The Mortgage Bankers Association sent a letter this week to the Consumer Financial Protection Bureau, providing additional comments on the points and fees calculations in the Ability to Repay/Qualified Mortgage rule and asking for further clarification on several items contained in the rule.
The CFPB’s proposed amendments to Ability to Repay standards and a Qualified Mortgage rule would change the Truth in Lending Act (Regulation Z). The Final Rule would require creditors to make a “reasonable, good faith determination” of the consumer's ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage or temporary loan). It also establishes certain protections from liability for loans that satisfy the requirements of a QM.
The requirements for QM loans include product and underwriting restrictions. These restrictions generally prohibit risky product features, for example, loans where the regular payments result in an increase in the principal balance or balloon payments on loans. (There is, however, an exception to the balloon payment restriction for certain balloon payment QMs by smaller creditors operating in rural or underserved areas which is one of the subjects of this rulemaking.) Also, the total “points and fees” payable in connection with a QM loan may not exceed three percent of the total loan amount.
MBA said it supports the Bureau's efforts to modify the “additive approach of including compensation to both individual originator employees and commission to brokerage companies in the points and fees calculation.” In addition, MBA would support the Bureau's exercising its authority to exclude from the QM points and fees test all real estate related fees, whether received by an independent entity or an affiliate of the creditor.
“At the very least, the title insurance premium to an affiliate should be excluded from the calculation of points and fees,” wrote MBA President and CEO David Stevens. “This issue is also central to the points and fees calculation and serves the same purpose as the proposed adjustment to loan originator compensation--ensuring that identical QM loans do not lose QM status simply because of business model chosen (e.g., wholesale vs. retail, affiliated vs. non-affiliated services).”
MBA said it supports exemptions proposed by the Bureau for Housing Finance Agencies, certain organizations and nonprofits; however MBA said the CFPB should address particular concerns discussed in this letter and move forward carefully in this area to avoid harming consumers in light of past abuses. It also said it supports exemptions from the ability to repay requirements for refinance programs and said safeguards should also be established to ensure that the exemption does not lead to unintended consequences.
However, MBA asked for clarity as to how a loan would be evaluated in the event an error in the origination or delivery process triggers a repurchase demand from a GSE and asked the CFPB to clarify its interpretation of the programs it deems to qualify as Eligible Targeted Refinance Programs, noting that the exemption appears uneven in its application and could affect credit risk for a “disproportionate number of refinanced mortgages” that could be directly assumed by the federal government, including FHA’s already troubled balance sheet.
MBA also said it supports a proposed new exemption for small creditors with an increased threshold of up to 3.5 percent over the Average Prime Offer Rate to define safe harbor QMs and an increase in the same threshold for to balloon loans. Stevens said the proposal’s focus on the significance of the threshold brings to light other areas in the Final Rule that MBA strongly believes the Bureau should address, including:
• Changing the QM APR/APOR for all loans. MBA analysis has shown that anomalies with the calculation of the APOR, as well as the inclusion of items discussed in this letter, warrant an increase in the APR/APOR threshold for all loans up to 200-250 basis points.
• Revising the APR/APOR threshold for FHA loans (at least until FHA issues its own rule). MBA said FHA loans comprise 30 percent of the purchase mortgage market in recent years, serving predominantly first-time homebuyers of low and moderate income, African-American and Hispanic borrowers. “Considering FHA loans are far more prevalent than small creditor loans and the program is subject to direct government participation with strong underwriting standards, and the loans are not “subprime,” the distinction between QM safe harbor and QM rebuttable presumption loans should be eliminated. All FHA loans should receive a conclusive presumption of compliance,” MBA said.
• MBA said while it recognizes that FHA is responsible for formulating its own QM requirements, FHA is unlikely to be able to do so until after the QM rules take effect. Making many FHA loans rebuttable presumption loans until FHA’s own QM rule comes out would have a chilling effect on FHA lending and the housing market in a period of fragile housing recovery.
MBA also urged the Bureau to review and consider additional revisions to the QM rule to provide greater clarity on the following additional issues:
• Buy Backs. The rule does not address whether loans that are subject to repurchase demands will lose their QM status based on deficiencies. MBA strongly believes they should not. However, clarification is needed.
• Smaller Loans. Data run by some members has raised concerns about the calculation of the points and fees limit, particularly the inclusion of loan originator compensation, affiliate fees and other items. These concerns are amplified greatly the smaller the loan size.
• Loan-Level Price Adjustments. The Final Rule indicates that charges to borrowers to offset GSE established loan-level price adjustments are included in the points and fees calculation. To the extent the charge to the consumer is for a bona fide discount point up to two may be excluded. Inclusion of LLPAs in many cases will force loans to lose their QM safe harbor status and/or result in an increase in rates potentially disqualifying borrowers at the margins. Because LLPAs are entirely outside the control of the lender and are a product of government policy, MBA strongly recommends excluding these charges from points and fees.
• Jumbo Loans. The Final Rule requires that borrowers for jumbo loans have a debt to income ratio of 43 percent or less, while other loans are able to qualify by meeting GSE and agency requirements. We can see no compelling policy rationale to demand that jumbo loans meet higher standards than other conventional loans, MBA suggests that the following approach to jumbo loans be adopted: (i) they should be excluded from the ability to repay requirements as they are under some state laws, for example, in North Carolina; or (ii) they should be eligible for QM if they meet the GSEs' or agency underwriting guidelines whether or not they are eligible for purchase; and the APR-APOR threshold for QM jumbo loans should be adjusted to reflect their pricing difference.
• Streamlining of FHA Underwriting Standards. Appendix Q, derived from the FHA underwriting handbook, outlines the underwriting and documentation standards that are to be used to determine the debt-to-income (DTI) ratio for those loans that must have a DTI of 43 percent or below to qualify for a QM. The standards in Appendix Q are burdensome and should be clarified.
• Construction Loans longer than 12 months. The exemption in QM is only for construction loans that are less than a year long. A potential renewal for another 12 months is allowed as long as the initial loan term is 12 months. This period should be extended as necessary during the period of construction even if it exceeds 24 months.
• Rebuttable Presumption Standards Including Residual Income. MBA appreciates the Bureau’s guidance in the Final Rule that litigants under the rebuttable presumption QM should prove that the borrower did not have sufficient residual income and that courts should acknowledge that a successful payment history over time should refute such claim. MBA urges the Bureau to provide guidance on residual income requirements as soon as possible and meet with MBA members as soon as possible to further define these standards.
Additionally, MBA said it has long-supported bright line standards for the QM that will be easy for consumers to understand and lenders to follow.
“In order to continue to work towards achieving this goal, we believe that clear guidance from the CFPB is essential in response to the many questions raised and that will be raised as the Final Rule is digested,” Stevens said. “We appreciate that the Final Rule generally defines the requirements for a QM and hope that with an interactive and responsive implementation process, it will be clarified and sufficient guidance provided to ensure a stable housing market and broad access to credit.”