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Senator Urges Federal Regulators to Sync QRM Rule with CFPB's QM Standard
On January 22, Senator Bob Corker (R-TN) sent a letter to federal regulators responsible for finalizing the Dodd-Frank Act mandated “qualified residential mortgage” (QRM) standard, urging that the final QRM definition mirror the “qualified mortgage” (QM) definition recently promulgated by the CFPB. The QRM rule will define those loans exempt from the Act’s risk retention requirements for mortgage securitizers, a requirement that also will be set by the rule though it cannot be less than the statutory floor of five percent of the credit risk for any asset that is not a QRM. The Act also prohibits the QRM standard from being broader than the QM definition. Senator Corker maintains that, because the QRM rule will exempt loans sold to federal government sponsored enterprises and government agencies, “if the QRM rule is written differently than the QM rule, most financial institutions will only originate loans intended for sale to” those entities and as a result the return of private capital to the secondary market will be limited.
Special Alert: Detailed Analysis of CFPB's High-Cost Mortgage Rule
On January 10, the CCFPB issued a final rule that amends Regulation Z (Truth in Lending) to implement changes to the Home Ownership and Equity Protection Act (HOEPA) made by the Dodd-Frank Act. As detailed in BuckleySandler's Special Alert, the rule expands the types of loans subject to HOEPA, revises the tests for whether a loan is "high-cost" and therefore subject to HOEPA, imposes new restrictions on high-cost loans, and requires new disclosures. Because of the special requirements for loans that meet HOEPA's high-cost tests, the HOEPA threshold has acted as a de facto usury ceiling for the vast majority of mortgage originators. With the rule's extension of HOEPA to more types of loans, and the lowering of the HOEPA thresholds, this ceiling will now affect a broader segment of consumers seeking mortgage loans than before. The rule also implements two additional Dodd-Frank Act provisions that are not amendments to HOEPA related to homeownership counseling. Click here to download BuckleySandler's detailed analysis of the final high-cost mortgage rule.
Special Alert: Detailed Analysis of CFPB's Final Ability-to-Repay/Qualified Mortgage Rule
As promised in our earlier flash Alert on the Consumer Financial Protection Bureau's highly anticipated final "Ability-to-Repay" rule governing residential mortgage lending under Regulation Z, we are providing in this Special Alert a detailed summary and analysis of the Rule, which becomes effective on January 10, 2014. We also assess the Bureau's concurrently issued proposal, which seeks comments by February 25, 2013 on potential amendments to the Rule. For ease of reference, the Alert contains a detailed, hyper-linked Table of Contents.
Special Alert: CFPB Issues Final Ability-to-Repay / Qualified Mortgage Rule
On January 10, the CFPB issued its keenly awaited final "Ability-to-Repay" rule under Regulation Z that will require lenders to verify a consumer's ability to repay a mortgage loan as required by Sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule will become effective on January 10, 2014. Concurrently, the CFPB released a proposal seeking comment on amendments to the final rule. Together, the releases containing the final and concurrent proposed rules total almost 1,000 pages. This alert highlights some key issues that the releases resolve and leave open; we will send a summary of the releases with additional analysis of the key issues once we have had more time to review.
Because of the severe penalties established by Congress for violating the "Ability to Repay" requirements - a borrower in foreclosure can assert a violation against the creditor or assignee seeking up to three years of finance charges paid on the loan - the key definitions and exemptions established by the rule are expected to greatly influence the availability and cost of residential mortgage credit for years to come.
The statute defines a subset of mortgage loans to be "Qualified Mortgages" (or QMs), which would be more difficult for consumers to challenge on ability-to-repay grounds. The rule resolves three of the major policy debates surrounding the QM concept, as discussed below, but leaves open many related matters:
- Whether the QM definition should be objective (and thus easier to determine compliance with up front but more rigid in application to individual borrowers) or subjective (creating more of a compliance challenge but allowing for more individualized determinations)
- The rule takes the more objective path, using as its underwriting criteria (i) a numerical standard of 43% debt to income (DTI) ratio as the QM cut-off or, alternatively, for the time being, (ii) eligibility for purchase, guarantee or insurance by the GSEs or Federal agencies. (This alternative to the 43% cut-off will become unavailable after seven years or, if earlier and as applicable, until the Federal agencies write their own qualified mortgage rules or the GSE conservatorships end.) Note that jumbo loans, by definition, could not qualify under the GSE/Federal agency alternative; thus, they will have to be made at a 43% DTI just to pass the QM underwriting test.
- Whether the QM definition should encompass much of the market or be limited to the very top end of the market
- The definition clearly includes much of the market. The underwriting criteria described above would make well over 90% of the current residential mortgage marketplace QM eligible. How many of those loans would also pass the separate "points and fees" test for QM (discussed below) is an open question, however.
- Whether QM status would provide a "safe harbor" from liability under the requirements or merely a "rebuttable presumption" that the loan meets the ability-to-repay requirements
- The rule provides a safe harbor for loans with APRs below the "higher-priced" threshold of 150 basis points over the Average Prime Offer Rate (APOR), and a "rebuttable presumption" for loans with an APR above that threshold.
The expansive underwriting criteria adopted in the final rule for QMs will place relatively more importance on the separate QM requirement that points and fees be limited to 3% of the loan amount. Indeed, to many observers, the components of that cap present the most significant unresolved issues in the rule. The final rule includes in the 3% cap both (i) direct and indirect loan originator compensation, as well as (ii) closing charges paid to affiliated settlement providers such as a lender-owned title company.
The inclusion of those items in the 3% cap will place a lot of stress on mortgage brokers and wholesale lending business models (and the brokers that send applications to those lenders) and on the use of affiliates. By including these items in the 3% cap, there will be little room for upfront lender charges. At least on the issue of indirect loan originator compensation, however, the Bureau has shown some potential flexibility by raising the matter in the concurrent proposal.
- Whether the QM definition should be objective (and thus easier to determine compliance with up front but more rigid in application to individual borrowers) or subjective (creating more of a compliance challenge but allowing for more individualized determinations)
Federal Banking Regulators Issue Statement on Conversions of Troubled Banks
On November 26, the Federal Reserve Board, the FDIC, and the OCC, together with the CSBS, issued guidance on implementation of section 612 of the Dodd-Frank Act, which imposes restrictions on conversions of national banks and federal savings associations to state-chartered institutions and vice versa. As the Interagency Statement describes, section 612 generally prohibits such charter conversions while an institution is subject to either a formal enforcement order issued by its primary regulator involving a significant supervisory matter or to a memorandum of understanding entered into with its primary regulator involving a significant supervisory matter. The Statement (i) explains that federal and state agencies consider the prohibition to cover all formal enforcement actions by a federal or state agency, (ii) encourages institutions subject to the prohibition that are seeking conversion under one of the several exceptions to notify regulators prior to submitting a conversion application, and (iii) outlines the processes by which federal and state agencies will comply with the notification and information sharing requirements of section 612.
Federal Reserve Board Governor Calls for New Approach to Mortgage Regulation, Highlights Potential Impacts of Qualified Mortgage Rule
On November 9, in a speech to the Community Bankers Symposium, Federal Reserve Board Governor Elizabeth Duke reviewed in detail the role community banks play in the mortgage market and the post-Dodd-Frank Act mortgage lending challenges facing community banks. Ms. Duke explained that new rules to implement the Basel III capital accords, as well as those to put in place by Dodd-Frank Act requirements regarding escrow accounts for higher-priced mortgages, loan officer compensation, and appraisal requirements will burden community banks significantly. Ms. Duke highlighted the pending qualified mortgage and qualified residential mortgage rules, noting that they could have a “profound effect on the mortgage terms offered and the underwriting conditions.” not only for community banks, but for all banks. Specifically, she said that these rules could “constrain community bankers from using their experience with the cash flows from a small business customer or their knowledge of local real estate markets to customize a loan for an ‘irregular’ situation, such loans may not be made.”. Given the “cost of regulation that is prescriptive with respect to underwriting, loan structure, and operating procedures” and the “lack of evidence that balance sheet lending by community banks created significant problems,” relating to the financial crisis, Ms. Duke concluded that policymakers should establish a separate, simpler regulatory structure applicable to community bank mortgage lending.
Former Florida Attorney General Comments on the Use of Outside Counsel by State AGs
On October 16, former Florida Attorney General (AG) Bill McCollum was featured during a STAGE Network webinar on the "Use of Outside Counsel by State AGs to Enforce Federal and State Law."AG McCollum referred to his own experiences, including his leadership in Florida's adoption of the innovative Transparency in Private Attorney Contracts (TiPAC) law, to provide a perspective on issues related to state AGs' engagement of outside counsel. AG McCollum also examined the prospect of an increased role for state AGs in the enforcement of federal laws, particularly the consumer protection related aspects of the Dodd-Frank financial reform statute. Finally, he discussed the comparative restrictions on state and federal actors in engaging outside counsel, particularly due to Executive Order 14333 regarding compensation for outside legal services. The archived webcast can be reviewed in its entirety at this link.
South Carolina Attorney General Discusses Decision To Intervene In Case Challenging Dodd-Frank Act
On October 5th, South Carolina Attorney General (AG) Alan Wilson, in an interview with the STAGE Network, discussed the reasons why he and the AG’s of Oklahoma and Michigan determined to join an earlier existing lawsuit in order to dispute the Orderly Liquidation Authority powers granted by Title II of the Dodd-Frank Act. AG Wilson also gave his perspectives on the appropriate balance between effective consumer protection and unduly burdensome regulation, and commented on the increased coordination among state AG’s in financial services related investigations and litigation. A webcast featuring AG Wilson’s views can be reviewed in its entirety at https://www1.gotomeeting.com/register/348234897.
CFPB Reports on Consumer Credit Scores
On September 25, the CFPB published a report on credit scores and consumer reporting agencies. As required by the Dodd-Frank Act, the CFPB compared credit scores sold to consumers to those sold to creditors to determine the impact of the different scoring models used by consumer reporting agencies. Using 200,000 credit files obtained from each of the major consumer reporting agencies, the CFPB found that for a substantial minority of consumers, the different scoring models yielded meaningfully different results, i.e., the consumer and creditor purchased different credit scores from the same reporting agency. In comparing different models across various demographic subgroups, the CFPB found that different credit scores did not appear to treat different groups of consumers systematically differently than other scoring models. The CFPB cautioned consumers against exclusively relying on credit scores they purchase as a guide to how creditors will view their credit quality. Additionally, the CFPB urged consumer reporting agencies to advise consumers that the scores they purchase could vary, sometimes substantially, from the scores used by creditors.
Three State AGs Join Challenge to Dodd-Frank Act and CFPB Appointment
On September 20, the Attorneys General (AGs) of Michigan, Oklahoma, and South Carolina joined an earlier-filed lawsuit in the U.S. District Court for the District of Columbia that challenges aspects of the Dodd-Frank Act, including the CFPB and its director. The AGs joined an amended complaint that seeks to challenge as unconstitutional the “formation and operation” of the CFPB, and that argues the President side-stepped constitutional checks and balances by refusing to submit his nominee for CFPB Director to the Senate. The AGs also charge that the “orderly liquidation authority” (OLA) for financial institutions provided to the Treasury Secretary by the Dodd-Frank Act violates the separation of powers doctrine, as well as the Fifth Amendment’s bar against the taking of property without due process. The AGs cite their state pension funds—each of which is invested in “a variety of institutions” subject to the OLA—as their basis for standing, claiming that the OLA exposes the states and their funds to “the risk that their credit holdings could be arbitrarily and discriminatorily extinguished.” Finally, the private plaintiffs that originally filed the suit also contest based on a separation of powers argument the “unconstitutional creation” of the Financial Stability Oversight Council.