a result, I had to pay a higher interest rate. 
Now, I suspect it might also have not helped that I was now 
seen as not having a stable job history, having just left one 
job and picking up another job.
    [Laughter.]
    Senator Rounds. I have heard that same story, though, from 
other South Dakotans. If you live in a rural area and you do 
not have comps, odds are that if you can get a mortgage, you 
will face higher mortgage interest rates.
    Another South Dakotan told me that he is also facing a 
similar situation. Because his loan cannot be sold into the 
secondary market, he is also paying a 1 to 2 percent interest 
rate premium for a loan with a 6-year term and a balloon 
payment. This is essentially a tax on living in rural America 
and another example of the red tape that is making it harder 
for people to own homes.
    Another example--and I thank my colleague, Senator Heller, 
for his leadership on this particular issue--residents in rural 
communities like South Dakota that I have mentioned often use 
balloon payments to finance home purchases. CFPB says this type 
of loan is abusive, but they have made an exception for parts 
of the country that the CFPB defines as rural in nature.
    The CFPB took two attempts, but even after their second 
try, the CFPB still does not define towns like Lead, South 
Dakota, population 3,109, or Sturgis, South Dakota, population 
6,683--other than during the Sturgis Motorcycle Rally when it 
goes to 600,000 for a period of 2 weeks--they consider both of 
those as not being rural. That is thousands of people who will 
have severe difficulties getting a loan.
    This rule makes no sense and the practical result is that 
if your bank has to hold a mortgage on its books and you need a 
balloon payment, you will not be able to get a mortgage in 
towns like Lead or in Sturgis.
    In South Dakota, the community bankers rely on 
relationships and knowing their customers. Another effect of 
these new rules is that it does not matter how well you know 
your customer.
    Another example is a constituent was looking to buy a home 
and went to a community bank where they had done business in 
the past. His father had passed away and he was due to inherit 
several thousand acres without a mortgage. Because at the 
moment he applied for the loan this individual's debt-to-equity 
ratio was not acceptable, he could not get a loan and that 
community bank lost his business and he had to go looking 
elsewhere.
    We need to take a look at all of these rules, all of these 
regulations, and, well, and ask the question, do they make 
common sense?
    I want to thank all of our witnesses here today. I want to 
ask them, aside from the fact of if you really had the 
opportunity to start out by eliminating the CFPB and starting 
over again, which rules do you think are the most egregious and 
which rules do you think constrain access to mortgage credit 
the most?
    Mr. Motley. I would be happy to start with that. I think 
that the QM rules are too prescriptive. They incorporate a one-
size-fits-all debt-to-income ratio. They restrict points and 
fees to too great an extent and lenders need to have more 
flexibility to accommodate the kind of loans that you are 
talking about.
    Senator Rounds. Yes.
    Ms. Gordon. Well, this may not be the answer you are 
looking for, but I actually think that by turning the qualified 
mortgage definition, which was never meant to be the box that 
everybody had to fit in--when CFPB, at the mortgage industry's 
request, turned that into a safe harbor, it had the unintended 
consequence of having all of these loans feel like they had to 
fit in that box. The purpose of the Ability to Repay rule was 
to provide exactly the kind of flexibility that you are talking 
about, to know your customer, and as long as you are 
documenting that what the customer, in fact, is saying to you 
is true, that you would be able to make loans that did not at 
all look like that QM definition.
    And, I know nobody here is asking to roll back that safe 
harbor. But, the answer is not to give everything a safe 
harbor, because then you will go back to irresponsible lending, 
and that might not happen in your community banks, but it will 
happen in other institutions that do not have those same 
community ties as yours do. So, that is really important.
    I will add, since I did not get an opportunity to say this 
before, I completely agree that just the 43 percent bright line 
is a problem and that compensating factors are really 
important. And, I will note again, when CFPB was implementing--
Congress did not put that 43 percent in the Dodd-Frank statute. 
That was something that CFPB did when it was implementing the 
rule at the request of industry groups that went in and said, 
bright lines. We need bright lines. We cannot do this unless we 
have bright lines. And then they got a bunch of bright lines--
--
    Senator Rounds. For fear----
    Ms. Gordon.----and now folks are saying, oh, well, you 
know----
    Senator Rounds. For fear of litigation.
    Ms. Gordon. Well, for fear of litigation, which, by the 
way, I would be interested if anybody can show me any kind of 
onslaught of litigation under Dodd-Frank on the consumer side--
--
    Senator Rounds. If I could----
    Ms. Gordon.----because I have not seen that.
    Senator Rounds.----and I know my time has expired, but, 
sir, would you care to----
    Mr. Motley. I would just point out that the safe harbor 
allows more security and less potential for litigation, not a 
rebuttal of presumption. Lenders are subjected to a defense of 
foreclosure, private right of action, punitive actions. It is--
a safe harbor loan is far safer and it is marketable. A 
rebuttable presumption--there is no market for a rebuttable 
presumption loan in today's world. So, there is a reason that 
we want to have safe harbor protections, because it is a more 
marketable loan. It allows banks to sell that loan into the 
secondary market, which they cannot do right now.
    Chairman Shelby. Go ahead, Senator.
    Senator Rounds. Thank you. I did not know whether anyone 
else wanted to comment on that or not, but I am over my time, 
but with your generous accommodation----
    Chairman Shelby. Go ahead.
    Mr. Polychron. The only thing I would comment on, A, about 
your appraisal process earlier, I concur with you 100 percent. 
Appraisals still cause a huge problem in our State and we would 
like to see that process strengthened.
    I think I would still go back to credit scores. The average 
credit score, you know, in 2013 was over 750. Last year, it was 
over 740. I still think going back to using a different method 
of scoring, credit scores, could certainly help more than 
almost any other thing.
    Senator Rounds. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Rounds.
    Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman.
    A lot has been covered, obviously, and I have been 
listening to this discussion of rural, and we have been able to 
work this through with Consumer Finance, and so we now have our 
definition that works, so give them a call. Maybe they will, a 
Governor, maybe they will work it out with you.
    One of the things that I want to point out, because we have 
been talking a lot about manufactured housing, and we are 
talking about real estate versus chattel lending. The 
difference that is hugely important to the consumer is the 
nonrecourse nature of a mortgage versus chattel lending. And, 
so, you could, in fact, if you overburden or put too much debt 
on a borrower who is financing a manufactured home, you could 
be indenturing them for a long time. They cannot simply walk 
away from that debt. In most States, they cannot. And, so, we 
just need to be really careful as we pursue the manufactured 
housing, understanding that it does not have the same kind of 
characterization that mortgage lending does. So, I just want to 
kind of put that down.
    I am concerned about creditworthiness, and manufactured 
housing plays into this, as you have said, Chris, about that--
or, I think it might have been you, Tom--that we begin with 
that lower level and then work up. We are looking at twin 
homes, condos, you know, apartment buildings, small first-time 
homeowner kind of operations that then move up. That is true 
for manufactured housing. Some of my folks live there for 50 
years, but many transition out to a regular mortgage and a 
regular home.
    Going back to credit scoring, one of the things that is 
happening now is in the world of big data looking at algorithms 
and looking at not whether you paid your bill or whether you 
have a bank account or, you know, what did you buy yesterday? 
Where do you shop? And, so, I want you to comment a little bit 
about this trend to try and analyze creditworthiness looking at 
big data and algorithms and different kinds of inputs and 
whether you have seen any movement in that direction or if this 
is a 10-year-out problem.
    And, Mr. Woods, maybe start with you.
    Mr. Woods. I think it may be the 10-year-out problem. I am 
intrigued by that kind of data. I think it plays into, as I 
say, the community banker. You know, those relationship loans 
that were first made in many cases were made because that 
banker knows the granddad and the dad and the uncles and they 
are a hard-working family and they pay their bills and it is 
just built into their nature. But, that young person that walks 
in there certainly does not have the credit and all the other 
things that he would need to have a 750 credit score.
    One of the other things I thought interesting that we 
passed over, they would allow loans at 660, but nobody is 
making them, you know. They are making them at 750 and above. I 
defend the fact that I came from some pretty humble beginnings. 
I would fight the fact that there are a lot of people in those 
lower scores that pay their bills. They pay them on time----
    Senator Heitkamp. Yes.
    Mr. Woods.----and that is their genetic----
    Senator Heitkamp. And an independent community banker who 
has been in that community, who has a relationship that goes 
way back, knows which family. I say this all the time in North 
Dakota. You could have a banker, a client or customer comes in 
and you look at the financial statement. It checks all the 
boxes. There is no way you are going to give them a loan. The 
guy who owns the body shop down the street who you know has 
always paid his bills, because you know his community 
reputation, you want to give him the loan and you do not want 
to be dinged for it in an examination, or you want to be able 
to do what you have always done in your communities, and so I 
do not think anyone is more sympathetic, coming from a town of 
90 people, than I am about what that means for relationship 
banking.
    But, I am concerned about creditworthiness. We hear this 
over and over again, and it is not just student debt. It is 
depressed wages. It is the whole nine yards that challenged 
millennials and young people.
    And, then, it is a change in consumptive behaviors. Are 
they really looking for those loans? Are they looking to the 
shared economy? And, how do we reach out to those folks, 
because we know that is also a way that they can build equity, 
that they can build a future. And, this is a big part of 
solving our retirement problem, as well.
    And, so, we--I am going to associate myself with Senator 
Corker. I was on that effort last time and urge the Committee 
Chairman to give us another go at the great work that we did 
last Congress. I think it will help solve and analyze a lot of 
these problems.
    And, so, I want to thank you all. I am going to submit some 
questions for the record, with the Chairman's appreciation and 
approval, and thank you for the work that you do in your 
communities and thank you for the work that you do on behalf of 
consumers.
    Chairman Shelby. Senator Merkley, do you have any other 
questions?
    Senator Merkley. Mr. Chair, I think the points have been 
quite well explored and it is very important to American 
families, this challenge. Home ownership is just an incredibly 
important part of families moving into the middle class, and 
getting it right in a fashion which empowers families and does 
not prey on families is what this conversation is all about, 
and thank you for bringing your insights to bear.
    Chairman Shelby. I want to, on behalf of the Committee, I 
want to thank all of you. We have had, I think, a very good 
hearing, a lot of participation. We appreciate your input and 
your willingness to come to share, and let us try to solve some 
of these problems that you pointed out here.
    The Committee is adjourned.
    [Whereupon, at 12:07 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                    PREPARED STATEMENT OF TOM WOODS
                     President, Woods Custom Homes
         on behalf of the National Association of Home Builders
                             April 16, 2015
Introduction
    Chairman Shelby, Ranking Member Brown, and Members of the 
Committee, I am pleased to appear before you today on behalf of the 
National Association of Home Builders (NAHB) to share our views on 
regulatory burdens to obtaining mortgage credit. My name is Tom Woods, 
and I am a home builder from Blue Springs, Missouri and NAHB's 2015 
Chairman of the Board. We appreciate the invitation to appear before 
the Committee on this important issue.
    NAHB represents over 140,000 members who are involved in building 
single family and multifamily housing, remodeling, and other aspects of 
residential and light commercial construction. Each year, NAHB's 
builder members construct approximately 80 percent of all new housing 
in America.
    The ability of the home building industry to meet the demand for 
housing, including addressing affordable housing needs, and contribute 
significantly to the Nation's economic growth is dependent on an 
efficiently operating housing finance system that provides adequate and 
reliable credit to home buyers and home builders at reasonable interest 
rates through all business conditions. At present, home buyers and 
builders continue to confront challenging credit conditions weighed 
down by a zealous regulatory response to the Great Recession. In 
addition, the ongoing uncertainty over the future structure of the 
housing finance system has intensified these challenges. This statement 
will examine several cases where Government regulation and other 
developments have impeded the ability of the housing sector to recover 
from the historically steep downturn and meet the credit needs of home 
buyers and home builders.
    The housing finance system is governed by statutes and regulation 
overseen by a myriad of Federal agencies. In response to the recent 
financial crisis, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Dodd-Frank) mandated significant mortgage 
finance reforms and created the Consumer Financial Protection Bureau 
(CFPB) to supervise and monitor many of the new requirements. 
Additionally, the Federal Housing Finance Agency (FHFA), the Federal 
Housing Administration (FHA) and the Federal banking regulators all 
have taken steps to ensure the U.S. economy will never again be as 
vulnerable to ``risky'' mortgage lending. The collective force of the 
actions taken by these agencies, along with the lingering doubts and 
uncertainty of market participants, has resulted in an undue 
restriction on the availability of mortgage credit to many creditworthy 
borrowers.
    While there have been some actions taken by the individual agencies 
to mitigate the overly tight lending conditions, the housing sector is 
still struggling to return to normal. NAHB believes there are 
additional steps that can be taken to eliminate some of the barriers to 
credit availability and support a stronger, more robust recovery of the 
housing and mortgage markets while still employing balanced reforms to 
protect the housing market from another crisis.
Factors Constraining Availability of Mortgage Credit
    While mortgage rates remain near historically low levels, access to 
mortgage credit is limited to home buyers and homeowners with pristine 
credit histories who can qualify for Government-backed programs. 
Presently, FHA, the Department of Veteran's Affairs (VA), Fannie Mae 
and Freddie Mac (the Enterprises) account for an overwhelming majority 
of mortgage originations.
    Today's tight lending conditions are keeping more buyers on the 
sidelines even as the housing market strengthens. As discussed below, 
significant new regulations, lender credit overlays, high fees and 
other factors continue to impact the availability of mortgage credit. 
At a time when housing affordability has been at record favorable 
levels, more buyers should be entering the housing market. However, 
many creditworthy borrowers are not able to take advantage of these 
opportunities. As more new rules are implemented, consideration should 
be given to how the cumulative impact of this imposing regulatory 
environment will adversely affect the availability of mortgage credit 
and housing market and economic activity.
Regulatory Constraints
    The regulatory environment for mortgage lending is undergoing 
significant changes as regulators implement new rules mandated by Dodd-
Frank. Uncertainty about the eventual impact of these regulations and 
the cost of compliance are key factors in tightened access to mortgage 
credit.
    Total loan production costs continue to escalate and NAHB is 
concerned about the effect of the additional regulatory cost to 
originate loans in today's environment, particularly for smaller banks 
and independent mortgage bankers. Many of these smaller originators 
serve rural communities, first-time home buyers and other underserved 
market segments. NAHB members are hearing that many smaller banks and 
independent mortgage bankers are choosing to depart the residential 
mortgage business, and in some cases, closing or merging their banks. 
This exodus will cause less competition and provide consumers with 
fewer choices.
Ability to Repay Rule
    The implementation of the final Ability to Repay (ATR) standard by 
CFPB, which took effect on January 10, 2014, defined new lender 
underwriting requirements for mortgage loans and liabilities. However, 
the rule has created new hurdles for borrowers, especially low- to 
moderate-income buyers and self employed borrowers that are under 
increased scrutiny due to the debt-to-income calculation and more 
stringent documentation requirements.
    The ATR rule establishes standards for complying with the ability-
to-repay requirement by defining a ``qualified mortgage'' (QM). The QM 
standard is intended to balance protecting consumers from unduly risky 
mortgages and providing lenders more certainty about potential 
liability. Lending outside the QM box still is allowed, and in fact, 
the CFPB is encouraging lenders to make non-QM loans. Lenders, however, 
must balance being exposed to increased litigation risk with expanding 
their non-QM product offerings. To the extent that lenders will remain 
cautious during the transition and beyond, creditworthy borrowers may 
not have access to affordable mortgage credit, or may be left out of 
the credit box all together. According to a Fannie Mae survey released 
in August 2014, 80 percent of lenders said they do not plan to pursue 
non-QM loans or prefer to wait and see.
    As required by Dodd-Frank, FHA and VA released separate QM 
definitions for loans insured or guaranteed by these agencies. As the 
HUD and VA QM definitions allow for lenders to follow current FHA and 
VA underwriting criteria, this has helped keep credit flowing.
    The final ATR rule included a 7-year window in which loans that are 
eligible for purchase by Fannie Mae and Freddie Mac are considered 
qualified mortgages. This provision will expire in 2021, or when the 
conservatorships of the Enterprises end. This provision of the ATR rule 
also has aided the continued flow of conventional mortgage credit 
through this transition period. With the Enterprises still purchasing a 
large percentage of mortgage originations, the market may not 
experience the full effect of the ATR rule until 2021 or when the 
conservatorships of the Enterprises has ended.
    Since issuing the final ATR rule, the CFPB has made several 
amendments to the rule to address the practical implementation of the 
rule. Most recently, CFPB proposed beneficial amendments relating to 
small creditors and rural underserved areas.
    An area that continues to be of concern to NAHB is how the final 
ATR rule requires lenders to calculate the 3 percent cap on points and 
fees. The final ATR rule includes closing charges paid to affiliated 
settlement service providers in the 3 percent cap on points and fees, 
while the points and fees charged by unaffiliated companies are not 
included. NAHB strongly objects to this disparity and has urged CFPB to 
exclude points and fees paid to affiliated firms when calculating the 
limit. Many home builders and lenders have established settlement 
service affiliates such as mortgage and title companies to facilitate 
home purchases for consumers. Requiring affiliate fees and points to be 
included in the 3 percent cap creates disincentives to establish these 
beneficial relationships. Affiliated and non-affiliated settlement 
services should be treated equally. NAHB adamantly believes that fees 
and points from affiliated firms should be excluded in the 3 percent 
cap, thereby giving equal treatment to affiliated and non-affiliated 
settlement service providers. We strongly urge the CFPB to implement 
such an exclusion.
    H.R. 685, the Mortgage Choice Act, introduced in February, and 
passed by the House on April, 14, 2015, would amend the Truth-in-
Lending regulation to clarify the final QM rule's definition of points 
and fees. The specific adjustments provided in the bill would clarify 
that title insurance charges by a title insurance provider affiliated 
with the lender and a homeowner's escrowed insurance premiums do not 
count toward the 3 percent cap on the points and fees limit for a QM 
loan. The bill is intended to help more sound loans pass the QM test 
and ensure that consumers can choose the lender and title provider best 
suited to their needs.
    Representative Andy Barr (R-KY) recently introduced H.R. 1210, the 
Portfolio Lending and Mortgage Access Act. The legislation is intended 
to ease the ATR requirements for community lenders who may be fearful 
to originate non-QM loans and, therefore, may limit access to credit 
for home buyers in their communities they believe to be creditworthy. 
This bill would amend the Truth-in-Lending regulation to provide that a 
loan satisfies the ATR requirement if the loan remains in the 
originating lender's portfolio. Banking regulators would be required to 
treat such a loan as a QM, if the lender has, since the loan's 
origination, held it on its balance sheet and all prepayment penalties 
with respect to the loan comply with specified limitations.
    NAHB believes the concepts behind each of these bills have merit 
and should be passed by both the House and Senate as methods to ease 
the components of the ATR rule with the most potential to restrict 
mortgage credit.
Qualified Residential Mortgages
    The implementation of the Credit Risk Retention rule, also mandated 
by Dodd-Frank, was finalized in 2014 and aligns the definition of a 
qualified residential mortgage (QRM) with the QM. Though the rule is 
not effective until December 2015, NAHB believes aligning the QRM with 
the QM has many benefits. Establishing one streamlined regulation, 
instead of having two separate sets of underwriting criteria, will 
alleviate confusion in the marketplace and will help provide clarity 
and transparency for home buyers, lenders, investors and other housing 
market participants. Aligning QRM with QM levels the playing field, 
promotes liquidity in the mortgage market and allows access to credit 
for a diverse range of home buyers, particularly first-time and low- to 
moderate-income home buyers. Additionally, the underwriting criteria 
and product limitations contained in the QM will promote more prudent 
lending and will provide investors with an assurance that the loans are 
sustainable.
Integrated Mortgage Disclosures under the Real Estate Settlement 
        Procedures Act and the Truth in Lending Act Proposal--``Know 
        before you owe''
    In December 2013, the CFPB finalized new mortgage disclosure forms 
that are intended to help consumers make informed decisions when 
shopping for a mortgage and avoid costly surprises at the closing 
table. The new forms will become effective August 1, 2015. The rule 
applies to most closed-end mortgages but does not apply to home-equity 
lines of credit, reverse mortgages or mortgages not attached to real 
property. The rule also does not apply to loans made by a creditor who 
makes five or fewer mortgages in a year.
    For over 30 years, Federal law has required lenders to provide 
consumers with a Good Faith Estimate of closing costs and a Truth-in-
Lending disclosure of the loan's annual percentage rate, total finance 
charges and total loan payments within 3 days of applying for a 
mortgage loan. The law also required the two different forms to be re-
disclosed shortly before closing on the loan. The information on these 
forms was determined to be overlapping and the language inconsistent. 
As directed by Dodd-Frank, the CFPB updated and integrated the forms 
based on extensive consumer and industry research.
    The new combined forms are called the ``Loan Estimate'' which is 
provided at application and the ``Closing Disclosure'' which must be 
provided at least three business days before the consumer closes on the 
loan. Any change to the information provided on the form that is made 
during that 3-day period will restart the 3-day waiting period (with 
limited exceptions). NAHB and other housing industry stakeholders are 
concerned with the practical outcome of transitioning to the new forms, 
particularly that there is no opportunity under this regulation to 
comply early, which means that industry will not be able to test 
systems, in real-time, in real circumstances, until after August 1. 
NAHB joined with other industry groups and recently wrote CFPB Director 
Cordray to encourage the agency to announce and implement a 
``restrained enforcement and liability'' or ``grace period'' for those 
seeking to comply in good faith with the provision after August 1 
through the end of 2015.
    NAHB members depend on the certainty of a smooth closing process 
and NAHB is concerned that any confusion related to the new rules, 
compounded by the fear of aggressive enforcement activities, will 
negatively impact the ability to close on a home in a timely manner.
Lender Credit Overlays and Buy Back Risk
    Lender overlays in the mortgage credit process have been a major 
factor in the greater difficulty potential home buyers are having in 
obtaining financing as lenders impose credit underwriting standards 
that are more restrictive than those required by FHA, VA, Fannie Mae 
and Freddie Mac. These credit overlays are employed due to heightened 
lender concerns over forced loan buy-backs on mortgages sold to Fannie 
Mae and Freddie Mac and/or greater required indemnifications on FHA-
insured and VA-guaranteed loans.
    When lenders sell loans to entities, such as Fannie Mae and Freddie 
Mac, and through the FHA/VA/Ginnie Mae securities process, they are 
required to make assurances that they have performed the appropriate 
level of due diligence on the loan application, and the lenders agree 
to buy back a loan if it is discovered that they were at fault in their 
underwriting process. These representations and warranties (``reps and 
warrants'') have been a standard practice in mortgage lending.
    In the aftermath of the collapse in the housing market, the 
underwriting of delinquent loans was alleged not to have met the 
established criteria of FHA, the Enterprises, and other secondary 
market entities. As a result, lenders have faced a protracted struggle 
with these agencies about the buy back of loans that have been deemed 
ineligible for Enterprise guarantees or Government insurance based on 
the finding of faulty due diligence practices. Lenders complain that 
the criteria triggering buy-back demands by Fannie Mae and Freddie Mac 
and insurance claims rejections by FHA and VA are unclear and 
inconsistent. The resulting uncertainty has caused lenders to employ 
underwriting standards that are more restrictive than those required by 
FHA, VA, Fannie Mae and Freddie Mac. These lender ``overlays'' have 
closed the credit window to many aspiring home buyers who actually meet 
the loan qualification requirements established for these programs.
    The recent sharp increase in borrower credit scores since 2001 is 
an indication of how lenders have responded to concerns about how the 
Federal agencies will implement repurchases and indemnifications. A 
recent report from the Urban Institute (UI)\1\ found that credit has 
become much less available to borrowers with lower credit scores. From 
2001 to 2013, the share of new purchase borrowers with FICO credit 
scores below 660 declined from 28 percent to 11 percent; those with 
FICO scores between 660 and 720 remained at 28 percent of the total. 
Meanwhile the share of borrowers with FICOs above 720 increased from 44 
percent to 62 percent of the total. The UI report estimates that as 
many as 1.25 million fewer mortgage purchases were made in 2013 than 
would have been made had credit availability been the same as in 2001. 
For 2009-13, UI estimates that 4 million more loans would have been 
made based on 2001 credit standards.
---------------------------------------------------------------------------
    \1\ The Impact of Tight Credit Standards on 2009-13 Lending. http:/
/www.urban.org/research/publication/impact-tight-credit-standards-2009-
13-lending.
---------------------------------------------------------------------------
    The weighted average credit score for loans purchased by Fannie Mae 
and Freddie Mac in 2014 was 744, while in fact, both Fannie Mae and 
Freddie Mac have a minimum credit score requirement of 620 for most 
purchased mortgage loans.
    FHA will insure mortgage loans with credit scores as low as 500 
under certain scenarios. However, according to the 2013 State of the 
Nation's Housing Report,\2\ in 2007, borrowers with credit scores below 
620 accounted for 45 percent of FHA loans. By the end of 2012, that 
share was under 5 percent.
---------------------------------------------------------------------------
    \2\ The State of the Nation's Housing 2013. www.jchs.harvard.edu/
sites/jchs.harvard.edu/files/son2013.pdf.
---------------------------------------------------------------------------
    Similar trends are evidenced in the share of first-time home buyers 
which accounted for only 28 percent of home sales in February 2015, 
well below the historical average of about 40 percent. In the new home 
market, NAHB survey data indicate the current share of first-time 
buyers is only 16 percent compared to an historic average of 30 
percent.
    In 2014, the Enterprises' regulator, FHFA, and FHA announced 
efforts to clarify and, in some cases, ease, the reps and warrants and 
identification of loan defects that will trigger enforcement actions 
against lenders. NAHB anticipates positive results from these 
modifications and is hopeful to see lenders originating to the 
underwriting specifications of the agencies rather than implementing 
their own, more strict, standards.
Alternative Credit Scores
    It is possible that the use of alternative credit scores could 
offer lending opportunities to borrowers currently lacking access to 
mortgage credit due to a low or inaccurate FICO credit score. Fannie 
Mae and Freddie Mac have been directed by FHFA to assess the 
feasibility of using alternative credit score models in their automated 
loan-decision models. The Enterprises are planning to study the costs 
and benefits associated with VantageScore 3.0 and FICO Score 9.
    To generate a traditional credit score, a borrower must have one 
trade line that is at least 6 months old, with a balance on it. Fair 
Isaac Credit Services, Inc. estimates that 50 million U.S. consumers 
have credit histories that do not meet that requirement. These 
potential borrowers are disproportionately Hispanic (24 percent), 
African American (14.6 percent), and recent immigrants. However, it is 
estimated these 50 million people have a history of paying regular 
bills such as rent, utilities, insurance, and telecommunications.
    FICO Score 9's primary enhancement is its separation of medical 
debt collection from other unresolved debts. As a result, Fair Isaac 
estimates that a consumer with the median credit score of 711 whose 
only negative collection issue is medical-related will see his or her 
credit score increase by 25 points. FICO also recently announced a new 
credit score based on a consumer's payment history with 
telecommunications and utility bills. The new score could help 
applicants who don't use credit often but are responsible with other 
monthly payments.
    VantageScore 3.0 claims the ability to calculate a score for 30 to 
35 million previously ``unscoreable,'' or ``thin file,'' consumers. 
VantageScore requires just 1 month of credit history and less frequent 
updates than the current FICO score used by the Enterprises. Credit 
scores can now be made available to consumers who are brand new to 
credit, those who only use credit occasionally and people who have not 
used credit at all recently. The VantageScore 3.0 credit score also 
ignores all paid collections, as well as any collections, paid or 
unpaid, under $250.
    HUD Secretary Castro also has stated that FHA is exploring the use 
of new credit scoring models that use nontraditional factors, such as 
rent and utility payments, to determine creditworthiness. The potential 
use of alternative credit scoring models by FHA and the Enterprises 
could help to open the credit box.
Fees
    Fees for Government-backed mortgages continue to be at an increased 
level, even though the credit quality of the underlying loans has 
increased significantly, as evidenced by the high FICO scores 
referenced earlier. These higher fees are usually passed on to 
consumers, making it more expensive for borrowers to obtain a home loan 
or, in some cases, even preventing them from qualifying for a loan.
    In the wake of the housing downturn, FHA steadily and significantly 
increased its upfront and annual mortgage insurance premiums (MIP). The 
annual MIP on a typical 30-year FHA loan (LTV less than 95 percent and 
loan amount below $625,500) was raised six times in 5 years and had 
reached 130 basis points by April 2013 compared to 50 basis points in 
April 2010. Further, FHA also terminated the policy that allowed 
borrowers to stop paying mortgage insurance premiums after their loan 
reaches 78 percent of its original value. As a result, the cost of an 
FHA loan over the life of the loan had become higher than that of a 
conventional loan with private mortgage insurance, which borrowers can 
stop paying when the LTV reaches 78 percent of original value.
    NAHB strongly supports FHA's announcement in January that, 
effective with case numbers dated on and after January 26, 2015, it 
would reduce its annual upfront MIP by 50 basis points to 80 basis 
points on FHA loans with LTVs less than 95 percent and loan amounts of 
$625,500 and below.
    At the direction of the FHFA, Fannie Mae and Freddie Mac have been 
increasing their guarantee fees (g-fees) that are charged to lenders to 
protect against credit-related losses. G-fees charged by Fannie Mae 
averaged 62.9 basis points on new single-family originations in Q4 
2014. This is a significant increase over 2012 in which the average was 
39.9 basis points.
    In addition to the g-fees, Fannie Mae and Freddie Mac continue to 
charge adverse market fees and loan level pricing adjustments. Fannie 
Mae and Freddie Mac have charged a 25 basis point adverse market fee 
since March 2008 for whole loans and mortgage loans delivered into MBS. 
The loan level price adjustments, which have been charged since 2009, 
add delivery fees to mortgages purchased by the Enterprises. The 
delivery fees which vary based on credit score and loan-to-value ratio 
range from 25 to 325 basis points. This translates into a 6 to 80 basis 
point increase in mortgage financing costs.
    In June 2014, FHFA requested input on setting the g-fees. NAHB's 
comments to FHFA opposed a further increase in g-fees and urged that 
affordability should be a significant consideration in setting g-fees. 
NAHB's comments also included a recommendation for the Enterprises to 
eliminate the upfront adverse market charge and loan level price 
adjustments. Current market conditions in which defaults and 
foreclosures are declining and housing markets nationwide are improving 
have rendered these charges obsolete.
    Though FHFA still is in the process of reviewing and considering 
comments received on the g-fee request for input, NAHB is hopeful that 
Director Watt will make an announcement soon that will provide for 
lower fees to lenders and, ultimately, home buyers.
Downpayments
    In an acknowledgement that high downpayments are a significant 
impediment to some borrowers, especially first-time home buyers, last 
October FHFA Director Mel Watt directed the Enterprises to begin 
purchasing 3 percent downpayment mortgages from creditworthy borrowers. 
Fannie Mae began purchasing 97 percent LTV mortgages in December and 
Freddie Mac's purchase program began in March.
    NAHB agrees with Director Watt's assessment that 3-percent 
downpayment mortgages can be made safely by imposing strict credit and 
underwriting standards that ensure borrowers have strong credit and 
meet income, asset and employment requirements. Also, a recent Urban 
Institute analysis found that the default rates on 3 to 5 percent 
downpayment loans and 5 to 10 percent downpayment loans purchased by 
the Enterprises are similar.\3\
---------------------------------------------------------------------------
    \3\ Urban Institute, Why the GSEs' Support of Low-Downpayment Loans 
Again is No Big Deal. http://www.urban.org/urban-wire/why-government-
sponsored-enterprises-support-low-down-payment-loans-again-no-big-deal.
---------------------------------------------------------------------------
Appraisals
    The housing recovery also has been impeded by ongoing problems in 
the U.S. residential appraisal system. While lenders, Federal banking 
regulators and federally related housing agencies implemented 
corrective measures in response to valuation breakdowns that came to 
light in the wake of the Great Recession, and Congress mandated 
additional measures in the Dodd-Frank Act, these steps did not address 
fundamental flaws and shortcomings of the U.S. residential appraisal 
framework. Improper appraisal practices, a shortage of experienced 
appraisers and inadequate oversight of the appraisal system continue to 
restrict the flow of mortgage credit and retard the housing recovery. 
NAHB is not advocating that appraisals should be higher than the real 
market. Rather, our goal is to establish an appraisal system that 
produces accurate values through all phases of the housing cycle.
    The principal focus of reforms to-date has been on eliminating 
undue influence on appraisers to produce inflated valuations that 
facilitate transactions. However, when home prices began declining, 
improper appraisal practices exacerbated the slide in values. Some 
appraisers used distressed sales--many of which involved properties 
that were neglected and in poor physical condition--as comparables in 
assessing the value of brand new homes, without accounting for major 
differences in condition and quality. Without such adjustments, the two 
housing types are not comparable. The inappropriate manner in which 
distressed sales were utilized distorted home valuations. Use of the 
cost and income approaches in conjunction with the comparable sales 
approach could mitigate such distortions.
    The dramatic increase in the use of Appraisal Management Companies 
(AMCs) is another factor contributing to inaccurate appraisals. Some 
AMCs have reduced appraiser compensation, which has led to more 
activity by appraisers with less training and experience, and shortened 
turnaround times for valuations to as little as 48 hours. These changes 
have had a significant adverse effect on appraisal quality.
    Other challenges facing the appraisal industry include shortcomings 
in appraiser training and experience in dealing with new construction 
and green building. Additionally there is insufficient new 
construction, energy efficient and green building data available to 
appraisers and current valuation practices do not provide a process for 
expedited appeals of inaccurate or faulty appraisals. Oversight of 
appraiser qualifications and appraisal practices falls to the 
individual states, and many jurisdictions have inadequate resources to 
adequately perform this function. In some states, fees collected for 
appraiser licensing and certification are swept into a general fund and 
are not utilized in appraisal/appraiser oversight and enforcement.
    NAHB has been a leading advocate for correcting the valuation 
process and has undertaken a number of actions to raise awareness and 
address the adverse impacts inaccurate appraisals are having on the 
housing sector. NAHB has conducted five Appraisal Summits to provide 
opportunities for the agencies and organizations that establish 
appraisal standards and guidelines to join housing stakeholders in a 
constructive dialog on major appraisal topics of concern.
    Through the Appraisal Summits and feedback from builders and others 
in the field, NAHB has identified the following key areas of focus to 
improve current appraisal requirements and practices, which are 
presented in a white paper entitled A Comprehensive Blueprint for 
Residential Appraisal Reform, which contains the following 
recommendations:

Strengthen Education, Training and Experience Requirements for 
        Appraisers of New Home Construction, including:
    The establishment of greater education, training and 
        experience requirements for those who are assigned appraisals 
        of new construction to ensure that lot values and building 
        costs, including those for energy efficient, green building and 
        other evolving new construction techniques and mortgage 
        products, are fully considered in valuation of new home 
        construction.

    The incorporation of the qualifications for appraisers of 
        new construction into appraisal regulations and guidelines of 
        the bank regulatory agencies, Fannie Mae, Freddie Mac, FHA, VA, 
        and USDA.

Improve the Quantity and Quality of Data for New Construction through:

    Establishment of an appraisal database system for new 
        construction.

    Standardization of loan level valuation data by Fannie Mae, 
        Freddie Mac, FHA, VA and

    USDA in their Uniform Appraisal Dataset (UAD).

    Expansion of the UAD to include new construction, energy 
        efficient and green building data standards. Develop New 
        Appraisal Standards and Best Practices for Conducting 
        Appraisals in Distressed Markets by:

    Modifying current appraisal practices and procedures to 
        consider all three approaches to value--cost, income and sales 
        comparison--in appraisals of residential properties to mitigate 
        distortions and volatility.

    Giving greater weight in distressed markets to alternative 
        means of valuation, such as the cost-based approach to value.

    Revising banking agency guidelines to require the appraisal 
        entities used by financial institutions to avoid the use of 
        distressed sales as comparables for new construction sales and, 
        if distressed sales are the only comparables available, to make 
        adjustments to accurately reflect possible condition and stigma 
        issues associated with distressed properties.

Develop Processes for Expedited Appeals of Inaccurate or Faulty 
        Appraisals through:

    Federal agency adoption of an appeals structure similar in 
        design to that of the Department of Veterans Affairs Loan 
        Guaranty Service Home Loan Program.

    The establishment of more efficient, timely and effective 
        processes for State and local appraisal oversight.

    The establishment of a timely value dispute resolution 
        process that is fair, balanced and appropriate to allow 
        interested parties to appeal appraisal values when appraisal 
        techniques and/or assumptions are incorrect.

Strengthen Oversight of Appraisal Activities through:

    Streamlining and coordinating the current regulatory 
        framework to devote adequate resources and ensure effective 
        oversight and enforcement.

    Full implementation of appraisal mandates in recent Federal 
        legislation addressing:

      Appraisal independence

      Customary and reasonable fees

      Mandatory reporting of appraisal standards violations

      Strengthening of State appraisal oversight and 
        enforcement of regulations

      Dispute resolution

    Establishment of best practices for effective and 
        consistent appraisal practices, policies and procedures.

    NAHB stands ready to work with appraisal, housing and financial 
stakeholders to address the real challenges we face in restoring the 
public trust in how we build, transfer, value and finance the American 
consumer's most valuable asset. Solving these issues, in the short and 
long term, is a critical step toward establishing an efficient and 
sustainable housing finance system.
Regulatory Constraints to Housing Production Credit
    Despite signs of improvement in recent months, many home builders 
continue to deal with a significant adverse shift in terms and 
availability of land acquisition, land development and home 
construction (AD&C) loans. Lenders are reluctant to extend new AD&C 
credit citing regulatory requirements or examiner pressure on banks to 
shrink their AD&C loan portfolios as reasons for their actions. While 
Federal bank regulators maintain that they are not encouraging 
institutions to stop making loans or to indiscriminately shrink their 
portfolios, reports from NAHB members in a number of different 
geographies continue to suggest that bank examiners in the field are 
maintaining a more aggressive posture.
    According to data from the FDIC and NAHB analysis, the outstanding 
stock of 1-4 unit residential AD&C loans made by FDIC-insured 
institutions to residential construction businesses rose by $1.158 
billion during the fourth quarter of 2014, a quarterly increase of 2.32 
percent. On a year-over-year basis, the stock of residential AD&C loans 
is up 17 percent from the final quarter of 2013. Despite these gains, 
AD&C lending remains much reduced from years past.
    The current stock of existing residential AD&C loans of $51.2 
billion now stands 74.9 percent lower than the peak level of AD&C 
lending of $203.8 billion reached during the first quarter of 2008. 
However, the count of single-family homes under construction is down 
only 33 percent from the first quarter of 2008 compared to today. Thus, 
there exists a lending gap between home building demand and available 
credit. This gap is being made up with other sources of capital, 
including equity, investments from non-FDIC insured institutions and 
lending from other private sources, which may in some cases offer less 
favorable terms for home builders than traditional AD&C loans.
Concentrations in Commercial Real Estate Lending
    In general, the Federal banking regulators have been reminding 
financial institutions to adhere to the December 2006 bank regulatory 
guidance Concentrations in Commercial Real Estate Lending, Sound Risk 
Management Practices issued by the Office of the Comptroller of the 
Currency (OCC); the Board of Governors of the Federal Reserve System 
(Federal Reserve); and the Federal Deposit Insurance Corporation (FDIC) 
(collectively ``the Agencies'') in which the Agencies specified 
criteria they would review to determine when a bank was exposed to 
potential CRE concentration risk. A financial institution is considered 
to have a high CRE concentration, and thus subject to the Guidance, if 
it exceeds or is rapidly approaching the following thresholds:

    If loans for construction, land development, and other land 
        loans equal 100 percent or more of total capital, the 
        institution would be considered to have a CRE concentration and 
        should have heightened risk management practices.

    If loans for construction, land development, and other land 
        loans secured by multifamily and non farm nonresidential 
        property (excluding loans secured by owner-occupied properties) 
        equal 300 percent or more of total capital, the institution 
        would be considered to have a CRE concentration and should 
        employ heightened risk management practices.

    The guidance emphasized that the 100 percent and 300 percent 
thresholds are not to be considered as limits or caps on bank CRE 
lending but rather are intended as guidelines for banks and their 
examiners in determining appropriate loan underwriting and review 
systems, risk management practices and levels of reserves and capital.
    NAHB continues to raise awareness in Congress about the lack of 
AD&C financing and the possible adverse economic impacts of this 
situation.
Basel III
    In mid-2013, the U.S. Federal banking agencies approved a new 
regulatory capital regime for all federally insured banking 
institutions. Referred to as Basel III, the new requirements increase 
the quantity and quality of capital for all federally insured banking 
institutions and will impose additional capital thresholds for the 
largest banking organizations. Basel III was effective for the largest 
banks beginning January 2014; compliance for community banks was 
mandatory beginning January 2015.
    Basel III revised the definition of High Volatility Commercial Real 
Estate (HVCRE) and required HVCRE financings to be risk-weighted at 150 
percent up from 100 percent. AD&C loans considered HVCRE financings 
which generally will include commercial real estate projects with an 
LTV greater than 80 percent and borrower-contributed capital of less 
than 15 percent of the project's ``as completed'' value.
HVCRE loans do not include:

  (1)  One-to-four residential property; or

  (2)  Commercial real estate projects that meet certain prudential 
        criteria, including with respect to the LTV ratio and capital 
        contributions or expense contributions of the borrower.

    The new HVCRE capital requirement is affecting the ability of 
community banks to provide financing for AD&C loans using traditional 
methods and will impede the ability of banks to make high quality AD&C 
loans to builders and developers. As AD&C lending finally begins to 
recover, NAHB is extremely concerned that this rule introduces a 
significant new impediment to further improvement.
Cost of Regulation
    NAHB appreciates the Committee's focus on regulatory activities 
that are adversely impacting the housing credit availability. Along 
with the challenges faced by home buyers and home builders in securing 
financing, regulatory burdens impose costs on the development of land 
and the construction/remodeling of homes, both multifamily and single-
family, that are passed along to home buyers/homeowners and renters 
through higher costs for housing, both in terms of prices and rents. 
New regulations are being developed that impact all aspects of home 
building. For instance, the housing and construction industry is 
actively engaged with OSHA, EPA, FEMA and other agencies on new 
regulations which could drive up the cost of housing further.
    NAHB survey data of builders has demonstrated that, on average, 
regulation imposed during development accounts for 16.4 percent of the 
price of a home built for sale; regulation imposed during construction 
accounts for 8.6 percent of the price. Thus, in total, 25 percent of 
the price of an average single-family home built for sale is 
attributable to regulation imposed by all units of government at 
various points along the development/construction process. Most of 
these burdens are associated with permitting, land use, and 
construction codes, however, other financial burdens impose costs on 
the construction process and contribute to an increased cost of 
housing.
    In turn, higher housing costs ``price out'' households from home 
ownership. For example, according to 2014 estimates from NAHB, on a 
national basis, a $1,000 increase in home prices leads to pricing out 
just slightly more than 206,000 individuals from a home purchase. The 
size of this impact does vary widely across States and metro areas, 
depending on population, income distributions and new home prices.
    Housing is an important source of economic growth and job creation; 
and regulations are limiting home builders' ability to grow and 
contribute positively to the economy. As of the final quarter of 2014, 
housing's share of gross domestic product (GDP) was 15.2 percent, with 
home building yielding 3.1 percentage points of that total. 
Historically, residential investment has averaged roughly 5 percent of 
GDP while housing services have averaged between 12 percent and 13 
percent, for a combined 17 percent to 18 percent of GDP. While these 
shares tend to vary over the business cycle, clearly housing is an 
important factor in a healthy economy. Job creation is one of the 
important ways that housing contributes to GDP. NAHB estimates that 
building an average new single family home creates 3.05 jobs; building 
an average new multifamily rental unit creates 1.16 jobs; and every 
$100,000 spent on residential remodeling creates 1.11 jobs. Therefore, 
the cost and availability of credit for builders and home buyers has a 
direct impact on the ability of housing to contribute to economic 
growth.
    All of these issues must be factored into the cost of housing. As 
the cost of housing increases and the credit box remains tight, home 
buyers and renters will have fewer safe, decent and affordable housing 
options.
Conclusion
    NAHB supports steps to ensure that mortgage lending occurs in a 
safe and sound manner, with appropriate underwriting, prudent risk 
management and sound consumer safeguards and disclosure. NAHB continues 
to advocate for comprehensive mortgage finance system reform. While we 
believe regulatory barriers can be alleviated to some degree by the 
various regulators of the system as well as by specific legislative 
reforms, comprehensive legislation would ensure that components of 
reform are not in contradiction, but will work together to offer the 
hoped-for result; minimum disruptions to the mortgage markets while 
ensuring consumer protections.
                                 ______
                                 
                 PREPARED STATEMENT OF CHRIS POLYCHRON
           2015 President, National Association of REALTORS
                             April 16, 2015
INTRODUCTION
    Thank you for the opportunity to testify today. My name is Chris 
Polychron. I am the 2015 President of the National Association of 
REALTORS (NAR). A REALTOR for 27 years, I am an executive broker with 
1st Choice Realty in Hot Springs, specializing in residential and 
commercial brokerage.
    While we have seen great progress in our economic recovery, access 
to affordable mortgage credit remains a problematic obstacle for 
prospective home buyers. The number of first-time buyers entering the 
market is at the lowest point since 1987, despite historically low 
mortgage rates. The Nation's home ownership rate has fallen almost to 
levels last seen in 1990. Today, the number of homes purchased annually 
remains less than 70 percent of what was purchased prior to the real 
estate bubble and subsequent collapse.
    Credit remains tight as lenders remain leery of taking on risk. NAR 
has long supported strong underwriting standards that require all 
mortgage originators to verify the borrower's ability to repay the loan 
based on all its terms, including taxes and insurance. However, there 
remain some unnecessary regulatory burdens that are preventing 
qualified, credit-worthy borrowers from obtaining the American dream of 
home ownership. These fall into four specific areas:

    Consumer Financial Protection Bureau Issues

    Specialty Markets Challenges

    Short Sales and Foreclosure Matters

    Lending Policies
CONSUMER FINANCIAL PROTECTION BUREAU (CFPB) ISSUES
    NAR appreciates the CFPB's approach in proposing regulations that 
recognize the balance between access to credit and responsible lending. 
We support regulations such as the Qualified Mortgage (QM) rule to 
ensure that borrowers can repay their mortgage. We generally believe 
that these rules have created certainty in the mortgage market and have 
encouraged increased mortgage liquidity and availability, while 
ensuring consumers are afforded necessary protections. However, we 
believe there are certain changes that can be made to existing rules 
that will promote a safe, but more robust housing market.
3 PERCENT CAP ON POINTS & FEES NEEDS TO BE FIXED
    This year, the U.S. House Financial Services Committee passed H.R. 
685, ``The Mortgage Choice Act.'' This bill is identical to legislation 
that passed the House last year. This legislation is a bipartisan 
compromise that reduces discrimination against mortgage firms with 
affiliates in the calculation of fees and points in the Dodd-Frank 
Ability to Repay/Qualified Mortgage rule. The QM rule sets the standard 
for mortgages by providing significant compliance certainty to QM loans 
that do not have risky features and meet certain requirements. A key 
requirement is that points and fees for a QM may not exceed 3 percent 
of the loan amount. The inherent discrimination in this rule arises 
from the fact that under current law and rules, what constitutes a 
``fee'' or a ``point'' varies greatly depending upon who is making the 
loan and what arrangements are made by consumers to obtain closing 
services. As a result of these definitions, many loan originators 
affiliated with other settlement service providers are not be able to 
make QM loans to a significant segment of otherwise qualified 
borrowers.
    The discrimination in the calculation of fees and points is being 
felt by consumers who are seeing reduced choices and added obstacles in 
their transactions. A Spring 2014 NAR survey of affiliated mortgage 
lenders revealed almost half experienced problems due to the ATR/QM 
rule. When the 3 percent cap was cited as the cause, a significant 
number had certain services outsourced or were not able to complete the 
transaction. Where services were outsourced and charges known to the 
lender, nearly half of loans (43.8 percent) included higher fees. NAR 
strongly urges the Senate to introduce companion legislation and work 
to pass the bill this year.
RESPA/TILA REFORM MUST BE ENFORCED SLOWLY
    On August 1, 2015, significant Real Estate Settlement Procedures 
Act (RESPA) and Truth in Lending (TILA) changes go into effect during 
the busiest transaction time of the year. There will no longer be a 
Good Faith Estimate (GFEs) or Truth in Lending disclosures. Those two 
forms have been combined into a single ``Loan Estimate'' or ``LE.'' 
While NAR is supportive of this harmonization, there will be 
unanticipated problems and issues uncovered in the implementation. NAR, 
as well as other industry groups, have urged CFPB to provide for a 
restrained enforcement period on the RESPA-TILA integration regulation, 
and have asked them to clarify TILA and RESPA liabilities under the 
regulation.
COMMUNITY BANK LENDING SHOULD BE ENCOURAGED
    Ensuring community banks can continue to maintain good 
relationships and provide mortgage credit to their customers without 
being overloaded with regulations intended for more complex financial 
institutions is an important goal.
    NAR supports strong underwriting standards and believes that all 
mortgage originators should act in ``good faith and with fair 
dealings'' in a mortgage transaction and treat all parties honestly. 
This idea is at the core of community banks which base their 
reputations on a relationship-lending model. These standards had been 
the basis for offering mortgage credit for decades until the mid-2000s 
which saw a proliferation of lenders offering mortgage products that 
were unstainable for most borrowers.
    In May 2005, NAR adopted principles that warned that consumers were 
being taken advantage of by intemperate, and often predatory, lending. 
We acknowledged then too that, in a credit-driven economy, the 
legislative and regulatory response to lending abuses could go too far 
and inadvertently limit the availability of reasonable credit for 
borrowers. Unfortunately, this restriction of credit was exactly what 
the market experienced. As a result of lenders and regulators over-
correcting in response to the abuses in the middle of the previous 
decade, NAR called on the credit and lending communities and Federal 
regulators to reassess the entire credit structure and look for ways to 
increase the availability of credit to qualified borrowers who are good 
credit risks.
    Noting the importance of both of these principles, NAR supported 
the balance that the January 2013 mortgage rules achieved including 
strong consumer protections, the promotion of mortgage liquidity, and 
important ability-to-repay standards. One compliance option allows the 
creditor to make a reasonable and good faith determination that the 
borrower has a reasonable ability to repay the loan and related 
obligations, based on verified and documented information based on all 
its terms, including taxes and insurance.
    The CFPB's proposed amendments recognize that community banks have 
a long history of this common sense approach to underwriting and that 
the relationship-lending model is one that should be maintained. Of 
course, any exception to the general rule must be limited and not 
become the general rule; moderating regulatory burdens for small 
lenders needs to be balanced with maintaining principles of strong 
underwriting based on a borrower's ability-to-repay.
SPECIALTY MARKETS SHOULD HAVE SPECIAL CONSIDERATION
    As stated, we believe that exceptions to the CFPB rules must be 
made on a very limited and specific basis. Certain markets may warrant 
that type of consideration. Rural communities and manufactured housing 
loans fall into this category.
RURAL COMMUNITIES
    Rural citizens face unique challenges finding access to credit. 
Almost 20 percent of the U.S. population lives in rural areas or small 
towns and nearly all of the counties with the highest poverty rates in 
America are rural. NAR recognizes the uniqueness of rural communities 
and the key role that housing plays in building strong communities. 
REALTORS who live in and serve these communities also understand the 
need for specialized programs to meet the needs of Americans living in 
rural areas.
    The CFPB has updated its own definition of a rural community for 
lending policies. NAR supports the recent changes they have made, but 
also believe communities should be able to petition the CFPB to be 
considered rural. To this end, NAR supports S. 871, the ``Helping 
Expand Lending Practices in (HELP) Rural Communities Act'', introduced 
by Majority Leader McConnell (R-KY), along with Senators Heller (R-NV), 
Capito (R-WV) and Paul (R-KY). This bill will allow communities to 
apply for a designation as a rural community. There are a number of 
factors to be considered when determining if a community warrants a 
rural designation--and some factors commonly used can be misleading. 
For example, the population determined by the census is a common tool 
used to determine a communities' rural nature. But institutions like 
prisons and colleges can distort the actual population of a community. 
This legislation does not require the CFPB to grant a rural 
designation, but simply allows communities to apply for 
reconsideration.
    The Association also support changes to the process by which loans 
are approved under the Rural Housing Service (RHS) of the Department of 
Agriculture. Today, every RHS loan must be reviewed and approved by 
staff of the Rural Housing Service. In recent years, RHS staffing has 
been dramatically reduced, and borrowers have experienced significant 
delays in loan approval. Both the Veterans Affairs loan guaranty and 
the FHA mortgage insurance program utilize private lenders for direct 
endorsement. Providing RHS with the authority to approve direct 
endorsed lenders would create great efficiencies for the Service and 
for home buyers. RHS, in turn, would have additional staff time needed 
to focus on a strengthened lender monitoring process and risk 
management. NAR strongly urges Congress to provide RHS with direct 
endorsement authority to ease burdens on the agency and accelerate loan 
processing for borrowers.
MANUFACTURED HOUSING LOANS
    Nearly 20 million Americans live in manufactured homes. These homes 
are often a more accessible and affordable way for many people to buy 
their own home. Manufactured housing has come a long way with respect 
to the features and quality of life it provides homeowners. Today, 
manufactured homes blend seamlessly into many markets or neighborhoods. 
In many areas of the country, particularly rural communities, 
manufactured homes are the only type of quality affordable housing 
available.
    The Dodd-Frank Act regulations have mistakenly resulted in 
manufactured homes becoming less available as an affordable housing 
option. We support S. 682, the ``Preserving Access to Manufactured 
Housing Act'', introduced by Senators Donnelly (D-IN), Toomey (R-PA), 
Manchin (D-WV), and Cotton (R-AR). This legislation will preserve 
manufactured housing as an affordable housing option without reducing 
important consumer protections.
    S. 682 clarifies the difference between manufactured housing 
manufacturers and loan originators, and ensures that low-dollar 
manufactured housing loans are exempt from Home Ownership and Equity 
Protection Act (HOEPA) standards. The costs of originating and 
servicing a manufactured loan are not much different than those of a 
more traditionally built home, even though the loan itself is often 
much smaller. Therefore, the closing costs of a manufactured loan as a 
percentage of the loan are much higher than the percentage on a more 
expensive home. This can cause manufactured housing loans to violate 
caps in Dodd-Frank and be categorized as ``High-Cost,'' or predatory. 
S. 682 will exempt manufactured loans from this label.
FORECLOSURES AND SHORT SALES REMAIN PROBLEMATIC
    Too often, short sales are still a story of delay and unrealistic 
views of current home values, resulting in the potential buyer 
canceling the contract and the property going into foreclosure. 
Enormous amounts of time are spent on potential short sales that 
ultimately result in foreclosures. Even if successful, the process 
usually takes many months and countless hours and often requires re-
marketing because buyers lose patience and terminate the contract.
CERTAINTY IS NEEDED TO MAKE THE SYSTEM WORK
    NAR believes that the short sale process would significantly 
improve with the passage of S. 361, ``The Prompt Notification of Short 
Sale Act,'' introduced by Senators Brown (D-OH) and Murkowski (R-AK) 
last year. This legislation requires servicers to decide whether to 
approve a short sale within 30 days of completion of the file. The bill 
attempts to prod servicers to make the short sales process more 
efficient by setting standards and penalizing them for inadequate 
performance. Streamlining short sales will reduce the amount of time it 
takes to sell the property, improve the likelihood the transaction will 
close, and reduce the number of foreclosures. This will benefit the 
lender, the seller, the buyer, the community.
TAXPAYERS NEED RELIEF
    Today, more than 5 million families remain in a home that is 
``under water.'' While Congress provided relief in recent years, 
uncertainty exists for these homeowners today. For many of these 
homeowners, a short sale or workout is the most viable option. However, 
the income tax exemption on mortgage debt forgiven in a short sale or a 
workout for principal residences was extended late last year 
retroactively, but expired at the end of 2014. Not having this relief, 
many families will simply walk away and accept a foreclosure on their 
home. This is contrary to the goal of every policy designed to keep 
people in their homes and prevent foreclosures.
    Unless remedied, homeowners who participate in a workout or short 
sale will have to pay tax on ``phantom income'' from forgiven debt. 
This is not only unfair but harms families, neighborhoods and 
communities. NAR urges all Members to extend this provision of the tax 
code. Without this provision, distressed homeowners will decide to take 
a pass on opportunities for workouts with the lender or short sales, 
opting instead for continued delinquency or possible default until 
foreclosure, or simply to walk away from the property. This will 
destabilize the communities where such homes are located.
LENDING POLICIES CONTINUE TO CONSTRAIN ACCESS TO CREDIT
    Loan pricing and lending restrictions also are making it more 
difficult for credit-worthy borrowers to purchase a home. We believe 
that these types of rules should be directly commensurate with actual 
risk. Borrowers should not be subject to higher fees or burdens that 
are unnecessary.
CONDO RESTRICTIONS PREVENTING HOMEOWNERSHIP OPPORTUNITIES
    Condominiums often represent the most affordable options for first-
time home buyers, including minorities. However, the Federal Housing 
Administration (FHA) and the Government-Sponsored Enterprises (GSEs) 
have significant restrictions on the purchase of condominiums. However, 
NAR supports developing policies that will give current homeowners and 
potential buyers of condos access to more flexible and affordable 
financing opportunities as well as a wider choice of approved condo 
developments. Specifically, we have five areas of concern.

  1.  Owner Occupancy--FHA requires that a condominium property be at 
        least 50 percent owner occupied. FHA's ratio greatly limits the 
        number of condominium buildings available to credit-worthy 
        borrowers. This policy is also self-fulfilling. If a building 
        has less than the 50 percent owner-occupancy ratio, sellers of 
        units have fewer buyers who are eligible, leading them to rent 
        out their unit rather than sell. This makes it difficult for 
        many buildings to achieve the 50 percent requirement. By way of 
        contrast, the GSEs do not place limits on the owner-occupancy 
        of a condominium project if the borrower is buying it as a 
        primary residence. NAR strongly urges FHA to eliminate this 
        requirement to open up more properties for FHA-eligible buyers.

  2.  Project Approval Process--FHA requires the entire condominium 
        project to be approved prior to a buyer purchasing a unit. This 
        certification process is costly and time-consuming, and 
        difficult for the often volunteer boards of condominium 
        buildings. Less than 20 percent of all condominium properties 
        nationwide have FHA approval.\1\ NAR strongly urges FHA to 
        reduce the burdens associated with project certification. NAR 
        also recommends that the spot loan approval process be 
        reinstated to allow purchases in some buildings that do not 
        have FHA certification.
---------------------------------------------------------------------------
    \1\ Based on estimates derived from FHA's condo lookup tool as of 
2/24/15.

  3.  Delinquent Dues--Following the housing crisis, a number of 
        condominium and homeowner associations have units that are 
        behind in paying their dues. Both FHA and the GSEs restrict 
        approval of properties where more than 15 percent of the units 
        have delinquent dues. While NAR appreciates the need to make 
        sure properties are properly capitalized with appropriate 
        reserves; dues payment should not be a sole determinant. Some 
        associations may have compensated for delinquencies by building 
        reserves or taking other steps to ensure that delinquencies are 
        not impacting their financial stability. This requirement 
        should NOT be a determining factor, but instead be a part of an 
---------------------------------------------------------------------------
        overall review of a property's finances.

  4.  Commercial Space--Multi-use properties and new ``town center'' 
        developments are very popular, and lauded by HUD as creating 
        benefits for communities in providing easy access to amenities 
        and transportation. Yet, condominium associations with 
        commercial space are restricted from approval by both the GSEs 
        and FHA. The GSEs limit commercial space to 20 percent, but 
        provide waivers. FHA's limit is 25 percent, also with allowable 
        waivers. The current policy hinders efforts to build 
        neighborhoods that have a mix of residential housing and 
        businesses with access to public transit. The Association urges 
        FHA and the GSEs to lift these restrictions.

  5.  Transfer Fees--FHA has a policy that prohibits FHA mortgage 
        insurance on any property that has a transfer fee covenant. 
        Fees that increase the costs of housing can disenfranchise 
        those who wish to obtain the American dream; however, fees that 
        provide a direct benefit to homeowners and improve the property 
        are legitimate and should be permitted. The blanket policy used 
        by FHA can greatly disadvantage the millions of homeowners 
        living in community associations, making it much harder for 
        them to sell their homes. FHFA has previously dealt with this 
        issue, following a thoughtful and lengthy rulemaking. FHFA's 
        final rule on transfer fee covenants establishes a clear, 
        national standard to protect homeowners from equity-stripping 
        private transfer fees while preserving the preeminence of State 
        and local governments over land use standards.

    FHA should accept a mortgagee's compliance with FHFA's transfer fee 
covenant regulation as compliance with relevant FHA mortgage insurance 
program rules, guidelines and requirements. Any additional and 
potentially conflicting Federal standard on transfer fee covenants by 
FHA will cause confusion in the housing market and require community 
associations to amend governing documents. Amendments to community 
association covenants, conditions, and restrictions can be difficult to 
execute and by statute generally require legal counsel and the approval 
of at least a supermajority of owners. We urge FHA to mirror FHFA's 
rule, and prohibit only those fees that don't benefit the homeowner and 
association where they live.
    There are additional concerns related to condo rules including 
investor ownership, concentration limits, and pre-sale requirements 
that also should be changed. REALTORS were pleased to see a recent 
notice by Fannie Mae, loosening some restrictions. We look forward to 
the publishing of FHA's upcoming condo rule and are hopeful that it 
will loosen many of the current restrictions.
    Condominium unit mortgages are among the strongest performing in 
the FHA portfolio. According to FHA data from 2014, the national 
serious delinquency rate for condominium projects is 0.89 percent 
versus 1.17 for single-family homes.\2\ Condominiums are often the most 
affordable option for first-time home buyers, or older homeowners who 
wish to downsize. We strongly believe that qualified home buyers should 
not be prevented from this option, simply due to mortgage restrictions.
---------------------------------------------------------------------------
    \2\ Serious Delinquent Rates, Retrieved April 13, 2015, from 
Neighborhood Watch, Early Warning System. https://entp.hud.gov/sfnw/
public/.
---------------------------------------------------------------------------
HIGH G-FEES STILL HURTING CONSUMERS
    High guarantee fees (g-fees) and loan level pricing adjustments 
(LLPAs) charged by the GSEs are negatively impacting the housing 
recovery. These Enterprises buy single-family mortgages from mortgage 
companies, commercial banks, credit unions, and other financial 
institutions. A key revenue component for the GSEs is a g-fee received 
for guaranteeing the payment of principal and interest on their 
mortgage backed securities (MBS). The g-fee is a significant factor in 
determining profits earned from this credit guarantee. The g-fee covers 
projected credit losses from borrower defaults over the life of the 
loans, administrative costs, and a return on capital.
    Continued increases in g-fees and upfront borrower costs will 
extend a trend of reduced access to mortgage credit, which is counter 
to a principal duty of the FHFA Director under the Housing and Economic 
Recovery Act of 2008 (HERA). Continuing to increase the fee will mean 
that larger numbers of consumers, many of them first-time home buyers, 
will be forced to pay substantially higher mortgage rates, or be left 
with limited housing finance options. NAR believes borrowers who are 
either purchasing a home or refinancing their existing mortgage using 
conventional financing are being charged excessive fees due to policy 
goals that go beyond protecting taxpayers from GSE losses.
    NAR is especially concerned with the disparate impact the changes 
will have on first-time home buyers and other traditionally underserved 
borrowers. These families are more likely to bear the brunt of these 
fees, either because they have thin credit files and traditional credit 
models do not reflect payments toward housing expenses and utilities; 
or because they often make smaller down payments than do other 
borrowers.
    FHFA seems to believe that by raising costs for loans purchased or 
guaranteed by the GSEs, they can lure private sector capital back to 
the mortgage market. However, we believe this policy does not account 
for the aversion to, and lack of trust in, issuers of private mortgage 
backed securities that many investors still harbor since suffering 
tremendous losses during the recent housing crisis. This lack of trust 
remains and is hard to quantify. When increasing fees, the GSEs must 
include performance measures to ensure they are meeting the goal of 
increasing private sector participation. In addition, the Agency should 
examine other factors that are holding back the private market in 
conjunction with the Treasury Department. The National Association of 
REALTORS believes that future data will show that the effect of 
raising fees will simply be increased costs to home buying taxpayers 
who can afford to become homeowners, and that the true effect will be 
redirection of more mortgage loans to FHA without a robust private 
sector return.
CONCLUSION
    The Urban Institute recently reported that ``If credit standards 
had been similar to those of 2001, more than 4 million additional loans 
would have been made between 2009 and 2013. The missing loans grew from 
500,000 in 2009 to 1.25 million in 2013.''\3\ While we generally 
support recent regulations such as QM, policies still exist that 
unnecessarily constrain lending to credit-worthy borrowers. While no 
one wants to see a return to the unscrupulous, predatory lending 
practices that caused the Great Recession, some modifications of 
existing regulations may be necessary to ensure a robust housing 
market.
---------------------------------------------------------------------------
    \3\ http://blog.metrotrends.org/2015/04/million-mortgage-loans-
missing-2009-2013-due-tight-credit-standards/
?utm_source=iContact&utm_medium=email&utm_campaign=Housing
%20Finance%20Policy%20Center&utm_content=HFPC+newsletter+4%2F8%2F2015.
---------------------------------------------------------------------------
    Adjustments to rules issued by the CFPB including 3 percent cap on 
points and fees, enactment of RESPA/TILA harmonization, and encouraging 
responsible community bank lending will help provide consumers with 
valuable protections and safe access to affordable credit. Small market 
areas such as rural and manufactured housing must also be provided with 
flexibility appropriate to their market conditions. Americans who 
continue to struggle with underwater mortgages or mortgages they simply 
cannot afford should be provide protections and given certainty so they 
can make decisions appropriate for their families. Last, loans must be 
priced to reflect actual risk, and unnecessary restrictions must be 
removed to allow families to achieve the American Dream of home 
ownership.
    Thank you for allowing me to share the view of the National 
Association of REALTORS, and we look forward to working with you.
                                 ______
                                 
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                                
                                 
                                 
    
 RESPONSE TO WRITTEN QUESTION OF SENATOR HELLER FROM TOM WOODS

Q.1. A major issue for many potential home buyers and 
homeowners is flood insurance. Right now, homeowners 
essentially have no option but to buy Government-backed 
National Flood Insurance Program policies to meet mandatory 
purchase requirements. The Biggert-Waters flood insurance bill 
Congress passed had the unintended consequence of making it 
more difficult for private insurers to provide private flood 
insurance and for lenders to accept those policies. Right now 
lenders are being forced to reject many residential private 
flood policies. Senator Tester and I have introduced 
legislation in the past that would try to solve this problem.
    I would like to know, Mr. Woods, if you support the 
development of a private flood insurance market that meet 
mandatory purchase requirements and could this help increase 
home ownership because consumers will have more insurance 
options?

A.1. Thank you Senator Heller for your question regarding 
NAHB's support of the development of a private flood insurance 
market that meets mandatory purchase requirements and if this 
could help increase home ownership because consumers would have 
more insurance options.
    NAHB does not have policy on State-regulated insurance 
markets; however, we would welcome open competition and a 
vibrant private market.
    In NAHB's experience, without the NFIP, many communities 
would be unable to provide affordable housing to many of their 
citizens. One of the leading causes of the housing 
affordability problem is the shortage of buildable land. By 
guaranteeing affordable flood insurance, the NFIP allows 
communities to use land that would otherwise be too costly due 
to high flood insurance premiums. Through the NFIP, flood 
insurance policies remain available and affordable, and 
residential structures can be constructed in floodplains as 
long as they are built to withstand flooding.
                                ------                                


RESPONSE TO WRITTEN QUESTION OF SENATOR HEITKAMP FROM TOM WOODS

Q.1. Overlapping regulations in our mortgage markets have the 
potential to constrain credit and prevent otherwise worthy 
borrowers from qualifying for mortgages. That said, the 
Consumer Financial Protection Bureau (CFPB) has attempted to 
accommodate small and rural communities, institutions, and 
their customers during the rulemaking process by issuing a 
number of exceptions for these areas and revising rules when 
the existing regulations have proven unworkable or unduly 
burdensome. Below, find a list of regulatory accommodations 
that have been made by CFPB. How successful has each action 
been in providing relief, to what extent is each measure 
deficient, and what steps can the CFPB take to improve each 
provision? Please provide any data or other information to 
support your position.

  a. LSmall Creditor QM: Established a Qualified Mortgage (QM) 
        Option that provides loans originated by small 
        institutions--assets of less than $2 billion and make 
        fewer than 2,000 loans annually--and held in portfolio 
        for a minimum of 3 years a safe harbor.

  b. LBalloon QM: Created a QM option for mortgages with 
        balloon payments that are originated by small creditors 
        in rural or underserved areas.

      i. LEscrow: Exempted small creditors who operate 
        predominantly in rural or underserved areas from 
        requirements to establish escrow accounts for higher 
        priced mortgage loans.

  c. LRural Definition: Incorporated industry feedback and 
        expanded the definition of rural, using Census blocks. 
        The revised definition would designate the entirety of 
        North Dakota--except for the census blocks of three 
        major towns--as rural.

A.1. Thank you Senator Heitkamp for your question on the 
Consumer Financial Protection Bureau's (CFPB) efforts to 
accommodate industry concerns through the rulemaking process. 
NAHB supports balancing mortgage lending standards and consumer 
protections and appreciates that the CFPB has made a concerted 
effort to solicit feedback from industry on the practical 
implementation of the 2013 mortgage rules. NAHB commends CFPB's 
efforts to monitor the impact of the new mortgage rules and 
appreciates that the CFPB is willing to adjust the rules in 
response to concerns in areas where improvements are needed.
    NAHB supports the actions that CFPB has taken to provide 
relief to small financial institutions and those institutions 
lending in rural and underserved areas. NAHB believes that 
raising the loan origination limit for determining eligibility 
for small creditor status, along with the expanded definition 
of rural and the additional provisions, will provide small 
financial institutions with more flexibility in meeting the 
unique needs of the communities that they serve.
    However, tight lending conditions continue to keep buyers 
on the sidelines even as the housing market recovers. At a time 
when housing is affordable and interest rates are low, more 
buyers should be able to enter the housing market. However, 
many creditworthy borrowers are not taking advantage of these 
opportunities. This impact is evidenced by the reduced 
participation rate of first-time home buyers that has dropped 
to 30 percent of the purchase market\1\ from the historical 
rate of about 40 percent of sales.
---------------------------------------------------------------------------
    \1\ National Association of REALTORS (NAR) Press Release. 
Existing-Home Sales Lose Momentum in April. May 21, 2015. Retrieved 
from: http://www.realtor.org/news-releases/2015/05/existing-home-sales-
lose-momentum-in-april.
---------------------------------------------------------------------------
    NAHB believes that a healthy housing market includes broad 
participation from all population segments. NAHB has encouraged 
the CFPB to further investigate the impact of the new mortgage 
regulations, including the debt-to-income ratios and 
documentation requirements, on entry level buyers and other 
important market segments to ensure that creditworthy borrowers 
are able to access mortgage credit. Broader availability of 
safe and responsible credit increases home ownership 
opportunities and provides benefits to the housing market and 
the overall economy.
    NAHB believes that the CFPB should take additional steps to 
address today's tight lending environment, such as adjusting 
the QM 3 percent cap on points and fees to exclude fees paid to 
affiliated businesses, and to provide a reasonable hold-
harmless period for enforcement of the of the CFPB's TILA-RESPA 
Integrated Disclosures (TRID) regulation for those that make 
good-faith efforts to comply.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF CHAIRMAN SHELBY FROM J. DAVID 
                             MOTLEY

Q.1. You testified that loan officers employed by nonbank 
lenders are required to be licensed under the SAFE Act. Your 
testimony advocates for a transition period for new loan 
officers of nonbank lenders to work while they are earning 
their certification, so long as these employees were previously 
loan officers with another institution.
    How could this particular proposal aid in the expansion of 
mortgage credit of the reduction in the cost of credit? Based 
on the average time period to complete this transition, how 
long should this transition period last?

A.1. The Secure and Fair Enforcement for Mortgage Licensing 
(SAFE) Act, enacted in 2008, mandates a nationwide licensing 
and registration system for residential mortgage loan 
originators (MLOs). Some of the objectives of the SAFE Act 
include creating increased accountability for MLOs, greater 
consumer protection, and providing home buyers with tools to 
help them select their loan officers. Unfortunately, in its 
current form, the SAFE Act creates a two-tiered licensing 
system that impedes the mobility of mortgage loan officers 
(notwithstanding the fact that Federal depositories are 
required to conduct regular job-specific training for their 
consumer-facing employees).
    The SAFE Act requires MLOs employed by nonbank lenders to 
be licensed, which includes pre-licensing and annual continuing 
education requirements, passage of a comprehensive test, 
criminal and financial background reviews conducted by State 
regulators, and registration in the National Mortgage Licensing 
System and Registry. By contrast, MLOs employed by federally 
insured depositories or their affiliates must only be 
registered in the NMLS, and do not have to meet testing and 
specific education requirements.
    This two-tiered structure creates a significant 
disincentive for loan officers to transition from a depository 
to a nondepository. These MLOs must wait for weeks, or even 
months, while they meet the SAFE Act's licensing and testing 
requirements--despite the fact that they have already been 
employed and registered as a loan officer at a depository.
    Nonbank lenders or independent mortgage banks (IMBs) 
typically focus exclusively on mortgage lending. In recent 
years, large depository-institutions have moved away from the 
home purchase business and toward other types of mortgage-
related business, including refinancing, servicing portfolio 
retention, and making more jumbo and adjustable rate loans that 
can be held for investment. In contrast, from 2008 to 2013, the 
IMBs' share of the home purchase market grew from 25 percent to 
40 percent with a particular focus on providing loan products 
for first-time home buyers and underserved borrowers.
    A small amendment to the SAFE Act to require States to 
issue transitional licenses to registered loan officers seeking 
employment with nondepositories would help to eliminate the 
delays and hurdles in hiring highly qualified loan officers to 
work for IMBs and focus their efforts on providing home 
purchase mortgage credit. These individuals should be able to 
continue originating loans for 120 days after leaving their 
bank employer (and while beginning their work for an IMB). 
Similarly, a State-licensed loan originator in one State who 
takes a similar position in another State would have a 120-day 
grace period to obtain a license in the new State. This 120 
period is based on the amount of time it typically takes for an 
MLO to receive a license and is also consistent with laws in 
States that have already passed legislation to permit 
transitional licensing.
    This narrow and simple solution creating transitional 
licenses would eliminate a significant impediment to IMBs 
hiring highly qualified bank loan officers. IMBs have made the 
commitment to provide mortgage credit to a broad range of 
creditworthy borrowers. By increasing labor market mobility, 
loan originators could freely move to lenders that are best 
able to serve their clients through competitively priced 
products that will insure more qualified borrowers access to 
credit.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR VITTER FROM J. DAVID 
                             MOTLEY

Q.1. Mr. Motley, In your statement you assert that ``New 
servicing rules have dramatically driven up the cost to service 
loans and driven down efficiency in servicing operations'' and 
cite that loans serviced per full-time employees have decreased 
from 1,638 in 2008 to 790 in 2014. Moreover, you cite that 
direct costs to service each loan have increased from $173 per 
loan in 2008 to $309 in 2014, and costs to service loans in 
default have risen from $423 per year in 2007 to $2,214 in 
2014.''
    Which regulations have most directly increased the cost and 
amount of time to service these loans?

A.1. It is difficult to isolate one particular regulation as 
the direct driver of the significant increase in servicing 
costs, due to the sheer number of new regulations from Dodd-
Frank as well as the increased costs associated with the volume 
of foreclosures following the 2008 financial crisis. Costs have 
increased across the board but particularly in the areas of 
collections, loss mitigation, recordkeeping, borrower 
communications, vendor management, servicing technology, and 
quality control and quality assurance.
    There have also been large increases in compliance costs in 
this time period as servicers implement the myriad new Federal 
and State requirements as well as the costs associated with the 
National Mortgage Servicing Settlement among the larger 
servicers. The CFPB's broad and prescriptive servicing rule 
necessitated costly system overhauls, training expenses, and 
ongoing compliance outlays and has certainly played a role in 
the increased costs of servicing.
    The effect of implementing regulations is also demonstrated 
by the increase in costs of servicing performing loans as well 
as nonperforming loans, suggesting that the impact of the new 
regulatory paradigm will be continued to be felt well into the 
future.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR HELLER FROM J. DAVID 
                             MOTLEY

Q.1. A major issue for many potential home buyers and 
homeowners is flood insurance. Right now, homeowners 
essentially have no option but to buy Government-backed 
National Flood Insurance Program policies to meet mandatory 
purchase requirements. The Biggert-Waters flood insurance bill 
Congress passed had the unintended consequence of making it 
more difficult for private insurers to provide private flood 
insurance and for lenders to accept those policies. Right now 
lenders are being forced to reject many residential private 
flood policies. Senator Tester and I have introduced 
legislation in the past that would try to solve this problem.
    I would like to know, Mr. Motley, if you support the 
development of a private flood insurance market that meet 
mandatory purchase requirements and could this help increase 
home ownership because consumers will have more insurance 
options?

A.1. The Mortgage Bankers Association supports the development 
of a private flood insurance market that meets mandatory 
purchase requirements. A competitive and sustainable flood 
insurance market will expand available insurance options, lower 
costs, and increase the number of at-risk properties that are 
insured. Increased private sector involvement can also serve to 
shift some of the burden of post-disaster recovery and 
rebuilding from taxpayers to the private sector thereby 
limiting the Federal Government's exposure to flood loss.
                                ------                                


RESPONSE TO WRITTEN QUESTION OF SENATOR HEITKAMP FROM J. DAVID 
                             MOTLEY

Q.1. Overlapping regulations in our mortgage markets have the 
potential to constrain credit and prevent otherwise worthy 
borrowers from qualifying for mortgages. That said, the 
Consumer Financial Protection Bureau (CFPB) has attempted to 
accommodate small and rural communities, institutions, and 
their customers during the rulemaking process by issuing a 
number of exceptions for these areas and revising rules when 
the existing regulations have proven unworkable or unduly 
burdensome. Below, find a list of regulatory accommodations 
that have been made by CFPB. How successful has each action 
been in providing relief, to what extent is each measure 
deficient, and what steps can the CFPB take to improve each 
provision? Please provide any data or other information to 
support your position.

  a. LSmall Creditor QM: Established a Qualified Mortgage (QM) 
        Option that provides loans originated by small 
        institutions--assets of less than $2 billion and make 
        fewer than 2,000 loans annually--and held in portfolio 
        for a minimum of 3 years a safe harbor.

  b. LBalloon QM: Created a QM option for mortgages with 
        balloon payments that are originated by small creditors 
        in rural or underserved areas.

      i. LEscrow: Exempted small creditors who operate 
        predominantly in rural or underserved areas from 
        requirements to establish escrow accounts for higher 
        priced mortgage loans.

  c. LRural Definition: Incorporated industry feedback and 
        expanded the definition of rural, using Census blocks. 
        The revised definition of would designate the entirety 
        of North Dakota--except for the census blocks of three 
        major towns--as rural.

A.1. MBA believes it is time to consider changes in the QM 
definition to mitigate the adverse impact the CFPB's Ability to 
Repay rule has had on access to credit for some borrowers. In 
this regard, MBA appreciates the CFPB's efforts regarding the 
Small Creditor and Balloon QM as well as the Rural Definition 
identified in your question. Nevertheless, MBA believes changes 
to the QM definition are better made holistically and not 
limited to certain lenders based on charter types or business 
models. Consumers should not be forced to discern which 
institutions offer particular types of loans and their choices 
should not be limited to particular providers. Stratification 
of the market by establishing different underwriting standards 
for some lenders and not others only causes unnecessary 
consumer confusion and will lessen competition. A holistic 
approach to revising the QM would ensure a competitive market 
for all types of QM loans, and would not burden the consumer 
with figuring out which lenders offer which QM products. 
Accordingly, as detailed in our testimony we believe: (1) in 
addition to adding certain protections against the re-emergence 
of loans with risky features such as pay option ARMs, stated-
income underwriting, and short-term balloon terms, any new 
portfolio QM also should be made available to all originators 
that process, fund and sell these loans to a bank (or REIT) 
that will retain the loans in portfolio for the required 
holding period; (2) the spread over the APOR for defining a 
safe harbor QM should be expanded to 200 basis points; (3) the 
definition of smaller loans should be increased to $200,000, 
with adjustments for inflation and a sliding scale that permits 
progressively higher points and fees caps for these smaller 
loans; (4) the right to cure or correct inadvertent errors be 
extended to DTI miscalculations and typographical and technical 
errors and omissions; and (5) title insurance fees paid to 
lender-affiliated companies should be excluded from the 
calculation of ``points and fees'' under QM just as such fees 
to non-affiliated companies are excluded.

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