EXAMINING HOW THE DODD-FRANK ACT 

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HEARING 

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AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

JUNE 18, 2013 

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EXAMINING HOW THE DODD-FRANK ACT 

HAMPERS HOME OWNERSHIP 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

JUNE 18, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–32 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

SEAN P. DUFFY, Wisconsin, Vice Chairman 

SPENCER BACHUS, Alabama 

GARY G. MILLER, California 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

MARLIN A. STUTZMAN, Indiana 

ROBERT PITTENGER, North Carolina 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

GREGORY W. MEEKS, New York, Ranking 

Member 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

NYDIA M. VELA ́ ZQUEZ, New York 

STEPHEN F. LYNCH, Massachusetts 

MICHAEL E. CAPUANO, Massachusetts 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 18, 2013 .................................................................................................... 1 

Appendix: 

June 18, 2013 .................................................................................................... 43 

WITNESSES 

TUESDAY, JUNE 18, 2013 

Calhoun, Michael D., President, Center for Responsible Lending (CRL) ........... 18 

Gardill, James, Chairman of the Board, WesBanco, on behalf of the American 

Bankers Association (ABA) ................................................................................. 11 

Reed, Jerry, Chief Lending Officer, Alaska USA Federal Credit Union, on 

behalf of the Credit Union National Association (CUNA) ................................ 13 

Still, Debra W., CMB, Chairman, Mortgage Bankers Association (MBA) .......... 14 

Thomas, Gary, President, National Association of REALTORS® (NAR) ........... 16 

Vice, Charles A., Commissioner, Kentucky Department of Financial Institutions, on behalf of the Conference of State Bank Supervisors (CSBS) ............ 9 

APPENDIX 

Prepared statements: 

Calhoun, Michael D. ......................................................................................... 44 

Gardill, James ................................................................................................... 63 

Reed, Jerry ........................................................................................................ 75 

Still, Debra W. .................................................................................................. 87 

Thomas, Gary .................................................................................................... 104 

Vice, Charles A. ................................................................................................ 109 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Capito, Hon. Shelley Moore: 

Written statement of the Community Associations Institute ....................... 124 

Written statement of the Consumer Mortgage Coalition .............................. 128 

Written statement of the Independent Community Bankers of America .... 265 

Written statement of the National Association of Federal Credit Unions .. 341 

(1) 

EXAMINING HOW THE DODD-FRANK ACT 

HAMPERS HOME OWNERSHIP 

Tuesday, June 18, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Shelley Moore Capito 

[chairwoman of the subcommittee] presiding. 

Members present: Representatives Capito, Duffy, Miller, 

McHenry, Pearce, Fitzpatrick, Luetkemeyer, Pittenger, Barr, Cotton, Rothfus; Meeks, Maloney, Hinojosa, Scott, Green, Ellison, 

Velazquez, Lynch, Capuano, Murphy, and Heck. 

Ex officio present: Representatives Hensarling and Waters. 

Chairwoman CAPITO. The Subcommittee on Financial Institutions and Consumer Credit will come to order. Without objection, 

the Chair is authorized to declare a recess of the subcommittee at 

any time. 

I now yield myself 21⁄2 minutes for my opening statement. 

This morning’s hearing is the second installment in a series of 

hearings that this subcommittee is holding on the effect that the 

Consumer Financial Protection Bureau’s (CFPB’s) ability-to-repay 

rule will have on the availability of mortgage credit for consumers. 

During the last hearing, we heard from representatives from the 

CFPB about the status of the rule and the feedback that they were 

hearing. There was almost unanimous agreement from members of 

the subcommittee that the rule in its current form could lead to a 

constriction of credit when it goes into effect in January of 2014. 

The CFPB must give those concerns serious consideration and address them in order to avoid serious market disruption. 

In the last 6 weeks, the CFPB issued amendments to the rule addressing concerns that had already been raised. Although these revisions attempt to provide clarity to lenders, the need for these 

changes highlights the fundamental problem with the ability-torepay rule. 

Mortgage lending can be a highly subjective business, especially 

in rural and underserved areas. This element of relationship-based 

decision-making is completely ignored by the premise of the rule. 

It will be nearly impossible for the CFPB to endlessly amend the 

rule to accommodate the ability of lenders to make these relationship-based loans. Unfortunately, the end result will be some conVerDate Nov 24 2008 17:59 Jan 30, 2014 Jkt 081767 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\81767.TXT TERRI
2 

sumers losing access to credit and the ability to own their own 

home. 

This morning, we will hear from mortgage professionals who are 

best able to determine the real effects of this rule and what effects 

it will have on the mortgage market. We are here today to not only 

learn about how this rule will affect the available mortgage credit, 

but also to begin discussion of better ways to preserve access to 

mortgage credit and protect consumers. 

I fear that without significant revision or repeal of this rule in 

its entirety, the consumers that proponents of the rule are attempting to protect will be the very consumers who are blocked out of 

the system. Without significant changes, consumers who live in 

rural areas with low property values will see a change in their 

availability of credit. The consequences of this rule, whether intended or unintended, will be very real to these communities. In 

fact, one of our witnesses today is concerned that the institution he 

represents may no longer be able to offer a charitable program for 

low-income borrowers. This program has been in existence since 

1951 and has helped residents of Ohio County, West Virginia, who 

otherwise could not attain the goal of home ownership. This is exactly the type of case-by-case local lending that will be threatened 

by rigid Federal standards. 

I now yield to the ranking member of the subcommittee, Mr. 

Meeks, for the purpose of making an opening statement. 

Mr. MEEKS. Thank you, Chairwoman Capito, for holding this important hearing. Let me start by reaffirming the need and the support for the Dodd-Frank Act. No bill that I have seen in my 15 

years here is perfect. But the 2008 financial crisis was a painful 

and regrettable demonstration of the need to reform our financial 

institutions, our capital markets, and our regulatory agencies, and 

to have laws to prevent the reoccurrence of the excessive behavior 

that got us here in the first place. 

That is why I have remained open-minded in my search for true 

bipartisan solutions to address some of the shortcomings of the bill, 

particularly those aspects of the law that affect the most vulnerable. We need to make sure that we help our local communities 

and our local banks, whose activities did not blow up the global financial system, but are facing real challenges in this modest economic recovery. 

I support a balanced, risk-sensitive Qualified Mortgage (QM) definition that protects consumers from predatory lending practices 

while also ensuring that we maintain a competitive, accessible, and 

liquid housing finance industry that serves all niches of the population. 

This is why I cosponsored H.R. 1077 to specifically address and 

support home ownership and financing opportunities by first-time 

home buyers and low- and moderate-income families. H.R. 1077 addresses major concerns on regulatory agencies’ rulemaking on 

Qualified Mortgages as required by Dodd-Frank and focuses on the 

Consumer Financial Protection Bureau’s ability-to-repay rule, 

which sets the baseline for a Qualified Mortgage. 

I am concerned that the Qualified Mortgage’s 3 percent cap on 

points and fees will especially affect first-time home buyers and 

low- and moderate-income consumers, especially in places like my 

3 

hometown of New York, which has some of the highest closing costs 

in home mortgages. It is problematic to me to include some specific 

closing cost charges in the cap, such as title insurance premiums 

from affiliated providers, escrow charges for future payment of tax 

and insurance, and low-level pricing adjustments which allow borrowers with not-so-perfect credit scores to qualify for affordable 

loans, and the double counting of loan officer compensation, which 

is unfair. 

With respect to title charges, we must be careful not to treat title 

insurance companies differently under the QM rules based on their 

business affiliations. The home purchase and settlement process is 

complex and difficult for most home buyers. If a buyer chooses the 

one-stop-shopping option by selecting an affiliated title company, 

he or she ought to be able to exercise that option without the penalty of extra points on their mortgage. 

To ensure that we have a thriving housing recovery that is farreaching and sustainable, we need to make sure that we have a financial system that provides access to credit in underserved communities and affordable loans to low- and moderate-income households. Our financial regulations must, therefore, be balanced between the need to protect against excessive risk-taking and enabling a liquid, well-financed housing industry. 

Consistent with this balanced approach, I support risk-retention 

rules as an important principle and risk-management tool in the 

securitization process. And risk retention would ensure that loan 

originators applied prudent underwriting standards at the critical 

initial stage of risk assessment. 

Under Dodd-Frank, securities-based Qualified Residential Mortgage (QRM) loans would be exempt from risk-retention rules, as 

these loans would have been vetted as having gone through prudential underwriting standards. 

The housing sector is vital to our economic recovery, and H.R. 

1077 is an important step in ensuring that this sector remains vibrant and accessible to all niches of the population. 

Chairwoman CAPITO. Thank you. 

Mr. Duffy for 2 minutes. 

Mr. DUFFY. First, I want to thank Chairwoman Capito for holding today’s very important hearing, and I appreciate the panel coming in and sharing your views with us on our mortgage market. 

I think everyone on this panel agrees that after the 2008 crisis, 

we have to have a review on what happened in regard to our underwriting standards with regard to our mortgages. I think it is 

fantastic that we have a bipartisan understanding that DoddFrank isn’t perfect and that there is room to improve the law that 

was written a few years ago. I am hoping this can be one leading 

committee on bipartisan activity. 

One of my concerns is specifically the civil liability that is imposed on banks in regard to assessing a borrower’s ability-to-repay, 

specifically in regard to those banks that originate and retain their 

mortgages on their books. They assume the traditional credit risk 

of that loan, but then now they also have a civil liability on top of 

the traditional credit risk. I am interested in the panel’s views on 

how that will impact the industry’s willingness to write mortgages 

in this new environment. 

4 

Also, I have read most of the testimony, and a lot of you have 

talked about the safe harbor rule under QM, and I am interested 

in the panel’s views on whether we can pierce—or an aggressive 

litigant can pierce that safe harbor rule and actually successfully 

litigate a positive outcome when our originators actually believe 

they were safely covered under the safe harbor rule. 

Listen, I come from a rural part of the country. It is moderate 

and low income. I am concerned on how the ability-to-repay standard, as well as QM, is going to impact my constituents’ ability to 

obtain mortgages as we move forward with these new rules. I look 

forward to the panel’s testimony and our bipartisan work on this 

committee. 

I yield back. 

Chairwoman CAPITO. The gentleman yields back. 

I now yield 3 minutes to the ranking member of the full Financial Services Committee, Ms. Waters from California. 

Ms. WATERS. Thank you very much, Madam Chairwoman. 

All of us on this committee know the 2008 financial crisis was 

a complicated event without a simple explanation, and I am sure 

there are differences of opinion on both sides of the aisle as to what 

led us into the greatest economic downturn since the Depression. 

We can all agree on at least one thing: Mortgage lenders were 

extending loans to people who couldn’t afford to pay them back. 

Underwriting standards went out the window as lenders raced to 

push as many people into complicated loan products as possible. 

Many borrowers who were eligible for prime rates received 

subprime loans from unscrupulous lenders that were compensated 

by yield spread premiums. The mortgage market wasn’t working 

for its customers at all and many homeowners are still struggling 

with their lingering problems in the housing market. 

In court documents released just last Friday, several employees 

of one of the Nation’s largest mortgage servicers claimed that their 

managers encouraged them to pretend they had lost customer paperwork so the customers could be foreclosed upon. As it turns out, 

when the servicer doesn’t own the loan it is servicing, it is cheaper 

to foreclose than to help a homeowner with a loan workout. 

This misalignment of economic incentives is what the CFPB’s 

ability-to-repay rule is all about. Rather than banning any type of 

loan product or feature, the Dodd-Frank Act empowered the Federal Reserve and the CFPB to go after lenders who recklessly 

trapped borrowers in loans they couldn’t afford and provided consumers with additional rights to pursue compensation for faulty 

loan products. But Congress also realized it would be unfair to 

make lenders bear all of the risk these new rules present, so we 

worked with the industry to craft a set of standards which a mortgage could meet in order to be automatically exempted from the 

penalty set up to catch bad actors. 

The CFPB has proposed a final rule on these so-called Qualified 

Mortgages, and I believe that rule has struck a very fair balance 

for the industry. The Qualified Mortgage rule incentivizes lenders 

to avoid complicated and risky loan structures with variable rates 

or features that allow borrowers to stay current while actually accruing more debt on their home, and it doesn’t prevent them from 

doing so. 

5 

It encourages lenders to really look into a potential borrower’s income documentation and compare that to the real payments the 

loan will require, not the tiny payments associated with a shortterm teaser rate, but it doesn’t force them to. And the Bureau has 

also made several adjustments to that rule addressing industry 

concerns, and I hope they will continue to work closely with the industry to strike the right balance of protection, specifically for rural 

lenders where credit availability is already a concern. 

I believe that Director Cordray’s establishment of the CFPB Office of Financial Institutions and Business Liaison will be very 

helpful to that effort. 

I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Miller for 2 minutes. 

Mr. MILLER. I want to thank the Chair for holding this important 

hearing today. We are starting to see a rebound in the housing 

market, and that is really important to the economic recovery of 

this country and for job creation. But we need to be cautious that 

Federal policies don’t have a negative impact on that. And the 

CFPB’s ability-to-repay rule governs lending for the foreseeable future for all of us, without a doubt. 

But the rule contains Qualified Mortgage, called QM, and it is 

meant to protect consumers from subprime loans that are really 

predatory, but I have some real concerns with that. I have had a 

concern with the definition between subprime and predatory for 

years, and I am glad to see we are going to finally deal with it. But 

when you look at the concerns we have on that, the way it is written it could prevent creditworthy borrowers from being able to actually get a home and get a loan. 

Some studies that have been released lately, one done by 

CoreLogic, says that about half of the mortgages that originated in 

2010 could not be issued under this rule. The problem I have with 

it is that the mortgages in 2010 are performing very well. So if 

there is a problem with those loans, I think we need to look at 

them, but from what I am seeing, there doesn’t appear to be a 

problem. 

I have spoken with loan originators up and down the spectrum, 

from mortgage brokers to mortgage bankers to retail banks, and 

they all said basically the same thing: ‘‘We will not originate a nonQualified Mortgage; there is too much liability.’’ The Administration doesn’t seem to see a problem with this, but the marketplace 

does notice a huge problem. 

I support sound underwriting standards, but I am concerned the 

QM definition is basically too narrow and sometimes unclear. And 

there is an issue of a 3 percent point fee cap to determine someone’s ability-to-repay a loan, and there are so many exclusions to 

that, it doesn’t seem to make any sense. And the thing that I have 

problems with is you can’t even drop that fee cap once you state 

what it is going to be in order to close a loan, even to the benefit 

of the buyer and the seller. 

So we need to look at that issue and say, is it going to work, is 

it not going to work? But our housing market, as I said, is finally 

showing signs of life and I am concerned that what we are doing 

here could have a negative impact. 

6 

I yield back the balance of my time. 

Chairwoman CAPITO. The gentleman yields back. 

Mr. Ellison for 2 minutes. 

Mr. ELLISON. Thank you. Thank you, Madam Chairwoman. 

Thank you, Madam Chairwoman and Mr. Ranking Member, for 

holding this important hearing. 

I was intrigued by the title, ‘‘Examining How the Dodd-Frank 

Act Hampers Home Ownership.’’ I don’t know a lot, but I do know 

that homeowners paying fees completely separate from the actual 

cost of the service they receive is a damper on home ownership. Appraisal fees, title insurance, private mortgage insurance, all manner of inflated fees raise the cost of a mortgage by thousands of dollars. 

I know that using language, or ethnic or religious affiliation to 

trick people into high-cost mortgages when they qualify for low-cost 

prime mortgages hampers home ownership. We have a lot of examples here of that. For example, Wells Fargo paid $175 million to 

settle accusations that it allegedly discriminated against AfricanAmerican and Latino home buyers. An NAACP study found that 

African-American home buyers are 34 percent more likely to receive a subprime loan than White borrowers even when other factors are equal. 

Of course, foreclosures don’t help home ownership, either. We 

have had 4 million of them so far. 

So when I think about the title of this hearing, and it seems to 

imply that Dodd-Frank is the problem with home ownership, I 

think that a whole lot of things that led up to the establishment 

of Dodd-Frank actually are the real problem with home ownership. 

This isn’t to say that we shouldn’t look at how we can improve 

things and we shouldn’t continue to refine the bill, but I do think 

that it is important to maintain some perspective on how we arrived at Dodd-Frank and what we are doing now, and I don’t think 

that associating Dodd-Frank with being some barrier to home ownership is fair. 

The global financial crisis cost this economy $16 trillion in 

wealth. The Qualified Mortgage and other elements of the DoddFrank Reform and Consumer Protection Act are not hampering 

home ownership. Dodd-Frank enables sustainable home ownership. 

We don’t want somebody to get into a home that they can’t keep. 

That is not promoting home ownership. That is putting somebody 

in a situation where they are set up to fail. 

So I hope that despite today’s title of this hearing, we can have 

some testimony that will actually show us how the Consumer Financial Protection Bureau is doing some good things and helping 

safeguard the American people’s economic interest. Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Barr for 1 minute. 

Mr. BARR. Thank you, Chairwoman Capito, for holding this very 

important hearing to examine the consequences of Dodd-Frank on 

home ownership. 

A theme that I consistently hear from the community bankers in 

Kentucky’s Sixth Congressional District is that they no longer have 

the discretion and flexibility to serve their communities in the ways 

that they know best. Whereas individual business judgment and inVerDate Nov 24 2008 17:59 Jan 30, 2014 Jkt 081767 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\81767.TXT TERRI
7 

stitutional knowledge of the community should be considered 

strengths, and strengths that are encouraged, these bankers tell 

me that rather than focusing on their core business, they instead 

have to devote an increasing amount of time to playing catchup 

with regulations from Washington. 

While each story is unique, the tale of the financial institution 

where personnel hiring in the compliance department dramatically 

outpaces hiring in the lending department is not unique. Some 

bankers have gone so far as to tell me that this new wave of regulations and lending rules in Dodd-Frank is leading them to seriously rethink their business model and whether they should get 

out of providing home mortgage services altogether. 

I am confident that many in this room have heard these same 

concerns, and so I look forward to the opportunity presented by today’s hearing to further explore Dodd-Frank, the CFPB rulemaking, the QM rule, and whether it truly strikes the proper balance between safety and soundness of our financial system and 

making sure creditworthy borrowers have access to the mortgage 

credit they need to purchase a home. 

Chairwoman CAPITO. The gentleman’s time has expired. 

The gentlelady from New York for 2 minutes. 

Mrs. MALONEY. I thank the chairlady and the ranking member 

and all of the panelists for being here. It is no secret that leading 

up to the financial crisis, mortgage lending was literally out of control, with prudent underwriting taking a back seat to profit-seeking. 

The comment in New York was, if you can’t afford to pay your 

rent, then go out and buy a home: no documents, no requirements, 

you can buy a home. And this hurt our economy, it hurt homeowners, it hurt our overall country, and it really alerted us to the 

need for greater standards and a minimum of safeguards for mortgage lending practices. That is what Dodd-Frank tried to accomplish, to show that we learned from our mistakes and that basic 

underwriting standards to prevent this from happening again were 

needed. 

With the new QM rule, we will hopefully be able to assure borrowers that they are better protected from predatory lending practices. The debt-to-income ratio of 43 percent is one that the FHA 

has used for decades. I understand that the CFPB has granted an 

exception to that for community bankers to have their discretion 

with balloon loans to make appropriate loans that they feel are appropriate for that individual. But it does come forward with an 

overall standard, which I believe is necessary and that Dodd-Frank 

dictated. 

We have to start somewhere. We can’t go backwards. I compliment the CFPB on their hard work and for giving us a document 

to work from. And I look forward to the testimony of the witnesses 

and your reaction to the proposed rule that the CFPB has put forward. Thank you for your hard work. Thank you for being here. 

Chairwoman CAPITO. Thank you. 

Mr. Pittenger for 1 minute. 

Mr. PITTENGER. Thank you, Chairwoman Capito, for calling this 

important meeting and for allowing me to make an opening statement. 

8 

We are here today to focus on the rules and regulations coming 

out of Dodd-Frank and out of these new policies that will affect 

home ownership across America, specifically regarding the abilityto-repay QM rule. 

However well-intentioned, it will end up restricting mortgage 

credit, making it more difficult to serve a diverse and creditworthy 

population. The definition of QM, which covers only a segment of 

loan products and underwriting standards and serves only a segment of well-qualified and relatively easy to document borrowers, 

could undermine the housing recovery and threaten the redevelopment of a sound mortgage market. 

The CFPB’s QM rule has caused great concern among banks and 

credit unions, especially with the new exposure to litigation from 

borrowers not being able to repay the loan. During meetings back 

in the district, I have found the fears from banks, large and small, 

and credit unions that the regulators will view any loan outside the 

QM standards as a risky loan that will be used against the financial institutions as a safety and soundness issue. 

With these new policies set to take effect in January of next year, 

my fear, as well as that of other Members, is that these new regulations will ripple throughout the economy and could lead to further anemic economic growth. It is my goal from this hearing that 

the CFPB hears the— 

Chairwoman CAPITO. The gentleman’s time has expired. 

Mr. PITTENGER. —bipartisan calls of concern and addresses these 

issues. Thank you. 

Chairwoman CAPITO. And last, but not least, Mr. Fitzpatrick for 

1 minute. 

Mr. FITZPATRICK. Thank you, Madam Chairwoman. And I appreciate the witnesses coming before the committee to discuss this 

really important issue. 

I meet on a regular basis with REALTORS®, community banks, 

credit unions, and homebuilders in my district back home in Bucks 

and Montgomery Counties, Pennsylvania. We discuss ways to improve access to home ownership and to boost the housing market. 

And while we all support the CFPB’s efforts to ensure that consumers are able to repay their loans, I continue to hear concerns 

that the Qualified Mortgage rule discriminates against small lenders, minimizes consumer choice in lending, restricts access to credit, and makes providing credit much more costly. As a result, the 

QM rule may significantly cut down the number of mortgages being 

made, and many small lenders have indicated a reluctance to provide any mortgages at all under the rule. 

This is a pretty tough economic market condition we find ourselves in. I believe Congress and the CFPB should instead be improving lending conditions so that individuals and families who 

have the ability-to-repay their loans have access to the affordable 

credit that they need. And so, we are all looking forward to the testimony here today. 

And I appreciate the hearing, Madam Chairwoman. I yield back. 

Chairwoman CAPITO. Thank you. 

And that concludes our opening statements. I would like to yield 

to the gentleman from Kentucky, Mr. Barr, to introduce our first 

witness. 

9 

Mr. BARR. Thank you, Madam Chairwoman. 

I am very proud today to welcome Commissioner Charles Vice to 

the Financial Services Committee. A resident of Winchester, Kentucky, Commissioner Vice has earned an outstanding reputation in 

the area of financial institution supervision, and we look forward 

to him sharing his expertise with the committee today. 

Mr. Vice currently serves as the Commissioner of the Department of Financial Institutions for the Commonwealth of Kentucky, 

a position he was appointed to in August of 2008. In this role, Commissioner Vice has responsibility for the regulatory oversight of all 

State-chartered financial institutions in Kentucky, which includes 

examinations, licensing of financial professionals, registration of securities, and enforcement. It is a credit to Commissioner Vice that 

the financial institutions in my congressional district, which he 

interacts with on a regular basis, consistently tell me that he is 

knowledgeable, thoughtful, and fair in his role. 

Commissioner Vice is also well-regarded by his peer supervisors. 

He serves in a national leadership capacity through the Conference 

of State Bank Supervisors, where he has been a member of the Executive Committee. Commissioner Vice formerly served as treasurer and chairman-elect of the CSBS board, and in May 2013, he 

officially became chairman of the governing board. 

In addition to his service on a number of supervisory boards and 

committees aimed at improving examinations of financial institutions, Commissioner Vice previously worked for 18 years as an employee of the FDIC. During his tenure with the FDIC, Commissioner Vice served in the Lexington, Kentucky, field office, where 

he was the office’s expert on subprime lending and capital markets. 

In recognition of his outstanding work, he received the FDIC Chicago Region employee of the year award in 2007. 

And on a personal note, I just want to thank Commissioner Vice 

for his courtesy in being available to me and my staff, for answering our questions, and for sharing his considerable expertise and 

insights with us. I am honored to welcome Commissioner Vice to 

the committee, and we look forward him sharing his expertise on 

the impact of Dodd-Frank on home ownership. 

Chairwoman CAPITO. Thank you. 

Welcome, Commissioner Vice. You are recognized for 5 minutes. 

And I would ask all the witnesses to please pull the microphones 

close to them, and make sure they are on, because sometimes it is 

difficult to hear, and we want to hear every single word. 

So, Commissioner Vice, you are recognized for 5 minutes. 

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

(CSBS) 

Mr. VICE. Good morning, Chairwoman Capito, Ranking Member 

Meeks, and members of the subcommittee. Thank you, Congressman Barr, for your service to the Commonwealth of Kentucky and 

for your kind introduction today. 

My name is Charles Vice, and I am the commissioner for the 

Kentucky Department of Financial Institutions. I am also the 

10 

chairman of the Conference of State Bank Supervisors. And I appreciate the opportunity to testify today. 

I have been a financial regulator, first with the FDIC, and now 

with the Commonwealth of Kentucky, for more than 20 years. During that time, I have observed a troubling trend. Federal regulators 

and policymakers seem to be taking a blanket approach to supervision, applying statutes and regulations to all banks regardless of 

size, location, ownership structure, complexity, or lending activities. This concerns me. 

While today’s hearing focuses on the ability-to-pay rule on the 

Qualified Mortgage, the broader issue for State supervisors is a 

one-size-fits-all approach to supervision and regulation. State regulators are dedicated to understanding the impact of the current 

regulatory environment on community banks. CSBS has established a Community Banking Task Force to explore these issues. 

Additionally, CSBS is partnering with the Federal Reserve System 

to host an upcoming community bank research conference. 

State regulators have found that regulation and supervision 

needs to be more tailored to how community banks lend. Policymakers should not hinder portfolio lending; instead, they should 

ensure community banks are able to positively impact local and national economic conditions. 

As a basic tenet of responsible underwriting, I believe lenders 

should determine a borrower’s ability-to-repay a loan; however, 

community banks that hold loans in portfolio are motivated to ensure the borrower can make their mortgage payment. As such, 

lenders that retain the full risk of a borrower’s default by community banks that retain mortgage loans in their portfolio should be 

presumed to have determined a borrower’s ability-to-repay. 

The CFPB has shown initiative by recognizing the portfolio lending business model. The small creditor QM creates a framework 

that supports retention of mortgages in portfolio by community 

banks. This right-sizing of regulation appropriately accounts for 

differences in community bank business model. Congress and Federal regulators should use the small creditor QM as an example for 

developing laws and regulations. 

The treatment of balloon loans is one case where a one-size-fitsall approach falls short. Under the Dodd-Frank Act, balloon loans 

would only qualify for QM status if they originated in a rural or 

underserved area. When used responsibly, balloon loans are a useful source of credit for borrowers in all areas. This provision effectively limits a bank’s flexibility to tailor products to the credit 

needs of the community. As a regulator, the banks under my purview and the consumers they serve benefit from having more products at their disposal. The CFPB has extended the timeframe before the balloon loan restriction takes place, potentially offering 

Congress the opportunity to act on this issue. 

Congress should amend the statute to grant QM status to all 

mortgage loans held in portfolio by community banks. This is a 

portfolio lending issue, not a rule or underserved issue. 

As a more immediate solution, and absent a legislative change, 

CSBS recommends a petition process to address inconsistencies for 

rule designations. The CFPB has the challenging task of providing 

an appropriate definition of rule. Unfortunately, the CFPB’s apVerDate Nov 24 2008 17:59 Jan 30, 2014 Jkt 081767 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\81767.TXT TERRI
11 

proach has some illogical results. This is inevitable when local communities are defined by a formula developed in Washington, D.C. 

Therefore, the CFPB should adopt a petition process for interested 

parties to seek rural status for counties, a step that is within the 

CFPB’s current authorities. 

State regulators stand ready to work with Members of Congress 

and our Federal counterparts to develop and implement a supervisory framework that recognizes the importance of our unique 

dual banking system. 

Thank you for the opportunity to testify today on this important 

topic. 

[The prepared statement of Commissioner Vice can be found on 

page 109 of the appendix.] 

Chairwoman CAPITO. Thank you, Commissioner. 

Next, I would like to recognize my fellow West Virginian, Mr. 

James C. Gardill, who is chairman of the board of WesBanco, Incorporated. He is testifying on behalf of the American Bankers Association. He has a distinguished career as a banker and an attorney in the northern panhandle of West Virginia. 

He and I have the distinction of being from Glen Dale, West Virginia, which we share that distinction with being the birthplace of 

Brad Paisley and the home of Lady Gaga’s grandparents. 

With that, I would like to thank Jim for coming today, and I look 

forward to his 5-minute presentation. Thank you. 

STATEMENT OF JAMES GARDILL, CHAIRMAN OF THE BOARD, 

WESBANCO, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA) 

Mr. GARDILL. Chairwoman Capito, Ranking Member Meeks, my 

name is James Gardill, and I am chairman of the board of 

WesBanco, a $6.1 billion bank holding company headquartered in 

Wheeling, West Virginia. We are active mortgage lenders with a 

$1.3 billion mortgage portfolio. I appreciate the opportunity to be 

here to represent the ABA regarding the new ability-to-repay and 

Qualified Mortgage rules. 

The mortgage market generates a substantial portion of the GDP 

and touches the lives of nearly every American household. The new 

ability-to-repay and Qualified Mortgage rules represent a fundamental change in this market. As such, it is critical that these 

rules make sense and do not end up hurting creditworthy Americans who strive to own a home. 

Unfortunately, the ability-to-repay and QM rule, however wellintentioned, will restrict mortgage credit, making it more difficult 

to serve a diverse and creditworthy population. 

Under the ability-to-repay rule, underwriters must consider a 

borrower’s ability-to-repay a mortgage loan. Qualified mortgages 

are designed to offer a safe harbor within which loans are assumed 

to meet the ability-to-repay requirement. However, the QM rules 

create a narrowly defined box that consumers must fit in to qualify 

for a QM-covered loan. Banks are not likely to venture outside the 

bounds of the QM safe harbors because of the heightened penalties 

and liabilities applicable under the ability-to-repay rule. 

Since banks will make few, if any, loans outside of QM standards, many American families who are creditworthy but do not fit 

12 

inside the QM box will be denied access to credit. In the short run, 

this could undermine the housing recovery. 

More fundamentally, this also likely means that less affluent 

communities may not be given the support they need to thrive. 

These rules may leave many communities largely underserved in 

the mortgage space. 

In particular, I am concerned that our bank will be unable to 

continue several loan programs targeting low- and moderate-income borrowers and neighborhoods. Our CRA Freedom Series forums and a charitable plan we administer designed to promote 

home ownership for families, our Laughlin plan, provides financial 

aid to families who would otherwise not be able to own a home, in 

the form of interest-free loans and insurance. These loans would 

likely not qualify for QM status, with some failing to meet the ability-to-repay requirements, meaning we would not be able to make 

them at all. 

Even if banks choose to make only loans that fit within QM, they 

still face a number of risks. Higher-interest-rate loans still carry 

both higher credit risk and liability risk under QM’s rebuttable 

presumption. This means banks will be hesitant to offer them, instead serving only the best qualified borrowers. The end result of 

this will be less credit available to some individuals and communities, creating conflict with fair lending rules and the goals of the 

Community Reinvestment Act. 

The rulemaking has left banks little time to comply with the QM 

regulations, despite the wide-ranging market implications and the 

tremendous amount of work which banks must undertake to comply with these rules. Currently, these and five other mortgage rules 

are scheduled to go into effect in January of 2014. Between now 

and then, banks must fully review all of the final rules, implement 

new systems, processes and forms, train staff, adapt vendor systems, and test these changes for quality assurance before bringing 

them online. 

Some institutions may simply stop all mortgage lending for some 

time because the consequences are too great if the implementation 

is not done correctly. I recently learned of a vendor that will not 

have the majority of its updates out until November 22nd, leaving 

its customers 7 weeks to customize, update, and train staff. 

These rules must be revised so that they help the economy and 

at the same time ensure that the largest number of creditworthy 

borrowers have access to safe, quality loan products. In order to do 

this, we need to extend the existing deadlines, as well as address 

these outstanding issues. 

Thank you very much. I am happy to answer any questions that 

you may have. 

[The prepared statement of Mr. Gardill can be found on page 63 

of the appendix.] 

Chairwoman CAPITO. Our next witness is Mr. Jerry Reed, chief 

lending officer, Alaska USA Federal Credit Union, on behalf of the 

Credit Union National Association. Welcome. 

13 

STATEMENT OF JERRY REED, CHIEF LENDING OFFICER, 

ALASKA USA FEDERAL CREDIT UNION, ON BEHALF OF THE 

CREDIT UNION NATIONAL ASSOCIATION (CUNA) 

Mr. REED. Chairwoman Capito, Ranking Member Meeks, thank 

you for the opportunity to testify at today’s hearing. I am Jerry 

Reed, chief lending officer of Alaska USA Federal Credit Union, 

which is based in Anchorage, Alaska. I am here today representing 

the Credit Union National Association. We greatly appreciate the 

attention this subcommittee has given to the Qualified Mortgage 

regulation issued by the CFPB. We also appreciate the consideration the Bureau has given credit unions in the rulemaking process. However, we have significant concerns with how the rule may 

be implemented. 

My written testimony describes our concerns in detail, and I 

want to discuss a few of them with you today: first, I want to explain why all credit unions should be fully exempted from the QM 

rule; second, I want to discuss the impact the rule will have on the 

secondary market; third, I want to discuss how our regulators may 

view non-QM loans that credit unions may wish to add to their 

portfolios in the future; and fourth, I want to discuss our concern 

that QM may result in unintended disparate impact on the ability 

of otherwise creditworthy borrowers to achieve the American 

dream. 

Recent revisions provide QM status to loans originated by insti- tutions of $2 billion or less in assets that originate 500 or fewer 

first lien mortgages. We believe this is a good start, but unfortunately it only covers about a quarter of credit union lending. Since 

loan losses are so minimal across all sizes of credit unions, it is 

clear the cooperative structure and purpose of credit unions, not 

their size, leads to quality loan decisions for the borrower and their 

ability and willingness to repay. 

Since the onset of the financial crisis, annual losses on the credit 

union first mortgages have averaged only 0.29 percent, compared 

to 1.13 percent at banks. 

The structure of credit unions merits the exemption, because we 

are operationally conservative and already have been applying ability-to-repay standards for years in the normal course of business to 

minimize loan losses. Moreover, the Bureau has clear statutory authority to go further in exempting credit unions and deeming all 

credit union mortgages as QM loans. 

Given the recent announcement by the FHFA that Fannie Mae 

and Freddie Mac will not be able to purchase certain non-QM 

loans, credit unions are concerned about the long-term effect this 

rule and its application will have on the secondary market and 

what that means for credit unions and their members. 

We ask the committee to ensure that credit unions have a functioning secondary market to sell loans, even if they do not meet the 

QM definition, if they otherwise meet secondary market standards. 

Being unable to sell non-QM loans to the secondary market will 

make the management of assets at a credit union difficult. 

Prudent interest rate risk management requires being able to 

sell long-term fixed rate loans into an efficiently functioning secondary market. It is paramount that Congress and the Bureau 

work closely with prudential regulators to ensure that this instruVerDate Nov 24 2008 17:59 Jan 30, 2014 Jkt 081767 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\81767.TXT TERRI
14 

ment of consumer protection does not become an instrument of prudential regulation. 

Likewise, we have significant concerns that examiners will severely restrict the ability of credit unions to keep non-QM loans in 

their portfolio after the rule goes into effect. As well, the possibility 

exists that examiners will determine that non-QM mortgages are 

a safety and soundness concern, resulting in a downgrade in credit 

unions and their associate camel ratings. 

As the economy recovers, the credit union model continues to 

serve credit union members well, but the QM rule has the potential 

to fundamentally alter that relationship. In fact, had this rule been 

in effect during the crisis, it is very likely that as the economy 

worsened, NCUA examiners would have increasingly frowned on 

non-QM loans, making it that much more difficult for credit unions 

to continue to lend when other providers did not. 

Director Cordray has indicated his support of non-QM loans 

made by credit unions. It is essential that Congress direct other 

regulators to follow the lead of the Bureau in this matter so that 

non-QM loans and the availability of loans to creditworthy borrowers should be encouraged and not viewed negatively by examiners. 

As I have pointed out, the QM rule forces individuals into a onesize-fits-all box. Equally, this could result in the unintended consequence of disparate impact in residential mortgage lending. It 

would restrict the ability to sell those mortgages to the secondary 

market and hold them in portfolio. This would ultimately exclude 

borrowers with perfectly good abilities to repay, but who do not 

meet the specifics of the QM rule. This would make it more difficult for credit unions to fulfill their purpose of providing credit to 

all who could benefit from it and are able to repay it. 

Thank you again for the opportunity to testify at today’s very important hearing. 

[The prepared statement of Mr. Reed can be found on page 75 

of the appendix.] 

Chairwoman CAPITO. Thank you, Mr. Reed. And, boy, you have 

really brought them to their feet out there. 

Our next witness is Ms. Debra Still, no stranger to the committee. Welcome back. 

Ms. STILL. Thank you. 

Chairwoman CAPITO. She is the chairwoman of the Mortgage 

Bankers Association. 

Welcome. 

STATEMENT OF DEBRA W. STILL, CMB, CHAIRMAN, 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Ms. STILL. Thank you very much, Chairwoman Capito and Ranking Member Meeks. 

Since I last testified before your committee, the CFPB has finalized the ability-to-repay rule, including the definition of a Qualified 

Mortgage. Lenders are now fully focused on understanding and implementing this new rule by its effective date of January of next 

year. Of all of the Dodd-Frank rules, QM will have the single-most 

significant impact on consumer access to credit and a vibrant competitive marketplace. 

15 

The industry applauds the CFPB for getting a lot right, using a 

deliberative and inclusive approach. Most notably, the CFPB established a safe harbor for most QM loans and a temporary QM, both 

critical provisions for borrowers. But there is still serious concern 

that certain aspects of the rule will be prohibitive to otherwise 

qualified consumers. 

QM takes effect at a time when credit is already overly tight and 

underwriting standards are well above industry norms. In the current form, this rule could cause unintentional harm to the very 

consumers it was designed to protect and make lenders even more 

cautious than they are today. 

In the foreseeable future, MBA believes that lending will be substantially limited to loans that meet the definition of a Qualified 

Mortgage with a safe harbor provision. QM loans with a rebuttable 

presumption and non-QM loans will have little market liquidity 

and, if available at all, will be more costly for borrowers. 

The element with the greatest potential for unintended consequences is the 3 percent cap on points and fees. The points and 

fees test is a threshold requirement for all QM loans. The calculation is highly complex and is based on criteria unrelated to credit 

quality, and penalizes both affiliate and wholesale lenders. 

This inconsistent treatment impairs a consumer’s ability to shop 

and their choice in settlement service providers. Any negative impact will be on smaller loan amounts and fall most heavily on lowto moderate-income and first-time home buyers. 

I want to thank Congressman Huizenga for introducing H.R. 

1077, the Consumer Mortgage Choice Act, and also the many members of this subcommittee who have given this legislation the broad 

bipartisan support it currently enjoys. The ability-to-repay rule 

must be centered on consistent consumer protection regardless of 

business model. H.R. 1077 will fix the points and fees calculation, 

leveling the playing field. By passing the bill before January 2014, 

Congress will ensure a vibrant, competitive marketplace for consumers. 

For the same reason, we also suggest that an additional way to 

reduce QM’s impact would be to raise the small loan limit to 

$200,000, and increase the points and fees limit to 4 percent, and 

up to 8 percent for very small balance loans. 

The QM rule is so vital it is imperative that it be aligned with 

other Federal regulations. Lenders are seeking clear guidance on 

reconciling QM with other compliance obligations. Specifically, 

HUD’s disparate impact rule makes lenders liable under the Fair 

Housing Act for mortgage lending practices if they have a disproportionate effect on protected classes of individuals, even if the 

practice is neutral and nondiscriminatory. If a lender limits its listing to QM loans only, the lender may face exposure under the disparate impact rule. Lenders must have more certainty that their 

decisions with respect to QM will not place them in jeopardy. 

Of equal significance is the need for clear alignment between QM 

and the definition of a Qualified Residential Mortgage within the 

pending risk retention rule. MBA believes that it is essential that 

QRM equals QM, particularly as it relates to the elimination of 

prohibitive downpayment requirements in QRM. Any variation between these two rules will increase the cost of credit, discourage 

16 

private capital, and add to the complexity of mortgage finance for 

industry participants and consumers alike. 

Chairwoman Capito, I want to thank you and your colleagues for 

your continued focus on this highly complex QM rule. We all share 

the same goal: to strike the right balance between consumer protection and access to credit. If not appropriately modified, this wellintentioned rule may fail consumers in the most fundamental way. 

Access to safe and affordable credit is vital to the future growth 

of home ownership in America. In the months ahead, we urge you 

to encourage the CFPB to exercise its authority to make change 

and we ask for your support for speedy passage of H.R. 1077. 

Thank you. 

[The prepared statement of Ms. Still can be found on page 87 of 

the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next witness is Mr. Gary Thomas, president of the National 

Association of REALTORS®. Welcome. 

STATEMENT OF GARY THOMAS, PRESIDENT, NATIONAL 

ASSOCIATION OF REALTORS® (NAR) 

Mr. THOMAS. Thank you. Madam Chairwoman, Ranking Member 

Meeks, and members of the subcommittee, on behalf of the 1 million members of the National Association of REALTORS®, whose 

members practice in all areas of residential and commercial real estate, thank you for the opportunity to participate in this hearing. 

I am Gary Thomas, president of the National Association of REALTORS®, from Orange County, California, and I have more than 

35 years experience in the real estate business. I am the brokerowner of Evergreen Realty in Villa Park, California. 

The Dodd-Frank Wall Street Reform Act established the Qualified Mortgage, or QM, as a primary means for mortgage lenders to 

satisfy its ability-to-repay requirements. However, Dodd-Frank also 

provides that a QM may not have points and fees in excess of 3 

percent of the loan amount. 

As currently defined by Dodd-Frank and the Consumer Financial 

Protection Bureau’s final regulation to implement the ability-torepay requirements, points and fees include fees paid to affiliated 

title companies, amounts of homeowners insurance held in escrow, 

loan level price adjustments, and payments by lenders in wholesale 

transactions. Because of this problematic definition, many loans 

made by affiliates, particularly those made to low- and moderateincome borrowers, would not qualify as QMs. Consequently, these 

loans would be unlikely to be made or would only be available at 

higher rates due to the heightened liability risk. Consumers would 

lose the ability to choose to take advantage of convenience in market efficiencies offered by one-stop shopping. 

To correct unfairness in the fees and points calculation, the National Association of REALTORS® supports H.R. 1077, the Consumer Mortgage Choice Act. The bill has been introduced by Representatives Huizenga, Bachus, Royce, Stivers, Scott, Meeks, Clay, 

and Peters. Similar legislation has been introduced by Senators 

Manchin and Johanns in the Senate. 

The legislation solves a problematic definition of points and fees 

in several distinct ways. First, it removes affiliated title insurance 

17 

charges from the calculation of fees and points. The title industry 

is regulated at the State level and is competitive. It does not make 

sense to discriminate against affiliates on the basis of these fees. 

To do so only reduces competition and choice in providers of title 

services, to the detriment of consumers. 

Furthermore, owners of affiliated businesses can earn no more 

than a proportionate return on their investment under the Real Estate Settlement Procedures Act (RESPA). RESPA also prohibits referral fees or any compensation at all for the referral of settlement 

services. As a result, there is no steering incentive possible for individual settlement service providers such as mortgage brokers, loan 

officers, or real estate professionals. 

Consumers repeatedly have said that they want the convenience 

of one-stop shopping since buying a home is complicated, and for 

most buyers, they will only do it a couple of times in their lifetime. 

This legislation will continue to allow ease and accessibility offered 

through one-stop shopping. NAR believes legislative language is 

necessary to ensure that efficient business models are not unfairly 

discriminated against in the calculation of fees and points. 

Second, the legislation removes the calculation of fees and points 

Fannie Mae and Freddie Mac loan level price adjustments. This 

money is not retained by the lender. These adjustments are essentially risk-based pricing established by the GSEs and can sometimes exceed 3 points in and of themselves. Including these loan 

level price adjustments would limit access to affordable mortgage 

credit to many borrowers or force borrowers into more costly FHA 

or non-QM loans unnecessarily. 

Finally, the bill removes from the calculation of fees and points 

escrows held for taxes and insurance. The tax portion is a clarification of imprecise language in Dodd-Frank. In the case of insurance, 

these escrows are held to pay homeowners insurance and can be 

a large amount. They are not retained and cannot be retained by 

the lender since RESPA requires excess escrows to be refunded. 

Once again, NAR supports a legislative fix because it is the most 

certain way to avoid future confusion and legal risk. 

In conclusion, NAR believes H.R. 1077 is essential to maintain 

competition and consumer choice in mortgage origination. Without 

this legislation, research shows that up to one-half of the loans currently being originated would likely not be eligible for the QM safe 

harbor and would likely not be made by affiliated lenders. Instead, 

if loans are made at all, they would be concentrated among the 

largest retail lenders, whose business models are protected from 

the points and fees definition discrimination. 

It is for these reasons that NAR urges Congress to pass H.R. 

1077 well before the ability-to-repay provisions take effect in January 2014, since lenders are likely to begin adjusting their systems 

in the fall of 2013. 

Thank you for the opportunity to share our thoughts. We look 

forward to working with Congress and the Administration on efforts to address the challenges still facing the Nation’s housing 

markets. 

[The prepared statement of Mr. Thomas can be found on page 

104 of the appendix.] 

Chairwoman CAPITO. Thank you. 

18 

Our final witness is Mr. Michael D. Calhoun, president of the 

Center for Responsible Lending. 

Welcome. 

STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER 

FOR RESPONSIBLE LENDING (CRL) 

Mr. CALHOUN. Thank you, Chairwoman Capito, Ranking Member 

Meeks, and members of the subcommittee for this opportunity to 

testify today. 

It is important to remember that unsustainable mortgages were 

at the heart of the financial crisis. Large fees were paid for originating unnecessarily risky mortgages. For example, a no-doc loan 

or an exploding ARM loan would pay twice as much in fees as a 

30-year fixed-rate loan to the exact same borrower, and thus it is 

no surprise that those exotic products came to dominate the market. The response of the ability-to-repay provisions requires that 

lenders make loans based on the borrower’s capacity to repay, and 

we are all better off for that. 

In my testimony, I am going to emphasize three points. First, excluding broker fees made by creditors from the points and fees 

tests would reinstate these incentives for risky lending. Second, 

lenders should not be rewarded with a competitive advantage by 

encouraging and steering borrowers to use their own service providers. And finally, existing exceptions to the QM points and fee 

tests already provide ample space for broad lending. 

On the first issue, one of Dodd-Frank’s central mortgage reforms 

was including payments made by creditors to brokers in the points 

and fees. This followed the practice that had been tried successfully 

in a number of States around the country for many years. It is 

based on common sense and reflects the experience of the financial 

crisis. 

First, broker payments are generally included, and should be included in points and fees. The broker is supposed to be providing 

origination services that reduce the lender’s costs that they would 

otherwise charge for. Brokers can be paid directly by the borrower. 

Everyone agrees those fees can be included. As an alternative, brokers can be paid by the creditor, and those are intended to be a 

direct substitute for the borrower fee and should likewise be included. 

Most important, these are essential to prevent steering. A broker 

could provide only high-priced loans with very high broker fees, 

and those would not violate the other anti-steering provisions of 

Dodd-Frank. They would, though, provide a powerful incentive to 

steer borrowers to those loans. That steering is bad for all home 

buyers, and is particularly bad for families of color. The National 

Council of La Raza, NAACP, the Leadership Conference on Civil 

Rights, and other civil rights groups oppose H.R. 1077, which 

would bring back this tool of discrimination. 

On the second issue, affiliated services have been counted in 

points and fees under Federal law for nearly 2 decades, and it is 

especially important for title insurance. Title insurance is negotiated between the title insurer and a third-party agent, even 

though it is the consumer paying the fee. Not surprisingly, out of 

every dollar of title insurance, which can be $1,000 to $2,000 on a 

19 

mid-sized loan, only 10 cents goes to actually paying claims; 75 

cents of that dollar gets paid out as commissions. When affiliated 

title services are used, the lender captures part of the title charge, 

increasing its revenue on the loan. This should not be a competitive 

advantage and windfall for that lender, but rather should be reflected in lower fees elsewhere in the loan. 

Third, the points and fees test, and this is very important, has 

many provisions that already permit loans fees meet its test. First, 

third-party fees are not included. Legal fees, filing fees, insurance 

fees, and other items are explicitly excluded. Second, on top of the 

fee amounts, an additional 2 discount points can be charged and 

not counted in the points and fees test. Third, for smaller loans, 

they have higher fee thresholds, for example 5 points for a $60,000 

loan and even 8 points for very small loans. Finally, lenders can 

recoup their costs by including them in the interest rate instead of 

charging upfront fees. This is what lenders have historically done. 

Fannie and Freddie report today, as of last week, that average 

lender fees are less than 1 point—1 point—and this aligns the interest of the borrower and the lender with both profiting from performance of the loan rather than from large feels at closing. 

In summary, H.R. 1077 as it is currently drafted would produce 

steering, higher fees for borrowers, and more concentration in the 

mortgage market as larger lenders are most able to take advantage 

of its provisions. 

Thank you again for the opportunity to testify, and I look forward to your questions. 

[The prepared statement of Mr. Calhoun can be found on page 

44 of the appendix.] 

Chairwoman CAPITO. Thank you. 

That concludes the testimony of our panel, and I will begin with 

questioning for 5 minutes. I want to thank you all before I begin 

that. 

Mr. Gardill, we have talked about the Laughlin program, which 

is the charitable program. Do you know approximately how many 

families have been assisted by that program in the life—I believe 

it began in 1951? 

Mr. GARDILL. Several hundred, Chairwoman Capito. We currently have 100, roughly 100 active borrowers, but several hundred 

over the last several decades. 

Chairwoman CAPITO. Right. 

Mr. GARDILL. Probably over 1,000 at this point. 

Chairwoman CAPITO. Right. You don’t believe that you can continue this charitable program that really is the only way for these 

families to get into a home under your guidance. It has been very 

successful, I understand. You obviously have some underwriting 

standards that you put into effect that don’t fit into the QM box. 

Is that the gist? 

Mr. GARDILL. That is correct. We look at the individual credit, so 

we have flexibility in designing that opportunity for that customer. 

It applies to heads of households and single parents with two or 

more children. We don’t fit in the box that they have designed. 

Chairwoman CAPITO. So you would discontinue writing those 

loans, then? 

20 

Mr. GARDILL. We would have to severely reduce it, maybe even 

have to discontinue it entirely. 

Chairwoman CAPITO. Okay. There has been a study looking at 

the mortgages of 2010 that only 52 percent of those mortgages that 

were made in 2010 would actually fit into the definition for the 

safest loans under the QM rule. 

As a banker in West Virginia, what happens to the other 48 percent of those mortgages, in your opinion, once this rule goes into 

effect. 

Mr. GARDILL. They probably won’t be made. 

Chairwoman CAPITO. Will they be made at all by any other sort 

of institutions or any online lenders or— 

Mr. GARDILL. I think the market is going to have to settle in. The 

problem is that period is going to create a severe restriction in 

lending. And it is going to hurt the most vulnerable the worst, and 

that will be the low to moderate income in the rural areas. We are 

in both large metropolitan areas and in rural areas and we see that 

impacting. 

Last year, about 38 percent of our loans were sold in the secondary market. So we originated the rest of those in portfolio. As 

a community-based lender, we lend to our communities and support our communities. We can’t fit everybody within the box that 

has been created. 

Chairwoman CAPITO. Great. Thank you. 

Commissioner Vice, you mentioned in your testimony—or it was 

mentioned actually by several folks—that if somebody does write a 

non-QM loan, what effect as a regulator will that have on your 

evaluation of that institution’s safety and soundness? I think you 

mentioned a little bit in your statement. How are you going to be 

able to evaluate those loans, if in fact they are actually written, 

which is dubious at this point? 

Mr. VICE. That is one thing the regulatory entities would have 

to determine, how to treat these going forward. First, there would 

probably have to be some kind of identification piece to it, some 

kind of monitoring piece to it. 

The one thing I would hope is that it would not be an automatic 

detraction for an examiner going in and looking at a portfolio. 

Again, it should be on an individualized lending basis and the loan 

should be looked at and graded on its credit quality. And I would 

hope that all the Federal regulators and my fellow State regulators 

would not see a non-QM loan to be a negative or to hold that 

against the bank. Again, it needs to be looked at on an individual 

basis, and the credit quality of that individual loan has to be assessed. 

Chairwoman CAPITO. Do you think there should be an exception 

from the ability-to-repay standards for loans that are held on portfolio? 

Mr. VICE. Yes, yes. If a small community bank does originate a 

loan and hold it in their portfolio, we believe that that should receive QM status in and of itself, simply because it is being held in 

portfolio. 

Chairwoman CAPITO. All right. 

Mr. Reed, your State is very rural and much like our State, but 

you are probably a billion times bigger in land mass, and you rely 

21 

on relationships to be able to help your constituents. With the new 

definitions of ‘‘rural,’’ and some of the one-size-fits-all definitions 

and ability-to-repay, what impact is that going to have on a State 

such as yours? 

Mr. REED. Yes, the majority of our State is rural. You can fit 

three sizes of the State of Texas and the State of Alaska. So that 

kind of gives you an idea. A lot of that population is dispersed 

throughout that State in what we call the bush. And it is absolutely going to impact us. 

I have to agree with Mr. Vice, that is one of the reasons that we 

are seeking an exemption. It is going to impact us significantly and 

our membership. 

Chairwoman CAPITO. Thank you. 

Mr. Meeks? 

Mr. MEEKS. Thank you, Madam Chairwoman. 

Let me go to Mr. Calhoun first. Clearly, no-doc loans, when you 

do no-doc loans you are saying that you are not looking at a person’s ability to pay, whether they are creditworthy, et cetera, and 

just passing it on. And it seems to me that one of the biggest issues 

that we were confronted with in this crisis is that there was no risk 

retention by many of the banks; they would just no-doc, bundle 

them, sell them, get rid of them. Some would steer people, but 

steer people basically, as Mr. Ellison indicated, some by race, et 

cetera, not treating people equitably who would go to a subprime 

loan and who would get a prime loan, et cetera. So no one agrees 

with steering, et cetera. 

But are we talking about creating a situation where individuals 

who have less than perfect credit—and that is what I am concerned 

about—individuals now who have less than perfect credit, should 

they not have the opportunity to own a home? And what opportunity will be, what doors will be closed to them? Because I can tell 

you that, at least in the community that I was raised in, there 

were a lot of individuals, if you document their employment and 

you document their income, that they paid their mortgage, but they 

did pay some other bills late, so they didn’t have perfect credit. 

And so, I am concerned about those individuals getting locked 

out of this market and trying to figure out how they can be included so that they can enjoy what has been—because I still believe home ownership is the American dream, it is still the largest 

investment that most Americans will make in their lifetime, and it 

improves family and quality of life. 

Let me just ask this. For example—and one of the reasons I look 

at H.R. 1077, is it does call for loan-level price adjustments, so that 

individuals can qualify for a QM if they put up some upfront fees 

so that they will qualify, then they can go on. Now, they understand they made a mistake with some of their credit levels, so 

therefore they have to put these upfront fees. Had they not, then 

they wouldn’t have had to. So tell me how can we make sure that 

those individuals are included so they can still have the opportunity to purchase and own a home? 

Mr. CALHOUN. The Center for Responsible Lending strongly supports broad lending activities. Our parent organization, that has 

been its mission for the last 35 years, is how do you expand the 

boundaries of home ownership opportunities. 

22 

I think a really important distinction, and I think there has been 

confusion on this today, is the QM rule—and there has been reference to the CoreLogic report, which included a provision that any 

loan eligible for insurance or purchase by any of the government 

agencies—FHA, VA, Rural Housing, the GSEs—is a QM loan. And 

as the CoreLogic report notes, when that is done, 95 percent of 

those loans qualify with no restructuring at all. 

So first, I want to clear up—and we have supported making that 

provision permanent. They have made it, I think, for the next 7 

years. We think the CFPB should make that permanent. But at 

least for that time period, the box is much bigger than has been 

talked about here. So, for example, for FHA, GSEs, that is credit 

scores in the 500s, that is DTI, debt to income, up to 50 percent, 

that is 50 percent of gross income before your taxes are paid, not 

a lot of left money there. Most people are criticizing FHA as being 

too loose with lending, not too tight. 

So we support a broad box, but I think when you look hard at 

the particulars of this rule, it created a broad box. 

Mr. MEEKS. Let me just ask Ms. Still to respond to that. 

Ms. STILL. Yes, I think certainly the temporary QM that the 

CFPB provided for will be helpful in the short run. But you can’t 

just look at the credit quality. You have to look at the fees and 

points test, which will have a disparate impact on smaller loan 

amounts, which will hurt middle-class home buyers, first-time 

home buyers, and protected classes. So I think that is something 

that H.R. 1077 would address and fix. 

You also have to look at the notion of an APOR comparison and 

what that will do to certain consumers, and it will also disproportionately impact the first-time home buyer. And so with those two 

tests, you are going to not be able to take otherwise qualified borrowers and make a loan for them. You will either end up with a 

non-QM loan, in which there will be little liquidity for that product, 

or you will make a rebuttable presumption loan, which if there is 

a secondary market for that, it will be much smaller and it will be 

more costly. 

Chairwoman CAPITO. The gentlemen’s time has expired. 

Mr. Duffy? 

Mr. DUFFY. Thank you, Madam Chairwoman. 

I think we find ourselves in another unique situation where bureaucrats in Washington know far better how to run our community banks and our credit unions than our community banks and 

our credit unions do. And it concerns a lot of us up here, especially 

those of us, again, from small communities who have lower-income 

and more moderate-income individuals. And when I look at the 

ability-to-repay rule, and the QM standard, if you are wealthy and 

have great credit this works fantastic for you. But if you are from 

a lot of our districts, this is tough. 

As Mr. Meeks said, the American dream oftentimes is buying 

your own house. Home ownership is associated with the American 

dream, and so many more Americans aren’t going to be able to access that dream because of these rules. 

Mr. Gardill, you indicated that through your analysis, 50 percent 

of the loans that were written would not meet the QM standard. 

Is that correct? 

23 

Mr. GARDILL. It might be a little bit higher than that, Congressman Duffy. 

Mr. DUFFY. So in regard to the 50 percent that don’t meet the 

QM standard in your analysis, those folks who don’t fall under QM, 

are they still creditworthy? 

Mr. GARDILL. They are. We make loans to them every day. One 

of our problems, which I think Congressman Meeks spoke to, is 

that those with less than perfect credit, we have designed programs 

to meet their needs in our communities. This applies to banks regardless of size. And our hands are being tied, we are going to be 

restricted in what we can do. Our freedom series is designed for 

just that purpose. We would loan up to 97 percent loan to value, 

but we structured the loans to meet their opportunities. We are not 

going to be able to do that under these rules. 

Mr. DUFFY. And how well did those loans perform, Mr. Gardill? 

And, Ms. Still, if you want to answer that as well? 

Mr. GARDILL. The flexibility that we have to design those, they 

have worked very well. We actually received the FDIC Chairman’s 

Award in 2011 for that program. 

Mr. DUFFY. Ms. Still? 

Ms. STILL. I would like to make one observation. Whether my colleagues point out the problems with rural communities or community banks or credit unions or portfolio lenders, the MBA represents all business models, all constituents of real estate finance, 

and our concern is that this rule—we have to get this rule right 

and it has to be centered on consumers. And any consumer with 

the same interest rate, points, and fees should be treated equally. 

So while the problems that we are talking about and the request 

for exemption are relevant because the rules are not right yet, we 

need to get the rule right for every business model—and so that is 

just one thing I wanted to point out—rather than a very complex 

rule where a borrower can’t shop anymore because they don’t know 

which business model will treat them more favorably under access. 

To answer your question, though, one of our concerns is now that 

the FHFA has chosen not to allow Fannie and Fannie to buy a nonQM loan, a loan that we would sell today based on acceptable credit quality to the GSEs, if it did not meet 3 point rule would now 

not be eligible to be sold. And so, we have mitigated the secondary 

market for otherwise qualified borrowers and that is a concern. 

Mr. DUFFY. Banks and credit unions are pretty good at pricing 

risk. And is it fair to say there is a new risk with the ability-topay rule in that you have new liability, and with that new liability 

is new risk, and isn’t it fair to say that we are going to have increased prices to accommodate that risk? 

Ms. STILL. There will be a base price for a QM with a safe harbor, then we will have a price for a QM with a rebuttable presumption. We may have a price for a QM with using Appendix Q, and 

then we will definitely have an escalated price for a non-QM. So, 

we now have four classifications of risk-based pricing. 

Mr. DUFFY. Mr. Calhoun, you had talked about a lot of these outrageous products that were offered. And I agree with you, they 

were outrageous, people weren’t treated fairly, and it was part of 

the cause of the crisis. We are on the same page. But weren’t a lot 

24 

of those no-doc loans, weren’t they all floated? Those loans weren’t 

actually kept on the books of the originators, were they? 

Mr. CALHOUN. It was a combination. And let me be clear, I think 

people do share similar goals here in getting this rule, it is important and hard. But many of those loans we are working right now 

with a loan program done by a community bank in New York that 

did thousands of loans and they are having about a 50 percent default rate. They kept them on portfolio, but they are lending to people who have substantial home equity. And so they come out okay, 

they collect a high interest rate as long as the loan performs. 

And so we have to be very careful. What we saw in the crisis is— 

and to follow up on Deb’s point there—what we saw in the crisis 

is, if you carve out—when you carve out exceptions—and we have 

strongly supported the provisions for the community banks in our 

filings with the CFPB and we work closely, particularly with the 

ICBA—but if you carve out blankets, the bad actors go to those 

places and try and use them. 

And it has to be a balance. We won’t create a perfect rule that 

stops all predatory lending. That can’t be the goal because it will 

cut down too much credit. But we need to realize the bad guys 

know how to exploit those exception provisions, and they have done 

it and are doing it today. 

Mr. DUFFY. But if the bad actors retain that risk; I think you 

have a whole different scenario. 

Chairwoman CAPITO. The gentlemen’s time has expired. 

Mr. DUFFY. I yield back. 

Chairwoman CAPITO. Ms. Waters for 5 minutes. 

Ms. WATERS. Thank you very much, Madam Chairwoman. 

Mr. Calhoun, the Consumer Financial Protection Bureau has 

been working very, very hard to make sure that they produce the 

regs, the rules to implement Dodd-Frank. On May 29th, the CFPB 

announced several amendments to the original ATR rule. 

The first amendment clarified that compensation paid from a 

mortgage originator that is a bank or brokerage firm to one of its 

employees would not be counted toward the 3 percent points fees 

cap. 

The second amendment exempted State housing finance agencies, nonprofits, and other community development groups from the 

QM rule if they make fewer than 200 loans per year and those 

loans are to moderate- or low-income consumers. 

The third amendment makes it easier for community banks and 

credit unions with less than $2 billion in assets to make QM loans. 

If they make fewer than 500 first lien loans per year, and hold 

those loans in portfolio, they are not required to comply with the 

43 percent debt-to-income ratio under the rule. These same lenders 

have also been granted a 2-year reprieve on the ban of balloon 

loans while the CFPB studies the issue further. And I guess that 

would refer to the rules. 

Would you say that these amendments are an example of how 

hard the CFPB is working to make sure that we make good sense 

out of all of this? Do you think this is reasonable? 

Mr. CALHOUN. Yes, we supported those. And I think what is important is those are a continuation of what they have done 

throughout this rulemaking process. Industry asked for a broad 

25 

QM and some folks opposed that. The CFPB gave a broad QM definition. Industry asked for bright line rules. And I think this is important when you talk about what is going on with access to credit. 

If you look at surveys, even of the members here, the number one 

thing holding back credit, home credit, is buy-back claims, not borrower claims on ability-to-repay. Buy-backs are when investors, 

whether they be the GSEs or private investors, force lenders to buy 

back the loans. 

And this is the real key. Under the law, they are entitled to force 

those buy-backs if there is any variation in the loans. They don’t 

have to show that is the reason the loan went into default. There 

have literally been tens of billions of dollars of buy-back claims 

paid, not just brought. And that is really what is pushing. I know 

the FHA has announced that they are going to start rulemaking to 

reduce the buy-backs and to clarify that. The GSEs have done some 

work, but really need do a lot more, because that is the real steam 

right now that is pushing in credit so much. The QM rule isn’t 

even in effect yet and hasn’t been over the last year and a half. 

Ms. WATERS. Thank you. One moment, Mr. Calhoun. I want to 

get to Mr. Gardill. 

Mr. Gardill, do you agree with these amendments that have been 

made by the Consumer Financial Protection Bureau? 

Mr. GARDILL. I don’t think the amendments cure the problem 

that we have. 

Ms. WATERS. Would you like to go back to the way we were prior 

to the subprime meltdown and just leave you guys alone and not 

have a Qualified Mortgage rule at all? Is that what you want? 

Mr. GARDILL. I am not asking for that. 

Ms. WATERS. What were you asking for? 

Mr. GARDILL. I think what we are asking for is that we be given 

the opportunity to provide flexible lending products to meet the 

needs of our customers as a community bank, and these rules don’t 

give us that flexibility. 

Ms. WATERS. You had that flexibility before the subprime meltdown and you almost brought this country to its knees— 

Mr. GARDILL. No, I don’t— 

Ms. WATERS. —with a depression almost. 

The question becomes, with the Consumer Financial Protection 

Bureau working very hard, coming up with amendments, trying to 

make sure that they address your concerns, the question really is 

specifically what more do you want? 

Mr. GARDILL. I think we need to look at the forest. To equate it 

to a forest, if we have a couple of bad trees, we don’t want to burn 

the forest down to correct that. 

Ms. WATERS. I don’t want to talk about the forest and the trees, 

I want specificity. 

Mr. GARDILL. And that is what we are trying to do. We are trying to provide some input here today in good faith to assist in the 

process. And I think the fact that we are having this meeting and 

this hearing indicates that there is so much uncertainty that we 

are going to affect, adversely affect the housing recovery, that we 

need to step back and give ourselves more time to evaluate the impact of the rule and work with the CFPB to come up with better 

rules that retain the flexibility— 

26 

Ms. WATERS. Let me submit to you, Mr. Gardill, that the Bureau 

is working very, very hard. And it appears that there are too many 

who are willing to go around the regulators and come here and try 

and convince Members of Congress that somehow our attempt to 

address those concerns that this country all faced with the 

subprime meltdown, somehow you want to not deal with that, you 

simply want no rules, no rules to deal with the problem. And you 

still have not been specific about what it is— 

Chairwoman CAPITO. The gentlewoman’s time— 

Ms. WATERS. —given these amendments, that you want to do. I 

yield back. 

Chairwoman CAPITO. Mr. McHenry? 

Mr. MCHENRY. I thank the chairwoman. 

Mr. Calhoun, in your previous question they asked about, you 

said you wanted a permanent Federal exemption for the GSEs 

under QM. Is that right. 

Mr. CALHOUN. We believe that we— 

Mr. MCHENRY. Yes? 

Mr. CALHOUN. We have supported lending above 43 percent— 

Mr. MCHENRY. No, no, no, but you said you wanted a permanent 

extension for GSEs. So then, a separate question just to get this 

on the record, do you support the permanent existence of Fannie 

and Freddie? 

Mr. CALHOUN. When we say for GSEs, I mean for them or their, 

the various bills that are out that have some sort of— 

Mr. MCHENRY. Oh, okay, I just wanted to make sure we had that 

on the record just to understand, because some of us have concerns 

about keeping Fannie and Freddie around as they currently exist. 

Mr. CALHOUN. Many of us do. 

Mr. MCHENRY. Thank you for answering that. 

But, Mr. Gardill, in your written testimony, to follow on to Chairwoman Capito’s question, you mentioned that financial institutions 

are being encouraged to go into the non-QM space, right? And 

there are some concerns about liability. You reference that it would 

run counter, if you are held to the QM box as an institution, that 

would limit your ability to meet the Community Reinvestment Act 

obligations on institutions. Is that correct? 

Mr. GARDILL. That is correct, Congressman. 

Mr. MCHENRY. So out of that there is some fear that examiners 

would have some problems with that and some difficulty reconciling the two. Can you explain? 

Mr. GARDILL. As I mentioned, some of our CRA-related programs 

will not qualify under the QM rule. We add liability under the ability-to-repay rule, now we have a serious issue whether we can do 

those loans. 

I am also concerned about the regulatory impact of that, how are 

the regulators going to look at non-QM loans when you have liability? Do you have to establish reserves for those liabilities? So it creates a whole world of uncertainty. 

What we retain those portfolio loans, which we do on our CRA 

loans that we have in our communities, and we have targeted programs for low- to moderate-income borrowers, but also low- to moderate-income neighborhoods where we are trying to maintain housing quality, and that goes to income borrowers of all sizes. We are 

27 

going to have an issue whether we can make those loans at all. 

Then we will have an issue as to whether or not we can meet the 

Community Reinvestment Act requirements. If we can’t do the 

CRA loans, how will we meet those requirements? So it is a Catch22 from a regulatory perspective for banks in compliance. 

And our purpose is to support our communities, that is what 

community banks do. Many banks provide community support. 

This straitjacket that we are being put in will limit our ability to 

design the programs necessary to meet the needs of our customers. 

Mr. MCHENRY. So the Federal Reserve, in their ability-to-repay 

rule, didn’t consider debt-to-income ratios as a very important predictor of the success of a consumer’s ability-to-repay, right? 

Mr. GARDILL. That is correct. And it very clearly is not set out— 

Mr. MCHENRY. So what is the strongest metric for success in ensuring that a borrower can repay their mortgage? 

Mr. GARDILL. It takes not only the ability-to-repay, but adequate 

collateral to support the loan; it is a two-sided equation. So there 

has to be value and there has to be the ability-to-repay, but we 

can’t create a straitjacket in how to measure that ability-to-repay 

by arbitrary rules that narrow what you can consider. Banks do a 

balanced approach in measuring credit, and that is what we want 

to retain. The rules don’t do that for us. 

Mr. MCHENRY. So, Mr. Reed, to that point, you mentioned in 

your testimony that you have credit unions that will lend with 

debt-to-income ratios of 45, 50, percent and their loan losses or 

mortgage losses remain very low. Why is that? 

Mr. REED. Credit unions are very unique, as I mentioned earlier, 

in our structure and our purpose. But I would like to address that 

in a broader perspective. 

Mr. MCHENRY. I have 20 seconds for you. 

Mr. REED. Yes, okay. So let me just say, I have underwritten 

loans, mortgage loans for 25 years. Let me tell you something fundamentally. The difference here is, we are focusing when we say, 

hey, we don’t like this, because you are focusing on product features—no-doc loans, loans that weren’t violating previous regulations that were already set by agencies which were underwriting 

guidelines. 

As already mentioned today, the FHA has a lot of leniency to address a lot of disparate impact issues and has been doing that very 

successfully for years. The people who were defaulting were the 

people being put into products that should have never been put 

into those products. That is the fundamental fee here. 

I think the CFPB has done an excellent job in eliminating those 

products that are not correct. But I don’t think the CFPB is doing 

any of us or the country any good by restricting the underwriting 

criteria that put people who are creditworthy, for example, who 

want two or three jobs and can do it. 

Chairwoman CAPITO. I am going to have to stop you here. The 

gentleman’s time has expired. 

Mrs. Maloney? 

Mrs. MALONEY. I agree wholeheartedly with the point that many 

of you are making that we shouldn’t have one-size-fits-all and every 

borrower should not fit into one box. But I can recall during the 

hearings the commonsense belief by many of us is that you 

28 

shouldn’t put someone into a loan they can’t afford. It is going to 

hurt the banks, it is going to hurt the economy, and it is certainly 

going to hurt the homeowner. And I feel that is what the CFPB 

tried to do, is to really come up with some standard where people 

don’t buy something they can’t afford. And it would include all of 

the income that you mentioned. You can be working three or four 

jobs; many of my constituents work two jobs. 

But I do think that they tried to be flexible; they came up with 

three exceptions. The exception for compensation for mortgage 

originator is not included in the 3 percent points and fee cap, it exempted nonprofits from the QM rule if they have fewer than 200 

loans, and lenders with less than $2 billion in assets may make the 

QM loans that do not meet the 43 percent debt-to-income ratio. 

And so, those are several of the exceptions that they have made. 

They may have made more. What other specific exception do you 

think should be made, Mr. Thomas and Ms. Still? 

Mr. THOMAS. I am going to yield to Ms. Still because she is better 

prepared. 

Mrs. MALONEY. Okay. Ms. Still? 

Ms. STILL. Thank you. Yes, so in terms of underwriting, I think 

the CFPB has done a fine job providing for the temporary QM. I 

think, though, when you look at the 3 point rule and you look at 

some of the inclusions still in the 3 point rule that have nothing 

to do with the consumer’s ability-to-repay, that is where it becomes 

prohibited, particularly to the smaller loan amounts. So affiliate 

fees should not be included in the 3 point rule, nor should compensation paid to brokers. 

Again, for any consumer who is getting the same rate, points and 

fees, the business channel should not matter. And so, the exemption should be on behalf of the consumer and a level playing field 

for all lenders serving finance in the United States. 

Mrs. MALONEY. In the terms of that, just taking for one example 

the title insurance that you mentioned, and I believe Mr. Thomas 

mentioned, and Mr. Calhoun, and if I recall, you said it was regulated by the States and very competitive, and I believe you testified 

that the title insurance would be more expensive under the CFPB 

rule. And I would like to ask Mr. Thomas and Ms. Still why it 

would be more expensive, because I don’t quite understand why? 

And also, Mr. Calhoun, you talked about the affiliated title insurance and taking the position that it should be included in the 

points and fees, if I recall. So if all three of you could answer that 

on the title insurance, which is one example you all mentioned. 

Thank you. 

Ms. STILL. As you did mention, title insurance is either regulated 

or promulgated by the State, therefore it is a very competitive environment in any given State. By eliminating or combining the affiliate fees, you eliminate the potential for competition, which is why 

the remainder of the market might get actually more expensive. 

There have been studies in the past, I believe there was one in 

Kansas about 6, 7 years ago that Kansas had tried to implement 

an affiliate fee, and the remaining competition actually raised 

prices. 

Mrs. MALONEY. Okay. Mr. Calhoun, could you respond? 

29 

Mr. CALHOUN. This committee, just a few years ago, raised the 

issue of the problems in the title insurance industry and asked for 

a report that was put out in 2007 by the GAO finding it is a deeply 

troubled industry. As I indicated, whenever you have a situation 

where two parties are cutting the deal and the third party is paying the price, that third party, in this case the consumer, often 

comes out on the short end of things. And as I said, it works out 

well for the parties at the table. There is a big commission. Seventy-five cents out of every dollar is what the GAO found out goes 

to pay this commission, while only 10 cents goes to claims. In most 

insurance, that is 80 to 90 percent. So this is just taking a broken 

system that needs reform and making it worse. 

Mr. THOMAS. If I could, the problem is this is a State-regulated 

institution, that being the title insurance, and it is very well-regulated, I can tell you, in California. At one time, there was a lot of 

money that was paid back to people as kickbacks and so on. Today, 

I can’t even get a pen from a title company. It is so well-regulated 

that they have clamped down on everything. And if you open it 

up—or if you clamp down even more and say, okay, only the large 

title companies can do anything and you cannot have affiliated title 

companies, you are only going to open it up so that they can do 

whatever they want to do. 

Ms. STILL. And I would argue that— 

Chairwoman CAPITO. Excuse me, the gentlelady’s time has expired. 

We will go to Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

One of the things that is kind of concerning to me is the very 

nature of a QM, because it seems like it is perverting the very 

thing you are trying to do, from a standpoint that we are trying 

to provide a save harbor here for lenders who if they go with a certain criteria are limited from the amount of liability they could 

incur if they are doing things right. 

You would infer then that if those loans don’t qualify for QM, 

suddenly now they would have more liability exposure, and if you 

have 50 percent of your loans that don’t qualify for QM, now you 

have 50 percent of the loans on your books with problems. 

Mr. Vice, you are a supervisor, how do you look at that? 

Mr. VICE. That is a concern to us. We don’t know exactly how 

that is going to be treated on examinations going forward. And that 

is one thing that the industry is kind of watching with bated 

breath to see. Once my first examination happens, if I have a nonQM on the books, how will regulators treat that? 

Again, as I stated before, it is my hope that we don’t treat that 

adversely, that we look at that and look at it on an individual credit basis. And again, our whole hope and our whole desire here is 

to make sure that we have a diverse marketplace where several 

lenders have the opportunity to meet the legitimate credit needs of 

the individuals who are there and we have to have that flexibility. 

And that is why we are seeking and applaud this small creditor 

qualification to QM. 

Mr. LUETKEMEYER. I think that we are looking also for an exemption for community banks and folks like that who work with 

small numbers of loans. 

30 

Mr. Gardill, it would seem to me that if something doesn’t qualify, it would really restrict the low- and moderate-income folks from 

the standpoint that they are the ones who are going to have probably the lowest credit ratings and have the most difficulty trying 

to prove that they can get into the QM box. It would logically seem 

to me that we are really restricting low- and moderate-income folks 

by doing this. What is your opinion on this? 

Mr. GARDILL. Yes, I agree 100 percent. By extending liability to 

those under the ability-to-repay rule, it is going to greatly restrict 

our opportunity to do them at all. If the safe harbor applied to the 

ability-to-repay rule, it would be an improvement in the structure, 

because then you could safely make those loans. But the QM rule 

has a very narrow save harbor; it is not available under the abilityto-repay. And we are permitting borrowers to assert, back to your 

point about the QM, even challenge the QM qualification as to 

whether or not proper verification of debt to income was created. 

So, we create potential liability claim even under the QM rule. 

Mr. LUETKEMEYER. It would seem to me that we are actually 

causing more risk here from the standpoint that the loans that are 

most risky, that have the poorer scores or have less ability to 

make—their income are less flexible, they are more on the edge, 

those are the ones that can’t qualify for QM, yet those are the ones 

that, if you make the loan, you are going to have to hold them in 

your portfolio. It would seem to me to be a real problem. 

Mr. GARDILL. And that is our principal concern, is serving our 

customers, and I am not sure these rules permit us to do that. That 

is really the issue, and that is why I think it deserves some time 

and study for us to evaluate this more carefully before we affect 

those most vulnerable in the communities that we serve. 

Mr. LUETKEMEYER. I have about a minute and a half left. I live 

in a very rural area. I know that the chairwoman made a comment 

a while ago about the rural designation here. One of you made the 

comment a while ago, I think it was Mr. Vice, with regards to petitioning, have a petition process available so that we could get this 

rural designation fixed. I think each one of you in your testimony, 

most of you anyway, as I have gone through the testimony, seem 

to have pointed out inequities in the rural designation. Can you describe your petition process suggestion a little bit further, Mr. Vice? 

Mr. VICE. I think one of the concerns from my perspective that 

occurred so far with this rural designation is that it is applying a 

formula developed in Washington. As the commissioner for the Department of Financial— 

Mr. LUETKEMEYER. That never works anywhere on anything, 

does it? 

Mr. VICE. —at the Department of Financial Institutions in Kentucky, I have not been asked what is a rural county in Kentucky. 

Same thing with the commissioner in West Virginia; they haven’t 

been asked, either. So our petition process—and again this is the 

short-term fix, we think this actually requires a statutory fix to address this problem—but a short-term fix would be to let the CFPB 

establish a process where local authorities could give input on what 

is a rural designation. Let the local authorities give various stakeholders the ability to have input in that process before we take it 

to the CFPB. And then also, as a third follow-up piece to that, have 

31 

a review process to make sure we got it right at some future point 

in time. 

Mr. LUETKEMEYER. Very good. I thank you for your testimony 

today. 

And I yield back. Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Chairwoman Capito and Ranking 

Member Meeks. And thank you to our witnesses today for sharing 

your valued testimony. 

As the Consumer Financial Protection Bureau has continued in 

the process of crafting the Qualified Mortgage rule, industry advocates have raised valid concerns and the Bureau has listened. For 

example, industry questioned why certain payments were double 

counted towards the points and fees cap, and the Bureau altered 

the rule accordingly. Additionally, manufactured home industry advocates found issue with the 3 percent cap and it was modified as 

well. 

My first question is for Mr. Calhoun and Ms. Still. I would like 

to ask you about the lack of mortgage credit for rural areas. As 

chairman of the Rural Housing Caucus, I am very concerned that 

housing in rural America is becoming progressively more neglected. 

The USDA rural housing programs are critical to ensuring a quality housing stock in areas with high need, such as my district in 

deep south Texas. The Bureau recently wrote a rule granting exemptions for rural areas from the balloon payment prohibition. 

However, the definition excludes all of Hidalgo County, with a population of 850,000 people, which is in my district and is home to 

more than 700 Colonias, which is higher than any county in United 

States. Colonias, for those who don’t know the word, are communities which lack basic infrastructure and often suffer from deplorable housing conditions. 

So, Mr. Calhoun and Ms. Still, do you feel that this rural definition is adequate, and does the Bureau need to do more to accommodate rural area lenders? 

Ms. STILL. Yes. We would agree with you that the Bureau has 

been a good listener of the industry and has responded to feedback. 

I believe the Bureau just in the last couple of weeks has suggested 

that it needs to continue to study the definition of rural, very appropriately so, and the MBA looks forward to working with the Bureau on helping with that definition. 

In the meantime we certainly need clarity around that, and I 

would suggest that when you look at the challenges for rural, it 

centers largely on smaller loan amounts, it centers largely on the 

community lending that possibly small community lenders and brokers do. And so, we need to look at all of the issues that are making up the problems for rural housing and address that in the entire rule for every consumer. 

Mr. HINOJOSA. Mr. Calhoun, would you answer that, also? 

Mr. CALHOUN. Yes. We agree that the CFPB has been a good listener, it has responded and even used its exception authority for 

a number of those rules that you mentioned to expand it. We have 

supported a very broad rural definition and are glad to see that 

32 

they are going to look at that further, and we are pretty optimistic 

and the indications are they know they need to do better on that. 

If I can quickly add, I think one point that has been lost here— 

people are acting as if we are going into this strange land and have 

no experience about what life would be like under these rules. We 

have a lot of experience. These rules are very similar to rules that 

have been in effect with similar fee limits at States for decades, 

and loans, including small loans, were made. As we sit here 

today— 

Mr. HINOJOSA. Let me remind all of you that the farm bill has 

been debated here in the House, it is before us now in the House 

of Representatives, and they are not answering the question about 

the definition of the rule so as to help rural America appropriately. 

And you all need to step it up and help us get that definition to 

where it does address it. 

Mr. CALHOUN. We agree. 

Mr. HINOJOSA. My next question is for Gary Thomas and for 

Debra Still. My question is, in your testimony you note that title 

insurance is a competitive market, and that by putting affiliated 

title companies at a disadvantage, prices might increase for consumers. However, you also state that title insurance pricing is wellregulated by the individual States. If that is the case, why do you 

think title insurance would be more expensive under the current 

CFPB rule? 

Mr. THOMAS. Once you eliminate competition, you come down to 

just a handful of players in any specific area. They can start going 

to the States and asking for higher rates and probably proving 

those up in the way they want to. And so, you have really restricted the number of players in the entire spectrum, you are 

going to have higher rights. 

Mr. HINOJOSA. Ms. Still? 

Ms. STILL. I would agree with that answer fully, this is the ability-to-pay rule, this is about a consumer’s ability to repay. So when 

we talk about the title insurance business, this should not have 

anything to do with that industry. This should have to do with a 

level playing field for affiliates and the fact that consumers have 

lost their ability to shop if the affiliates are treated in a disparate 

fashion. 

Mr. HINOJOSA. That answer justifies why REALTORS® are so 

concerned, and I think we need to address that question. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Pittenger for 5 minutes. 

Mr. PITTENGER. Thank you, Madam Chairwoman. 

In light of the concerns that have been expressed today regarding 

the ability-to-repay, the QM rule, as relates to the mortgage credit 

crisis that could evolve, what changes do you think should be made 

to the Dodd-Frank Act on the ability-to-repay QM provisions that 

this committee should be considering? I will start with Mr. Gardill, 

but any if others want to respond, I would welcome that. 

Mr. GARDILL. I think principally, we are looking for some flexibility of the verification rules. We want to work with the CFPB to 

get this right so that we don’t adversely impact our customers or 

the recovery in the housing market that we are experiencing. I 

33 

think we have to revisit the liability rule. The liability rule under 

the ability-to-repay is onerous. Permitting oral testimony after the 

fact, an unlimited statute of limitations, those things will restrict 

lending, they will restrict our ability to do that, they will affect our 

regulatory compliance. So that is for a start, I think. 

Ms. STILL. I might suggest that the spirit of the bill is fundamentally sound. The fact that we should verify that the borrower has 

the ability-to-repay, fully doc loans, taking away some of the extraordinary loan programs of the past. But H.R. 1077 fixes such an 

enormous amount of the problems with the ability-to-pay rule, and 

that would go such a long way. 

I also think we need to look at the hard stop 43 back ratio on 

jumbo loans, we need to look at the APOR index and the problems 

with that. And I think we need to look to Mr. Gardill’s comments 

earlier on industry readiness, and if the industry isn’t ready, will 

consumer lending stop or real estate finance stop in the short run 

and derail our housing recovery? 

Mr. REED. I just would like to add, too, that I think, based on 

all of my colleagues’ statements today, that we should make permanent and not be temporary the saleability of those loans to the 

GSEs. This is a huge issue and it is creating a tremendous amount 

of instability in the market presently because of this temporary period. 

Those regulations and those guidelines that were already established for years in the other agencies have served us well and it 

hasn’t been the underwriting criteria per se as much as the product 

features where we were not documenting loans and we were not 

asking for assets, we were not verifying income. 

The CFPB has addressed those issues. And I agree with Ms. Still 

that the spirit of the bill is where it needs to be, but we need to 

tweak it in those areas and set up those guidelines or those metric 

points so that we can retain our flexibilities. And that is, I think, 

what we are really asking here, is we need to be able to retain the 

flexibilities we have enjoyed previously. 

Mr. PITTENGER. Anyone else? 

Mr. THOMAS. Yes, I would like to comment, too. What we are facing if we don’t get this right is pretty much what we are facing 

right now, and that is the instability in the marketplace. As a 

street REALTOR®, what we are facing right now is 30 to 40 percent of the purchases are all cash. Where is that all cash coming 

from? It is coming from investors and it is coming from offshore. 

If we don’t get this right, you are shutting out the first-time home 

buyer and the underserved homeowners who want to get back into 

home ownership. 

And so, we are really talking about a severe sea change if we 

don’t get this right. We are going to have more and more investors 

investing in the marketplace, turning what used to be homeowner 

properties into rentals, and you are going have a big change in the 

whole socioeconomic makeup of this country. So we have to get it 

right. 

Mr. PITTENGER. Mr. Calhoun? 

Mr. CALHOUN. If I may add, I would agree with Ms. Still that 

the basic statutory framework provides the necessary mechanisms 

34 

and tools. We have a regulator who is data-based and who is listening. 

I think these oversight hearings are not just appropriate, but 

necessary as part of that process to raise concerns and to have the 

agency answer as to how they are addressing them. 

I would point out that those houses that are being bought today 

are houses that were foreclosed upon because there weren’t protections in place, and that is how we ended up in this mess. 

Mr. PITTENGER. I have 15 seconds. Mr. Vice, do you want to say 

something? 

Mr. VICE. The main thing I was going to say is if you are looking 

for a bright line of how do we change Dodd-Frank, I would make 

sure that it aligns with the business models. It is a completely different business model to originate a portfolio and sell it, and it is 

a completely lending aspect if you originate a loan and you are 

going to keep it in your portfolio because then the interest aligned 

between the borrower and the creditor. And there is a much different lending atmosphere. In Mr. Reed’s written testimony, you 

will see that there is a lot less credit risk associated with loans 

that are held in portfolio. 

Mr. PITTENGER. Thank you. I yield back my time. 

Chairwoman CAPITO. Thank you. 

Mr. Scott? 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Mr. Calhoun earlier made a statement that I totally disagree 

with, and that is on his issue of the need for H.R. 1077. 

Let me assure you, Mr. Calhoun, we desperately need H.R. 1077. 

Some of the very people you were talking about, some of the lowerincome African Americans, and not just them, but everybody—dealing with a home purchase in real estate is the most complex, most 

difficult transaction that 90 percent of the American people will 

ever go through. And you know what they need the most? Information. Information makes them powerful; it helps with the problems. 

That is why we have so much predatory lending. 

House Resolution 1077 does some essential things. First of all, it 

strengthens the Truth in Lending Act. It will require for the first 

time that customers and potential homeowners will receive information dealing with points, not maybe, not if, but they must be 

told information about points, about fees, about all of the loan 

modifications available to them. 

I represent Georgia and the suburbs of Georgia, at one time the 

leading part of this country with home foreclosures, and the number one problem they had was, ‘‘I didn’t know.’’ Well now, under 

H.R. 1077, they will know. This is vital information. This is an important bill. 

Mr. Thomas, I would like for to you address that, and Ms. Still, 

as to why House Resolution 1077 is very important. 

Mr. THOMAS. What it does is it levels the playing field. It makes 

it more open to more players in the marketplace. If my constituents, meaning other brokers, want to have a title company affiliation, if they want to have a mortgage affiliation, let me tell you, 

first of all, that the REALTORS® in that firm don’t necessarily 

flock to that title company or lender that the broker owns, because 

they are going to hold them to a higher standard. They want to 

35 

make sure that their customer is best-served. And whether it is the 

in-house lender or it is somebody else, they want to make sure that 

their consumer is handled properly because they want to have future business that is a referral from them. 

And so, we want to make sure that we have as many players in 

the marketplace in a level playing field rather than just bringing 

it down to a few, which is what we would have if we don’t pass 

H.R. 1077. 

Ms. STILL. Competition is good for consumers and we need as 

much competition as possible. We also need consumers to be able 

to have a choice of their settlement service provider. And we also 

need transparency in shopping, to your point. It has to be a level 

playing field or the consumer is not going to know how to shop. 

The bill is critical to level the playing field, and thank you for cosponsoring it. 

Mr. SCOTT. Thank you very much. 

Chairwoman CAPITO. Thank you. 

Mr. Barr for 5 minutes. 

Mr. BARR. Thank you, Madam Chairwoman. 

Mr. Gardill, this is a question for you. You included in your written testimony the following statement, ‘‘The QM box ironically may 

conflict with fair lending rules and goals of the Community Reinvestment Act. And it is quite the Catch-22 when a bank attempts 

to limit its regulatory litigation and reputational risk by staying 

within government prescribed rules only to be subject to possible 

regulatory litigation and reputational risks for not straying outside 

those rules.’’ 

Do you think it is possible for financial institutions to meet their 

CRA obligations while issuing only QM loans? 

Mr. GARDILL. No, I think it would be extremely difficult to do so. 

Mr. BARR. Would you view the QM rule as it is currently structured to be basically, in effect, a partial repeal of CRA? 

Mr. GARDILL. It is going to impact the bank’s ability to comply. 

The CRA is still there, we still have to meet that regulatory burden. Just for example, last year we did 203 loans, CRA eligible, 

about $17 million, and not one of them would meet the QM rule. 

Mr. BARR. Ms. Still, a follow-up question for you on the same 

topic: What do you believe is the implication of QM on the disparate impact analysis? 

Ms. STILL. The industry desperately needs clarification on how to 

comply with two rules that seemingly might bump up against each 

other. And so of course, the industry deplores discrimination in any 

fashion; it is very committed to complying with the disparate impact rule. But if the lender chooses only to lend on QM loans, it 

could be in violation of HUD’s disparate impact rule. So we need 

the regulators to work together and help the industry understand 

how to negotiate that situation with which we are faced. 

Mr. BARR. I appreciate the testimony of both of you in highlighting what appears to be a dramatic contradictory mandate coming from the regulators, that you have a CRA obligation on the one 

hand, but, Mr. Gardill, as you pointed out, it is a Catch-22 for the 

lender in this situation when you all are obligated to originate QMs 

to obtain the safe harbor and then also expected to somehow satisfy 

this disparate impact analysis. 

36 

I want to move now to Commissioner Vice and your testimony. 

And if staff could put up on the screen a picture of the Commonwealth of Kentucky? 

[slide] 

Mr. BARR. And this is kind of a follow-up to Mr. Luetkemeyer’s 

question about the CFPB’s rural designation. If you take a look at 

this screen, you can see a county-by-county map of Kentucky. And 

the counties in yellow, Commissioner Vice, are the counties that 

the CFPB recognizes as nonrural and the counties in blue are counties which the CFPB has classified as rural. 

This is obviously relevant to our hearing today because the CFPB 

has established a category of QMs with balloon payments that are 

originated by small creditors in rural or underserved areas. 

You will notice—and you are from Clark County, sir, so you are 

familiar with this geography—Bath County, which is just two counties over from you to the east. Can you share with the committee 

and with your colleagues on the panel, Bath County, and is it a 

proper designation to categorize Bath County as nonrural? 

Mr. VICE. I have actually had the distinct pleasure of being the 

examiner in charge of a couple of banks that are headquartered in 

Bath County. Everything about Bath County is rural and it should 

be considered rural. Even if you look at the population disbursement amongst the area, it should be considered a rural county. 

The community itself, there is a lot of ag-based businesses there. 

There is not a whole lot of industry in Bath County as well. So 

Bath County, out of any county in Kentucky, should be considered 

rural. 

Mr. BARR. So I think, Commissioner, this is exhibit A for your 

position that there needs to be some kind of petition process to fix 

the rural designation. 

A quick follow-up for you, Commissioner. Does the CFPB, in your 

judgment, have the statutory authority to do this or does Congress 

need to intervene here and give the CFPB the authority to implement this petition process you propose? 

Mr. VICE. It is our opinion that the CFPB currently does have 

the ability to do the petition process. 

Mr. BARR. If they continue to rely on the various government 

definitions of rural, would you recommend to this committee and 

to this Congress to statutorily implement a petition process? 

Mr. VICE. We would either like to see a statutory implementation 

of it or the Dodd-Frank Act be amended to move the reference to 

rural in the balloon loan category. 

Mr. BARR. Okay. And then I guess one final question, as my time 

is expiring. As a bank supervisor, Commissioner, could you just 

briefly amplify your testimony that Congress should create a general statutory small creditor QM and apply it to all loans held in 

portfolio? 

Mr. VICE. Yes. We think this is very important in that small 

community banks’—and again, their interests align when they are 

originating a loan—primary focus is to create, for lack of a better 

term, to borrow something from Steve Covey, a ‘‘win-win situation.’’ 

What are the borrower’s credit needs and how can we meet those 

to create a loan to meet those needs. 

Mr. BARR. Thank you 

37 

Chairwoman CAPITO. Mr. Capuano? 

Mr. CAPUANO. Thank you, Madam Chairwoman. 

I want to thank the panel members for being here today. 

I just have a question for everybody. And, again, we are talking 

a lot of details here, and that is fine, but to me the generalities of 

how we get here is also important. 

Does anyone on the panel disagree with the statement that prior 

to 2008, there were a fair number of mortgages given in this country that should not have been given out? Does anyone disagree 

with that statement? 

I didn’t think so. So, everybody agrees that prior to 2008 there 

were a fair amount of mortgages that should not have been given. 

Fine. 

Mr. Gardill, on page 11, you make a statement that I agree with, 

but I wonder what it means. It says, ‘‘These rules will restrict, 

rather than facilitate, credit to mortgage borrowers, particularly 

borrowers on the margins.’’ 

Isn’t that the whole point, that borrowers on the margins are the 

ones who got those loans in 2006 and 2007 and 2008 that we 

should not have been giving, and therefore the borrowers on the 

margins are the ones who should not get mortgages in the future? 

Should we not be restricting some of those, or should all borrowers 

on the margins be given mortgages at all times? 

Mr. GARDILL. I think we have to be careful how we generalize 

and preclude from our homeowner system in this country, otherwise qualified borrowers— 

Mr. CAPUANO. I understand— 

Mr. GARDILL. —with the flexibility that they could own a home 

and we can successfully provide credit. 

Mr. CAPUANO. I fully understand that. As a matter of fact, the 

other side criticized people like me for pushing that for years, actually for generations, that I thought more people should be qualified, 

but now, in light of 2008, I realize there is a line somewhere. I am 

not sure exactly where that line is. But do you agree that there is 

a line that at some point a borrower should not get a mortgage? 

Mr. GARDILL. And that is the reason I think we need some time; 

we are looking for an extra year here in order to make sure that 

we get it right. 

Mr. CAPUANO. I don’t disagree. I want to get it right, too. I actually think that the comments that were made earlier on competition and choice and level playing field and coordination of regulators are all 100 percent correct. I am not looking for one mortgage originator, I am not looking for no choice, I am not looking 

for that one person to do it all. That would be wrong, and it 

wouldn’t help anybody. So, I totally agree with those comments. 

I guess what I am trying get at is that we all seem to agree that 

there should be some restrictions. The question is, where should 

those lines be and exactly how does it all work? And we are all 

working on presumptions as to what they should be. 

I guess the question that I really have is, when everything is 

said and done, based on what you know—and I assume every one 

of you was active in this area before 2008—if there was 100 percent of the people, 100 percent of the people who got mortgages in 

2008, what percentage do you think should not get mortgages? 

38 

Where should that line be? Should it be 100 percent? Should it be 

110 percent? Should it be 70 percent? And I ask you because there 

is a study out there that suggests that the CFPB’s proposal will cut 

out something like 48 percent of the mortgages, which I think anybody would agree that, if that is correct, it is too high. 

I guess I am asking, what would your goal be? And we may as 

well just start with you, Mr. Vice. What would your goal be, starting in 2008, if that is equal to 100, what would it be? Should it 

be 95 percent? Should it be 75? And, again, general, and I am not 

going to hold it to you. I am just trying to get a general idea. 

Mr. VICE. I would be hesitant to look at it that way, and the reason I would be is in 2008, let’s take your example, 100 percent of 

the population who got more mortgages, some of those people may 

have been able to afford a mortgage, just a lower amount, but they 

were given the ability through a product offering to get a mortgage 

that they couldn’t afford, because it was too high. 

So I don’t think we should be looking at this or asking the question, you don’t deserve a mortgage, you shouldn’t get one, and this 

percentage should not have gotten one. I think the question should 

be more of, how do we make sure we are aligning the interests between the borrower and the creditor to make sure that the correct 

credit decision is made for that borrower? 

Mr. CAPUANO. The only thing I am interested in is having no 

more taxpayer bailouts for people who give out mortgages. 

Mr. VICE. I agree. 

Mr. CAPUANO. That is my main category. And achieving the highest percentage of homeowners as possible with that as the knowledge. But you are telling me that everyone who got a mortgage in 

2008, somehow, somewhere, could have been and should be qualified to get a mortgage today? 

Mr. VICE. No. I think— 

Mr. CAPUANO. So that there should be some percentage who 

shouldn’t. And I understand you may not have a number. 

Mr. Gardill, how about you? Do you have a general idea, a 

range? 

Mr. GARDILL. I think we have to look at the issues. I don’t think 

you can arbitrarily set a bright standard or a bright line. 

Mr. CAPUANO. I am not asking for a bright line. 

Mr. GARDILL. We had a rapid acceleration in value and a rapid 

deceleration in value, and what we are trying to do is avoid that— 

Mr. CAPUANO. So I guess I am not going to get an answer. Does 

anybody want to jump in with a number? I didn’t think you would, 

but I figured I would ask anyway. 

And the reason I ask is because that is what we are here for; no 

one wants 48 percent of the mortgages to not get access to credit. 

That is not good for anybody. But there are some people who 

should not get a mortgage. And I guess for me the question is, 

what is that goal? Because what I am hearing in the general testimony is that these proposals will shut off credit to too many people. Fine. That scares me, as it should. How many will it shut off 

credit to? Go ahead. 

Ms. STILL. But I think we need to be careful with context, because when you talk about the margins in 2006, 2007, and 2008, 

it was a very different margin than in today’s overly tight credit 

39 

conditions. So when we talk about deserving borrowers in 2013 

who may not get mortgages, it truly is a deserving borrower. 

I believe that the law, by prohibiting exotic loan programs, by 

mandating that lenders fully document income and assets, no more 

stated income loans, go an enormous way to helping the consumer 

make a good, well-informed decision with good counseling from a 

lender. So I just think we need to be very careful that it is not the 

same margin. Thank you. 

Mr. CAPUANO. I totally agree that we need to be careful, and that 

is what we are doing here. 

Madam Chairwoman, I know I am over my time. I apologize, and 

I appreciate your indulgence. 

Chairwoman CAPITO. Thank you. 

Mr. Miller? 

Mr. MILLER. Thank you, Madam Chairwoman. 

I respect my good friend’s concerns on making loans that are not 

predatory. In fact, in 2001 I started introducing amendments to 

bills and said, let’s define subprime versus predatory. I think it got 

to the Senate 5 times, as you recall, and they never took it up, or 

we might not have had some of the problems we had. 

I guess the definition of margins would be when you apply them 

to. And I think if you go back to 2006, 2007, and 2008, the margins 

were not margins, they were just, could you sign your name, you 

are qualified. There were no underwriting standards. 

But my biggest concern is the CoreLogic study in 2010, because 

those loans were not being made in 2010. In fact, the CoreLogic 

study shows that the loans made in 2010 were very good loans. My 

good friend, the ranking member, Maxine Waters, brought up a 

concern she had that people were going to be limited from the marketplace. And I think, Mr. Calhoun, you said that based on the 

flexibility that is allowed through QM, the GSE would still provide 

the loan. So 95 percent of the loans that they said wouldn’t be 

made would be made. 

The problem I have with that, and I am not impugning you, is 

that Secretary DeMarco came right before this committee, as all of 

you recall, and said that GSEs will not be allowed to go outside of 

a strict QM definition. So your response to defining the study that 

was given to us by CoreLogic would not be applicable based on his 

definitive comment to us, and that is where my concern comes 

from. 

If they are going to go strictly by the guidelines of QM and not 

be allowed flexibility, which he said without a doubt they are going 

to be required to do, half of those loans made in 2010 that are performing very well would not be allowed to be made today. That is 

what the debate is on today, not whether we made bad loans in 

2006, 2007, and 2008, because we did. The underwriting standards 

then were just, especially through Countrywide, can you sign your 

name, you met the underwriting standards. That is how bad they 

were. 

But, Ms. Still and Mr. Gardill, what impact would this have on 

housing today, this strict requirement, especially by DeMarco and 

the GSEs, that they are going to have stay within QM? How much 

impact is it going to have on the market today? 

Ms. STILL. I don’t know an exact number for you. 

40 

Mr. MILLER. Does it drive more buyers to FHA, which we are trying to eliminate buyers from FHA, I guess is the other guideline. 

Ms. STILL. Yes. Any borrower, because the points and fees test 

is a test that will determine QM or non-QM, any borrower who 

cannot meet the points and fees test will no longer now be eligible 

to be sold to a GSE. 

Mr. MILLER. And they are going to go over to FHA, which is increasing the burden on FHA, which we are trying to decrease the 

burden on FHA? We are creating a— 

Ms. STILL. The FHA program will be mandated to meet the 

points and fees test as well. So the points and fees tests have to 

be met regardless of the investor. It will be private capital that 

would choose to do that non-QM loan, and we don’t think there will 

be a lot of private capital at all. And if there is, it will be only for 

the highest quality borrowers, not for the broad middle-class America. 

Mr. MILLER. Whether you support GSEs or not, if they are out 

of the marketplace in this market, it could be devastating. 

And the ability-to-repay rule purpose, it is very clear to me, and 

it sets guidelines to approve a borrower’s ability-to-repay, but I 

don’t know where the 3 percent cap on points and fees falls in that 

at all. The 3 percent cap in fee has nothing to do with the borrower’s ability-to-repay. And I look at what is included in the caps, 

how does escrow insurance relate to the person’s ability-to-repay? 

Some title insurance is included, but other title insurance is excluded depending on who pays for the policy. Mortgage origination 

fees are included when a mortgage broker is used, but not when 

a loan is originated at the bank or credit union. Nonprofit creditors 

are exempt from all the caps completely. 

So if there are so many exclusions and the exclusions are based 

on who you are, what does this do to the underlying issue of trying 

to create a safe and sound loan? I guess, Ms. Still, I would go back 

to you again to let you answer that if you can. 

Ms. STILL. We would agree that the points and fees cap and some 

of the fees that are included in have nothing to do with the abilityto-repay. It has to do with a business channel. And we believe all 

of that should be a level playing field, which is why it is so important to pass H.R. 1077. 

Mr. MILLER. It is beyond that. You are discriminating against 

certain groups. For an example, if you are a non-profit creditor, you 

are exempt completely. If you are a mortgage originator, you are 

included when a mortgage broker is used. So if you are a mortgage 

broker, you are going to be inclined not to use a mortgage broker, 

because I am penalized if I do. But when a loan is originated by 

a bank or credit union, well, I don’t have to comply. 

So I am really bothered by anything we do that discriminates 

against anybody or any group or organization or it picks winners 

and losers. So you can say, really I can save myself some money 

and not be—not save money, but I could be exempt from all this 

if I just use a nonprofit; or if I don’t use a mortgage broker, the 

loan can be through a bank or credit union, then I have no fees 

or caps. 

If you just look at that alone, you have to say something is seriously wrong with the structure when we pick winners and losers 

41 

and we discriminate against some and not others. So I think that 

is something that we seriously need to look at. 

And I yield back the balance of my time. 

Chairwoman CAPITO. The gentleman yields back. 

I would like to ask for unanimous consent to insert into the 

record written statements from the Consumer Mortgage Coalition, 

the National Association of Federal Credit Unions, the Independent 

Community Bankers of America, the Community Associations Institute, and the American Land Title Association. Without objection, it is so ordered. 

Mr. Ellison? 

Mr. ELLISON. Thank you, Madam Chairwoman. And thanks to 

the ranking member and all of the witnesses today. It is an important issue, and you all have helped us understand it better. 

Ms. Still, I wanted to ask you a question. I believe you recommended allowing higher fees for loans up to $200,000. What percentage of home sales and refinances for mortgages below 

$200,000? If we were to follow your idea, who will we be affecting? 

Ms. STILL. I believe the right way to fix the points and fees problem is H.R. 1077, but another alternative way would be to raise the 

tolerance of the definition of a small loan from $100,000 to 

$200,000. 

And as I look at all of the loans that I made last year, which was 

to about 12,000 customers, I would tell you that the points and fees 

start tripping at about the $160,000 to $180,000. If we were to go 

to $200,000, we would probably solve about 90 percent of the problem, based on the data that I have looked at in my company. So 

it is another way to raise the definition of a small loan and more 

borrowers would be included in the QM definition. 

Mr. ELLISON. Do you want to respond to that, Mr. Calhoun? 

Mr. CALHOUN. Yes. First of all, I think it is important that people have asked, what do fees have to do with this? The Financial 

Crisis Commission found that high fee loans contributed to the crisis, because lenders are collecting their revenue at closing, not 

through the performance of the loan. It misaligns the borrower and 

the lender incentives there. The lender wins by charging the high 

fees at closing. This bill would far more than double the fees that 

could be charged and still be a QM loan. 

Mr. ELLISON. Excuse me. When you say, ‘‘this bill,’’ you are referring to H.R. 1077? 

Mr. CALHOUN. H.R. 1077. 

The other point is people are acting as if an ability-to-repay rule 

is something new. All loans that have over 150 basis points of interest rate over APOR, which is significant ones, are currently subject and have been for the last several years to an ability-to-repay 

rule under the Federal Reserve rules with no safe harbor for any 

of the loans, and the sky didn’t fall. I asked people, tell me of these 

lawsuits. No one can point to a single one, much less a flood of 

them. 

So Congress based this ability-to-repay rule off of what the Federal Reserve had done before Dodd-Frank was passed. We have experience under that. It worked. This rule has a lot more industry 

protections than the Federal Reserve rule did. It has a safe harbor 

42 

for most of the loans. The Federal Reserve rule did not have a safe 

harbor for any of the loans. 

Mr. ELLISON. Okay. Anybody else want to weigh in on that question I asked? You don’t have to. 

Ms. STILL. The only thing I was going to mention is my MBA colleagues behind me tell me that the average loan amount in America is $220,000, which is why the $200,000 is a relevant number. 

Mr. ELLISON. All right. Thank you. 

Mr. Calhoun, I have a question for you. How would a consumer 

comparison shop for title insurance? How many title insurance 

firms are there nationwide? If you wanted to go for the lower price, 

could you do it, given current standards? 

Mr. CALHOUN. As the GAO study found, there is virtually no 

shopping for title insurance. And I find that is true even when I 

ask financial and mortgage professionals did they shop for title insurance. They don’t market to consumers; they market to other industry professionals, because those are the ones who select the 

service. And, in fact, there is little or no price competition. Everybody tries to charge the maximum rate. 

And lenders who are larger—Ms. Still’s operation can have 125 

people who focus just on title insurance. That gives them an edge 

over those who can’t do that. We already have five lenders who 

control more than half of all mortgages in this country. Now you 

want to hand the title insurance to them also and encourage that? 

That doesn’t seem like it makes a more competitive market. 

Mr. ELLISON. Do home buyers know that they are paying a commission? 

Mr. CALHOUN. My experience has been virtually none do, much 

less that the commission is 75 percent of the premium. For a 

$500,000 loan here in the District, the insurance premium for just 

the bare-bones coverage is about $3,000. The commission part of 

that in the District is about $2,200 going to the person who picks 

the policy even though they charge you separately for the other 

title work. 

Those are the kinds of facts that led the GAO to raise grave concerns about the title insurance market. And as I said, instead of 

fixing it, this makes it worse. 

Chairwoman CAPITO. The gentleman’s time has expired. 

I thank all of the witnesses, and I would like to thank the ranking member, as well, for his attention to this very important issue. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing is now adjourned. I would like to thank the witnesses for their testimony and for their responses to the questions. 

Thank you. 

[Whereupon, at 12:18 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

June 18, 2013 

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Testimony of Michael D. Calhoun 

President, Center for Responsible Lending 

Before the House Committee on Financial Services 

Subcommittee on Financial Institutions and Consumer Credit 

June 18,2013 

Good Morning Chairman Capito, Ranking Member Meeks, and Members of the 

Subcommittee. Thank you for inviting me to testifY at today's hearing to discuss the 

Consumer Financial Protection Bureau's implementation of mortgage reforms that will 

prevent future lending abuses and promote stability in the mortgage market. 

I am President of the Center for Responsible Lending (CRL), a nonprofit, nonpartisan 

research and policy organization dedicated to protecting homeownership and family 

wealth by working to eliminate abusive financial practices. CRL is an affiliate of SelfHelp, a nonprofit community development financial institution. For thirty years, SelfHelp has focused on creating asset-building opportunities for low-income, rural, womenheaded, and minority families, primarily through financing safe, affordable home loans 

and small business loans. In total, Self-Help has provided $6 billion in financing to 

70,000 homebuyers, small businesses and nonprofit organizations and serves more than 

80,000 mostly low-income families through 30 retail credit union branches in North 

Carolina, California, and Chicago. 

The Consumer Financial Protection Bureau (CFPB) has released mortgage rules that 

strike the right balance of protecting consumers while also enabling lenders to comply 

with these new reforms. Throughout the rulemaking process and in the final result, the 

CFPB has taken a measured and reasonable approach. As a result, these mortgage rules 

will provide important legal protections for borrowers and for lenders. 

The rules-required by the Dodd-Frank Act of 20 1 O-address head-on a key cause of the 

mortgage meltdown and ensuing recession: many lenders made high-risk, often 

deceptively packaged home loans without assessing if borrowers could repay them. 

Because of these reforms, lenders now must assess a mortgage borrower's ability to repay 

a loan. The rules' definition of a safe mortgage-known in Dodd-Frank as a "Qualified 

Mortgage"- also means that restrictions on harmful loan terms such as balloon 

payments, teaser rates and high fees will extend to families who in the past too often were 

steered into unfair, harmful financial products. At the same time, the CFPB's rule 
45 


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provides lenders with significant legal protection whcn thcy originate Qualified 

Mortgages, although they are not required to do so. 

In asscssing the CFPB's Qualified Mortgage definition, my testimony will highlight the 

same "scorecard" of issues that CRL highlighted in front of this subcommittee at a 

hearing last summer before the CFPB issued its final rules: 

• Qualified Mortgage definition is broadly defined: The CFPB's rules adopt the 

widespread view - including from CRL - that Qualified Mortgages should be 

broadly defined to encompass the vast majority of the current mortgage markct. 

The rules include four different paths for a mortgage to gain QM status, including 

one specifically for small creditors holding loans in portfolio and another one that 

is based on cligibility for purchase or insurance by Fannie Mae, Freddie Mac and 

the Federal Housing Administration. This multi-faceted approach will maintain 

access to affordable credit for borrowers. 

• The CFPB used clear, bright lines in the Qualified Mortgage definition: In 

addition, the CFPB used specific standards to define which mortgages will be 

eligible to obtain QM status. The CFPB's first prong for a Qualified Mortgage 

definition uses a back-end debt-to-income ratio cut-off of 43 percent, and another 

definition depend on whether the loan is eligible for purchase or insurance by 

well-established programs. This specificity will enable both lenders and 

borrowers to know upfront when a mortgage is originated whether it has QM 

status. 

• Qualified Mortgage definition protects borrowers with the riskiest loans: On 

the issue of whether lenders should receive a safe harbor or a rebuttable 

presumption of compliance when originating a QM loan, the CFPB created a twotier system. The vast majority ofloans will have a safe harbor and others will 

have a rebuttable presumption. The threshold between the two depends on the 

loan's annual percentage rate (APR) relative to the average prime offer rate 

(APOR). Ideally, as consumer groups supported, the new rules would have 

allowed any borrower with a QM loan to challenge a lender who failed to evaluate 

if the borrower could afford the loan. However, the CFPB's rules do allow 

borrowers to hold lenders accountable on the riskiest types of mortgages, those in 

the subprime market where the problems that led to the housing crisis were 

concentrated. 

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As a whole, these rules continue the CFPB' s approach of expanding access to credit 

while ensuring that loans are sustainable for the borrower, the lender and the overall 

cconomy. 

I. Harmful Mortgage Features and Lending Practices Were Prevalent in 

the Pre-Crisis Mortgage Lending Market and Led to Massive 

Foreclosures. 

In the fallout of the foreclosure crisis, the alphabet soup of harmful lending products and 

practices - such as YSPs, lOs and NINJA loans - is now well known. Many of these 

features and practices were at one time touted as innovations to serve borrowers. As the 

foreclosure crisis has made plain, such rhetoric has failed to match reality. 

For more than ten years, CRL has produced research highlighting the increased 

foreclosure risk posed by abusive lending practices. In 2006, which pre-dated the worst 

of the foreclosure crisis, CRL released a report estimating that abusive and predatory 

lending would lead to approximately 2.2 million foreclosures among subprime 

mortgages. 1 At the time, our report was denounced by the mortgage industry as absurdly 

pessimistic. As we all now know, the system was loaded with much more risk than CRL 

originally reported. 

CRL released a follow-up report entitled Lost Ground in 2011 that builds on our precrisis research and confirms the link between risky mortgage features and foreclosure 

rates. For mortgages originated between 2004 and 2008, this research shows that loans 

originated by a mortgage broker, containing hybrid or option ARMs, having prepayment 

penalties, and featuring high interest rates (i.e., subprime loans) were all significantly 

more likely to be seriously delinquent or foreclosed upon than a 3D-year fixed-rate 

mortgage without a prepayment penalty.2 

CRL's research also demonstrates that African-American and Latino borrowers were 

much more likely to receive mortgages with these risky features. For example, AfricanAmerican and Latino borrowers with FICO scores above 660 were three times as likely 

I See Ellen Schloemer, Wei Li, Keith Ernst, and Kathleen Keest, Losing Ground: Foreclosures in the 

Subprime Market and Their Costs to Homeowners, (December 2006), available at 

http://www .responsiblelending. org/mortgage-Iending/research -analysis/foreclosure-paper -report -2-17 .pdf. 

2 See Debbie Gruenstein Bocian, Wei Li, Roberto Quercia, Lost Ground, 20] J: Disparities in Mortgage 

Lending and Foreclosures, (November 2011), available at http://www.responsiblelending.org/mortgagelending/research-analvsis/Lost-Ground-20 I J .pdf. 

3 
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to have a higher interest rate mortgage than white borrowers in the same credit range.3 

Although the majority of foreclosures have affected white borrowers, Lost Ground 

confirms that African-American and Latino borrowers have faced a disproportionate 

number of foreclosures and delinquencies than white borrowers within every income 

range. 

The foreclosure crisis could have been prevented, but it wasn't, and it bears revisiting the 

kind of harmful lending practices that fueled the crisis still affecting communities across 

the country. 

3 [d. 

• 2128s and other ARMs: Adjustable rate mortgages (ARMs) - including 

"2/28s" where starter rates reset after the first two years were widespread in 

the years leading up to the foreclosure crisis. These 2/28s and other ARMs led 

to payment shocks for many households who were unprepared for higher 

monthly payments once the interest rates increased. As of2009, subprime 

mortgages with short-term hybrid ARMs had serious delinquency rates of 48 

percent compared to 21 percent for subprime fixed-rate mortgages and 36 

percent for the total universe of active subprime mortgages. 4 In fact, were it not 

for the Federal Reserve lowering interest rates to historically low levels 

following the financial crisis, it's easy to imagine the payment shock from 

expiring teaser rates leading to an even higher number of foreclosures than has 

occurred so far. 

A related product called interest-only (10) ARMs let borrowers make interest 

only payments during an introductory period, which jeopardized any ability to 

build equity as well as leading to payment shock for borrowers once the loan 

started amortizing over a reduced loan life. Going even further, payment option 

ARMs (POARMs) allowed borrowers to make monthly payments where the 

amount paid could vary from month-to-month, including payment amounts that 

did not cover the full interest due. This resulted in negative amortization. Too 

many lenders structured these loans so that the payments would substantially 

increase in five years or less when borrowers hit their negative amortization cap, 

underwrote the loans only to the very low introductory teaser rate, and failed to 

document income. 

• Prepayment penalties: Many borrowers facing payment shock from increased 

interest rates once an introductory period ended also faced penalties when trying 

4 See GAO Nonprirne Mortgages: Analysis of Loan Performance, Factors Associated with Defaults, and 

Data Sources, at 12-13 (August 2010) (available at http://www.gao.gov/assets/310/308845.pdf). 

4 
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to exit into a new mortgage or to sell the property to avoid these built-in 

increases. These prepayment penalties are a feature associated with a higher 

likelihood of defaults and were present in the great majority of subprime 

mortgages, and increasingly in Alt-A mortgages (which generally consisted of 

limited documentation mortgages to higher credit score borrowers), during the 

mortgage boom.6 To avoid default, the typical subprime borrower had to sell or 

refinance before the rate reset. This produced prepayment penalties, generally 

equal to six months' interest- typically 3.5 percent to 4 percent of the loan 

balance. Because the average borrower did not have the cash Oil hand sufficient 

to cover the prepayment penalties and refinancing fees, they had to pay them 

from the proceeds of the new loan. This produced ever-declining equity even 

when home prices were rising. Once home prices declined, foreclosure risk 

climbed catastrophically. 

• No-doc or low-doc loans: The practice of failing to document a borrower's 

income and assets was also prevalent in the subprime and Alt-A market. For 

example, low-doc loans comprised 52 percent of Alt-A originations in April 

2004 and rose to 78 percent at the end of2006. 7 By 2006, no-doc or low-doc 

loans made up 27% of all mortgages.s These loans without proper 

documentation were frequently underwritten with inflated statements ofthe 

borrower's income.9 Lawyers representing borrowers in predatory lending cases 

often found the borrower's tax returns included in the file of those who were 

nevertheless given "no doc" or "low doc" loans. Unbeknownst to these 

borrowers, they paid higher interests rate for the "privilege" of receiving a no5 See, e.g., Lei Ding, Roberto G. Quercia, Wei Li, lanneke Ratcliffe, Risky Borrowers or Risky Mortgages: 

Disaggregating Effects Using Propensity Score Models, at 49 (Working Paper: May 17,2010) (stating 

"[w]e also found that subprime loans with adjustable rates have a significantly higber default rate than 

comparable CAP loans. And when the adjustable rate term is combined with the prepayment-penalty 

feature, tbe default risk of subprime loans becomes even bigher.") (available at 

http://www.ccc.unc.eduJdocuments/Bj~Disaggreg.5.17.1 O.pd!). 

6 See Report to Congress on the Root Causes of the Foreclosure Crisis, U.S. Department of Housing and 

Urban Development, Office of Policy Development and Research, at 23 (January 2010) (citing Demyanyk, 

Yuliya, and Otto Van Hemert. 2008. Understanding the Subprime Crisis. Working paper. St. Louis, MO: 

Federal Reserve Bank ofSt. Louis.) (available at 

http://www.huduser.org/Publications/PDF!Foreclosure 09.pd!). 

7 Rajdeep Sengupta, At/-A: The Forgotten Segment of the Mortgage Market, Federal Reserve Bank ofSt. 

Louis Review, January/February 2010,92(1), pp. 55-71 at 60 (available at 

http://research.stlouisfed.orgipub lications/review! I 010 I !Sengupta.pd!). 

8 See Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the 

Financial and Economic Crisis in the United States, at 165 (Jan. 2011) [hereinafter FCIC Report], 

(available at http://fcicstatic.law.stanford.eduJcdn medialfcic-reports!fcic fmal report full.pd!). 

9 Over ninety percent of a sample of stated income loans exaggerated income by 5 percent or more and 

almost 60 percent exaggerated income by over 50 percent. Mortgage Asset Research Institute, Inc, Eighth 

Periodic Mortgage Fraud Case Report to Mortgage Bankers Association at 12 (April 2006), (available at 

http://www.mortgagebankers.org!fileslNews!TnternaIResource/42175 Final8thAnnuaICaseReporttoMBA.pdf). 

5 
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doc loan, even where they provided full documentation to the broker. 

• Yield Spread Premiums: The proliferation of mortgages with these harmful 

features was driven in significant part by the use of yield spread premiums 

(YSPs) as a way to compensate mortgage brokers. Because YSPs paid mortgage 

brokers higher payments when a mortgage had a higher interest rate than the 

borrower qualified for, these YSPs gave mortgage brokers incentives to steer 

borrowers into loans that were more expensive and less stable than they 

qualified for. And, by 2006, mortgage brokers accounted for 45 percent of all 

mortgage originations and 71 percent of all non-prime mortgage originations.!O 

In fact, most borrowers who received subprime loans could have qualified for 

better, more sustainable loans. Many qualified for lower-cost prime loans;!! 

those who did not often would have qualified for sustainable, 30-year fixed-rate 

subprime loans for at most 50-80 basis points above the introductory rate on the 

unsustainable "exploding" ARM loans they were given. 12 This 50-80 basis 

point increase is modest compared with the 350 to 400 basis point prepayment 

penalty (plus additional refinancing fees) that the borrower had to pay to 

refinance the typical 2/28 loan before the end of the second year. 

• No Escrows for Taxes and Insurance: Subprime lenders commonly did not 

escrow for taxes and insurance, attracting borrowers with the deceptive lure of 

lower monthly payments. This practice increased the risk of default twice a year 

when the tax and insurance bills came due and produced further equity-stripping 

cash-out refinancings where the borrower had the equity to cover the bills and 

refinancing fees and penalties. 

On top of these harmful loan features and lending practices, many lenders also failed to 

determine whether a borrower had an actual ability to repay their mortgage. Proper 

10 Ren S. Essene & William Apgar, Understanding Mortgage Market Behavior: Creating Good Mortgage 

Options for All Americans, at 8 (Joint Center for Housing Studies, Harvard University Apr. 25, 2007) 

(citing Mortgage Bankers Association, MBA Research Data Notes: Residential Mortgage Origination 

Channels (2006) (available at http://www.jchs.harvard.eduisiteslichs.harvard.edu/files/mm07-

I mortgage market behavior.pdO. 

1I For example, a Wall Street Journal study found that 61 percent ofthe sUbprime loans originated in 2006 

that were packaged into securities and sold to investors "went to people with credit scores high enough to 

often qualiry for conventional [Le., primelloans with far better terms." See Rick Brooks & Ruth Simon, 

Subprime Debacle Traps Even Very Credit-Worthy As Housing Boomed. Industry Pushed Loans To a 

Broader Market, Wall Street Journal at A J (Dec 3, 2007). Freddie Mac estimated in 2005 that more than 20 

percent of borrowers with subprime loans could have qualified for prime. See Mike Hudson & E. Scott 

Reckard, More Homeowners With Good Credit Getting Stuck With Higher-Rate Loans, Los Angeles Times 

(Oct. 25,2005), available at http://articles.latimes.com/2005/0ct/24Ibusinesslfi-subprime24. 

12 January 25, 2007 letter from the Coalition for Fair and Affordable Lending ("CFAL") to Ben S. 

Bemanke, Sheila C. Bair, John C. Dugan, John M. Reich, JoAnn Johnson, and Neil Milner, at 3. CFAL was 

an industry group representing subprime lenders. 

6 
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underwriting is particularly important for mortgages with resetting interest rates or 

negative amortization or interest-only payments (or all of the above) to ensure that 

borrowers can afford the larger monthly payments when they kick in down the road. 

However, for many mortgage lenders, this straightforward underwriting never happened. 

For example, at the time when Fedcral regulators proposed that lenders fully underwrite 

mortgages with ARMs, interest-only and negative amortization features at the fully 

indexed rate and payment, Countrywide estimated that 70% of their recent borrowers 

would be unable to meet this standard. 13 This recklessness set borrowers up for failure 

and, a<; a result, caused a foreclosure crisis. 

The CFPB's rules implementing the Ability to Repay and Qualified Mortgage reforms 

put in place a system of incentives that will make it difficult for this kind of risky lending 

to re-emerge in thc mortgage market. Overall, these incentives work in two ways. First, 

while lenders are not required to originate QM loans, they rcceive a legal presumption of 

meeting the separate obligation to reasonably determine that a borrower can afford the 

offered mortgage. Second, QM loans benefit borrowers, because these mortgages arc 

restrictcd from having many of the risky product features that fueled the subprime 

lending crisis. The CFPB's Qualified Mortgage definition is explored in more detail 

below. 

II. Overview of the CFPB's Rulemakings on the Qualified Mortgage 

Definition. 

After an extensive rulcmaking process that included the Federal Reserve proposing a rule 

in 2011 and the CFPB seeking additional notice and comment in 2012, thc CFPB ha<; 

released two rulemakings on the Qualified Mortgage definition this year. The CFPB 

released its first rulemaking on January 10,2013. 14 On the same day, the CFPB released a 

concurrent proposal to obtain additional comment on additional aspects of the definition. 

These remaining pieces of the definition were finalized in a rulemaking released on May 

29,2013. 15 As part of its implementation process and in response to stakeholder 

13 Countrywide Financial Corporation, "3Q 2007 Earnings Supplemental Presentation," Oct. 26, 2007. 

14 Consumer Financial Protection Bureau, Ability to Repay and Qualified Mortgage Standards Under the 

Truth in Lending Act (Regulation Z), 78 Fed. Reg. 6408 (January 30, 2013) (rule was issued by the CFPB 

on January 10,2013 and printed in the Federal Register on January 30, 2013) (hereinafter "January 2013 

Final Qualified Mortgage Rule"). 

15 Consumer Financial Protection Bureau, Ability to Rcpay and Qualified Mortgage Standards Under the 

Truth in Lending Act (Regulation Z), 78 Fed. Reg. 34430 (June 12,2013) (rule was issued by the CFPB on 

May 29,2013 and printed in the Federal Register on June 12,2013) (hereinafter "May 2013 Final Qualified 

Mortgage Rule"). 

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feedback, the CFPB has also published notices requesting comment on ways to clarify the 

rules and provide further guidance. 

Throughout the rulemaking process - including the implementation efforts the CFPB 

has sought extensive feedback from various stakeholders and has incorporated that 

fecdback into the final rules. The result is a rule that reigns in many of the risky product 

features and lending practices that hanned borrowers during the subprime lending crisis 

while also prioritizing access to credit in many of the ways sought by lenders. 

A. Overview of Qualified Mortgage Definition. 

In order to create a rule that meets consumer protection goals while also providing 

flexibility, the CFPB has establishcd four different paths for loans to gain QM status. 

Each are detailed below: 

• General Definition: The general Qualified Mortgage definition requires eligible 

loans to not exceed the points and fees threshold, not have negative amortization 

or interest-only payments, and a term that does not cxceed 30 years. In addition, 

borrowers must have a back-end debt-to-income ratio at 43% or below. Lenders 

must collect and verify a borrower's income, assets, debts and other obligations 

according to standards established in the regulation, which are found in Appendix 

Q of the regulation, in order to caleulate the borrower's debt-to-income ratio. 

• Compensating Factors: The CFPB also created a temporary definition that 

allows loans eligible for insurance or guarantee by Fannie Mae, Freddie Mac, the 

Federal Housing Administration (FHA), the Rural Housing Service (RHS), and 

the Veterans Administration (VA) to gain Qualified Mortgage status. The CFPB 

created the temporary QM definition in order to "preserve[] access to credit in 

today's market by permitting a loan that does not satisfy the 43 percent debt-toincome ratio threshold to nonetheless be a qualified mortgage based upon an 

underwriting determination made pursuant to guidelines created by the GSEs 

while in conservatorship or one of the Federal agencies.,,16 These agency 

guidelines include additional underwriting standards - often called "compensating 

factors" in order to approve a borrower with a debt-to-income ratio above 43 

percent. 

This temporary definition is available for a maximum of seven years; however, 

there are situations where elements of the definition could expire sooner for each 

16 January 2013 Final Qualified Mortgage Rule, at 6506. 

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of the individual programs. Under the Dodd-Frank Act, the FHA, RHS and VA 

can issue their own rulemakings defining Qualified Mortgages for the respective 

agency program, and the CFPB's temporary designation for that agency would 

expire if and when that occurs. Additionally, thc temporary definition for Fannie 

Mae and Freddie Mac guaranteed loans would also expire if the GSEs exit 

conservatorship by the Federal Housing Finance Agency (FHF A) before the 

seven-year period ends. This temporary definition does not require that the GSEs 

or government agencies actually insure or guarantee loans under this categoryonly that loans would be eligible under the specified underwriting requirements 

for one of the GSEs or government agencies. 

• Portfolio Loans Originated by Small Creditors Definition: This definition is 

not required in the Dodd-Frank Act, but the CFPB created this designation using 

its regulatory authority with the goal of preserving access to credit. Under this 

definition, lenders need to meet two criteria to count as a small creditor: first, 

have assets of no more than $2 billion and second, originate no more than 500 

first-lien mortgages per year. Mortgages originated by an eligible small creditor 

ean obtain QM status if they meet the points and fees threshold, there is no 

negative amortization, no interest-only payments, and the loan has a term of no 

more than 30 years. In addition, the lender is also "required to consider the 

consumer's debt-to-income ratio or residual income and to verify the underlying 

information.,,17 However, borrowers do not need to meet the 43% debt-to-income 

ratio threshold or use the debt-to-income ratio standards in Appendix Q. 

• Balloon-Loan Definition: The CFPB also created a Qualified Mortgage 

definition specific to balloon loans. This designation is required by the DoddFrank Act, but the CFPB also used its regulatory authority to establish a two-year 

transition period that allows all small creditors - regardless of whether they 

operate in rural or undcrscrvcd areas to obtain QM status for balloon loans that 

are held in portfolio. After the transition period, the balloon loan definition only 

applies to those lenders who operate in rural or underserved areas under a 

definition that CFPB will continue to study. Both during the transition period and 

afterwards, balloon loans must meet the points and fees threshold, have no 

negative amortization, "have a term of at least five years, a fixed-interest rate, and 

meet certain basic underwriting standards; debt-to-income ratios must also be 

considered but are not subject to the 43 percent general requirement.,,18 

17 May 2013 Final Qualified Mortgage Rule, at 35487. 

18 January 2013 Final Qualified Mortgage Rule, rule at 6409. 

9 
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81767.010

An aspect of the QM definition that is consistent across all four of these categories is the 

requirement that loans not exceed the points and fees thresholds established by the CFPB. 

The points and fees definition established by the CFPB is addressed in the next 

subsection. 

B. The Qualified Mortgage Points and Fees Threshold Prevents a Return to 

High Fee Lending While Also Facilitating Lender Compliance. 

One borrower protection included across the four Qualified Mortgage definitions is a 

limit on the amount of points and fees the loan can have. Points are another name for 

upfront fees paid by the borrower, which encompass a number of items including yield 

spread premiums, origination fees and discount points. These costs are often expressed as 

a percentage of the borrower's loan amount where one point is equal to one percent of the 

loan amount. The points and fees component of the Qualified Mortgage definition 

ensures that higher fee loans - where lenders and originators would have less of an 

incentive to determine that a borrower has an ability to repay the loan over time because 

they receive so much compensation up-front - cannot benefit from the liability 

protections that come with QM status. 

The statutory language in the Dodd-Frank Act states that the points and fees cannot 

exceed 3% of the loan balance, but there are other provisions in the statute and CFPB's 

rules that make this threshold larger than just 3% in practice. First, the Qualified 

Mortgage rules allow lenders to exclude up to two bona fide discount points that reduce 

the interest rate the borrower pays from the overall points and fees calculation. Second, 

fees paid by the borrower to independent third-parties are not included in the definition. 

Both of these exceptions allow for a substantial increase in the amount of fees a borrower 

can pay and still have the loan considered a QM. Third, the CFPB's rule also 

accommodates smaller loans by having higher points and fees thresholds for loans under 

$100,000. Only loan amounts of $1 00,000 or more have a points and fees threshold of 

3%, and the CFPB set the below thresholds for smaller mortgages: 

• 3%: loan balance is $100,000 and above (i.e., $6,000 for a $200,000 loan) 

• $3,000: loan balance is greater than or equal to $60,000 and less than $100,000 

• 5%: loan balance is greater than or equal to $20,000 and less than $60,000 

• $1,000: loan balance is greater than or equal to $12,500 and less than $20,000 

• 8%: loan balance is less than $12,500 

Three parts of the points and fees definition loan originator compensation (including 

yield spread premiums), settlement services paid to companies affiliated with the lender, 

and loan level price adjustments are addressed in greater detail below. 

10 
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81767.011

1. Yield spread premiums are included the points and fees definition, 

but commissions to individual retail and mortgage broker loan 

officers are excluded. 

The CFPB has closely considered the issue of how to count loan originator compensation 

in the definition of points and fees, and the final regulations issued on May 29, 2013 

address this issue in detail. In this final rule the CFPB requires including all yield spread 

premiums (YSPs) in the points and fees definition, plus any upfront payment that 

borrowers pay directly to lenders and mortgage brokers. YSPs are the payments that 

lenders make to mortgage brokers, which arc indirectly funded by the borrower through 

an increased interest rate. In addition, the CFPB used its exception authority to exclude 

all commissions paid to individual mortgage broker and retail loan officers from the 

points and fees definition. 

The inclusion of YSPs in the points and fees definition is a significant reform that will 

help prevent a return to the kind of abusive lending practices that dominated during the 

subprime lending boom. Prior to passage of the Dodd-Frank Act, YSPs were not included 

in the definition of points and fees used to calculate whether a loan counted as a high-cost 

HOEPA loan. The Dodd-Frank Act amended this definition to include YSPs, and the 

CFPB's regulations have implemented this reform. This is an appropriate change, 

because the underlying premise of a YSP is that it allows the borrower to pay a mortgage 

broker through an increased interest rate as a substitute for compensating the mortgage 

broker in cash up-front. 19 

Since YSPs and upfront payments are direct alternatives for one another, these payments 

must count equally in the points and fees definition. As a result, a loan with 1.75% paid 

by the borrower to the brokerage upfront will be treated the same as a loan with 1.75% 

paid by the lender to the brokerage. 

Ifthe CFPB had, instead, chosen to fully or partially exclude YSPs from the points and 

fees definition, this would have created an improper incentive for originators to use YSPs 

instead of upfront payments paid directly by the borrower. Such a structure would result 

in less transparent transactions that make it harder for consumers to comparison-shop 

and, and a result, often result in higher cost transactions. 

While other reforms in the Dodd-Frank Act also aim to curb steering abuses, the points 

and fees limit is an essential reform to prevent a return to high fee lending. Because 

mortgage brokers are independent businesses (and not employees of the creditor), they 

can choose which lenders to do business with and can base this decision on who pays the 

19 See Nat'! Assoc. arMor/gage Brokers v. Fed. Reserve Bd., 773 F.Supp. 2d 151, 158 (D.D.C 2011). 

11 
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81767.012

highest YSP compensation. Lenders must compete for broker business, and they compete 

by bidding up payments to brokers, which inflates broker payments through reverse 

competition. Some brokers specialize in offering subprime loans that generated the 

greatest compensation. Prohibitions on loan term-based compensation would not prohibit 

such a result, as the DC District Court concluded in upholding the Federal Reserve's 

originator compensation rules.z° Additionally, anti-steering rules do not require brokers to 

develop business relationships with lower cost lenders. Counting YSPs in points and fees 

is a necessary counterweight to this continued ability for brokers to steer borrowers into 

loans that benefit the brokers more than the borrowers. 

The CFPB's May 29th rulemaking also provided that all commissions paid by mortgage 

brokers or retail lenders to their respective individual employee loan officers are excluded 

from the points and fees definition. The CFPB interpreted the statutory language as 

including these payments in the definition of points and fees, but the agency used its 

rulemaking authority to exclude them. The CFPB had proposed to exempt payments by 

mortgage broker companies to their employees because of concerns about double 

counting the compensation paid to the mortgage broker company by the borrower or thc 

lender but had not proposed to exempt payments by retail lenders to their employee loan 

officers. In the May 29,2013 rule, however, the CFPB decided to treat employees of both 

types of entities the same because "there were significant operational challenges to 

calculating individual employee compensation accurately early in the loan origination 

process, and that those challenges would lead to anomalous results for consumers. In 

addition, the Bureau concludcd that structural differcnces between the retail and 

wholesale channels lessened risks to consumers.,,21 CRL supports this decision by the 

CFPB. 

2. Settlement services provided by companies affiliated with the 

lender are included in the points and fees definition. 

In conformance with the statutory language in place since HOEPA was first passed in 

1994, the CFPB's rulemakings also established that settlement services provided by 

20 In upholding the Federal Reserve's 2010 loan originator compensation rule, the District Court noted that 

the prohibition on term-based compensation by itself did not eliminate all incentives for abuse by mortgage 

brokers: "Thus, proposed regulation § 226.36(d)(l), which prevents any compensation model based on the 

terms of the transaction, by itself, ensures that creditors' employees have no direct monetary incentive to 

direct consumers toward loans with higher rates of more adverse terms .... The same is not true, however, 

for mortgage brokers. Although § 226.36(d)(1) prevents mortgage brokers from receiving compensation 

tied to the terms of a loan, it does not prevent them or their employees from creating incentives for a loan 

officer to guide consumers toward certain loans and or to certain lenders." See Nat '/ Ass 'n of Mortgage 

Brokers, 773 F.Supp.2d at 175. 

21 May 2013 Final Qualified Mortgage Rule, at 35430. 

12 
56 


81767.013

companies affiliated with the lender are included in the points and fees definition. Somc 

settlement service providers - such as companies that provide title insurance are 

affiliated with lenders, while others are independent and unaffiliated with any individual 

lender. It has been reported that 74% of the market uses unaffiliated providers. Because 

one of the underlying purposes of the QM points and fees definition is to include all 

compensation received by the lender, the QM points and fees definition differentiates 

between service providers that are affiliated with a lender and those that are not. 

Accordingly, if a title insurer is affiliated with the lender used by the borrower, then the 

fees paid by the borrower for that title insurance are included in the points and fees 

calculation. 

Title insurance, which is one type of settlement service, is included in most mortgage 

transactions, but borrowers typically have limited control over the price charged for this 

service. A 2007 report by the U.S. Government Accountability Office found that 

"because consumers generally do not pick their title agent or insurer, title agents do not 

market to them but to the real estate and mortgage professionals who generally make the 

decision.,,22 As a result, the GAO concluded that borrowers end up "in a potentially 

vulnerable situation where, to a great extent, they have little or no influence over the 

price of title insurance but have little choice but to purchase it:,23 

Given this market dynamic where borrowers overpay for title insurance because 

businesses are competing to drive up prices instead of driving them down, the points and 

fees definition provides needed pressure to reduce these costs for borrowers. Including 

title insurance costs in the points and fees definition where the lender has an affiliation 

with the company supplying the title insurance reasonably targets the transactions with 

the most potential for up-charging. 

3. Loan Level Price Adjustments are included in the points and fees 

definition. 

On the issue of Loan Level Price Adjustments (LLPAs), the CFPB's regulation 

determined to not create an exemption for these charges out of concern that it would 

disadvantage smaller lenders that held loans in portfolio. Fannie Mae and Freddie Mac 

use LLP As to price loans they determine to have a higher risk, and these LLP As result in 

a fixed fee for mortgages with specified characteristics.24 For example, Fannie Mae and 

22 Title Insurance: Actions Needed to Improve Oversight of the Title Insurance Industry and Better Protect 

Consumers, United States Government Accountability Office, GAO-07-401 (April 2007). 

23Id. 

24 Fannie Mae, Loan-Level Price Adjustment (LLPA) Matrix and Adverse Market Delivery Charge 

(AM DC) lnfonnation, (September 20,2012) (available at httrs:!!www.fanniemae.com/contentipricingillra13 
57 


81767.014

Freddie Mac have an LLPA of 0.75% (75 basis points) for mortgages to purchase a 

condominium where the down payment is less than 25%. In evaluating comments 

arguing that these charges should be excludcd from the points and fees definition, thc 

CFPB concluded that the way Fannie Mae and Freddie Mac use LLPAs "is better viewed 

as a fundamental component of how the pricing of a mortgage loan is determined rather 

than a third party charge.,,25 As a result, the CFPB found that "allowing creditors to 

exclude points charged to offset LLP As could create market imbalances between loan 

sold on the secondary market and loans held in portfolio.,,26 In other words, allowing this 

exception would give some loans but not others - a type of discount in how they price 

the riskiness of a loan. If the LLP A is, as is generally the case, paid for through a higher 

interest rate rather than in points and fees up-front, they are not counted under the CFPB's 

rules. 

III. Qualified Mortgage Defrnition and Future Mortgage Lending. 

Taken as a whole, the CFPB's rules for the Qualified Mortgage definition are a 

reasonable approach to implement the reforms in the Dodd-Frank Act. In reaching this 

assessment, CRL looks to three different factors: 1) whether QM is defined broadly, 2) 

whether the definition uses clear, bright line standards, and 3) whether it provides 

borrowers with the ability to raise a challenge when a lender failed to reasonably 

determine whether the borrower could afford the offered mortgage. 

A. Qualified Mortgage Definition is Broadly Defined. 

The CFPB has drafted a QM rule that will cover the vast majority of the current mortgage 

market. This will prevent a dual mortgage market from developing, beeause a broad 

range of tamilies capable of owning a home - including lower-income borrowers and 

borrowers of color - will be able to take advantage of mainstream Qualified Mortgages 

that are restricted from having risky product features instead of being pushed into more 

expensive loans with abusive features and high fees. 

The breadth ofthe CFPB's rule is evident when considering that the Bureau adopted four 

different ways that a loan can gain Qualified Mortgage status. Among these is the 

definition relying on whether a loan is eligible to be guaranteed or insured by Fannie 

matrix.pdf); Freddie Mac, Single-Family SellerlServicer Guide, Exhibit 19: Postsettlement Delivery Fees 

(September 14,2012) (available at http://www.freddiemac.com/singlefamily/pdf/exI9.pdf). 

25 January 20 13 Final Qualified Mortgage Rule, at 6430. 

26 !d. 

14 
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81767.015

Mae, Freddie Mac or a government agency program. This definition incorporates the 

compensating factors used by the GSEs or government agencies in order to lend to 

borrowers with debt-to-income ratios above 43%. The CFPB designed the rule in this 

way to "help ensure access to responsible, affordable credit is available for consumers 

with debt-to-income ratios above 43 percent and facilitate compliance by creditors by 

promoting the use of widely recognized, federally-related underwriting standards.,,27 

Since loans guaranteed by Fannie Mae and Freddie Mac and insured by FHA and other 

government programs constitute approximately 90% of the current mortgage market, this 

definition on its own will cover the overwhelming majority of future mortgage lending. 

In addition to covering current mortgage lending, the CFPB's rule also has the potential 

to bring additional private capital into the market. As described in the CFPB's 

rulemaking, "[t]he temporary exception has been carefully structured to cover loans that 

are eligible to be purchased, guaranteed, or insured by the GSEs (while in 

conservatorship) or Federal agencies regardless of whether the loans are actually so 

purchased, guaranteed, or insured; this will leave room for private investors to return to 

the market and secure the same legal protection as the GSEs and Federal agencies."z8 For 

example, if a private investor securitizes loans according to the standards in Desktop 

Underwriter - which adheres to Fannie Mae's underwriting guidelines - then these loans 

can obtain QM status even though they are not sold to the GSEs. 

Lastly, the definition focused on smaller creditors holding loans in portfolio also provides 

flexibility for these lenders to exceed the 43% debt-to-income ratio cutoff that is the 

CFPB's general definition. In its rulemaking, the CFPB addressed the aligned incentives 

that small creditors holding loans in portfolio generally have to make affordable loans to 

borrowers: 

Small creditors also have particularly strong incentives to make careful assessments 

of a consumer's ability to repay because small creditors bear the risk of default 

associated with loans held in portfolio and because each loan represents a 

proportionally greater risk to a small creditor than to a larger one. In addition, small 

creditors operating in limited geographical areas may face significant risk of harm to 

their reputations within their communities if they make loans that consumers cannot 

repay.z9 

As a result of these aligned incentives and concerns that smaller lenders might restrict 

their lending if required to comply only with the general definition that has a 43% debt27 Jd., at 6533. 

28 Jd., at 6534. 

29 May 2013 Final Qualified Mortgage Rule, at 35485. 

15 
59 


81767.016

to-income ratio threshold, the CFPB concluded that creating a separate definition tailored 

to these lenders was appropriate. The CFPB concluded that "[b ]ecause there are 

thousands of small creditors as defined by § 1026.43(e)(5) in the United States, the 

Bureau believes that § 1026.43(e)(5) is likely to preserve access to affordable, 

responsible mortgage credit for hundreds of thousands of consumers annually.,,3o These 

definitions, as a whole, demonstrate that the CFPB's rules not only cover the vast 

majority of the current market, but will also provide flexibility for mortgage lending 

moving forward. 

Two additional points bear mentioning in terms of the breadth of the CFPB's definition. 

First, it's important to put CoreLogic's analysis of the Qualified Mortgage rule conducted 

earlier this year in proper context, because CoreLogic's conclusions are often taken out of 

context and faulty assumptions in their methodology are often not mentioned. 

CoreLogic's analysis found that when factoring in the definition relying on eligibility for 

guarantee or insurance by Fannie Mae, Freddie Mac, and the government agencies, "the 

near- and intermediate-term impacts of the rule are very smalL,,31 When assessing the 

general definition that uses a 43% debt-to-income ratio cutoff: the CoreLogic analysis 

claims that 52% of 20 1 0 originations would be covered by this definition. However, 

CoreLogic made several unnecessary assumptions resulting in an overly conservative 

analysis. First, it excludes all loans with credit scores below 640, although the Qualified 

Mortgage definition does not impose any credit score requirements. Second, it assumes 

that borrowers who received loan products with prohibited features would not be able to 

access QM-eligible loan products in the future - in fact, borrowers will be able to get 

safer mortgages instead. Unfortunately, this 52% figure is often taken out of context (i.e., 

the eligible for guarantee or insurance prong of the Qualified Mortgage definition is 

ignored) and the weaknesses in their assumptions are not mentioned. 

Second, while there is limited data on the amount of points and fees charged to borrowers 

in recent years, it is clear that the vast majority of recent mortgages would not exceed the 

points and fees thresholds required under the QM definition. As described earlier, the 

statutory points and fees definition excludes a number of origination costs from being 

counted in points and fees, such as upfront mortgage insurance premiums, up to two bona 

fide discount points, third party closing costs, and commissions paid to individual loan 

officers employed by mortgage broker and retail companies. 

Of the remaining charges eligible to be included in the points and fees definition, several 

sources confirm that the origination charges paid directly to lenders constitute a small 

30 Id. 

31 Sam Khater, The Mortgage Market Impact o/Qualified Mortgage Definition, CoreLogic, The 

MarketPulse. Volume 2, Issue 2 (February 12, 2013)(available at http://www.corelogic.com/downloadabledocs/MarketPulse 2013-February.pdD (emphasis added). 

16 
60 


81767.017

percentage of overall loan balances. Freddie Mac provides weekly reports on the average 

fees charged to borrowers, and the figure for the week of June 13,2013 was 0.7%, well 

under the 3% limit.32 This figure is confirmed by an industry comment filed with the 

CFPB, which also finds that the origination charges paid by borrowers (up-front points 

and fees and more than two discount points) were - for all loan sizes - less than 1%.33 

This leaves considerable room in the points and fees calculation for other possible fees, 

such as mortgage broker compensation and settlement services paid to a company 

affiliated with the lender. The industry comment mentioned above determines that if all 

settlement services are provided by companies affiliated with the lender for every loan in 

the sample, then 5.6% of all loans would exceed the points and fees limit. However, not 

all lenders use affiliated settlement service providers; the Mortgage Bankers Association 

reports that there is 26% market share for affiliated settlement service providcrs.34 As a 

result, it's appropriate to discount the comment's estimates by 74%, since loan level data 

on this sample is not available. This would result in 1.46% of all loans in the study 

sample exceeding the points and fees threshold when taking affiliate service providers 

into account, meaning that practically 99% of all loans in this sample would meet the QM 

points and fees limits. And, even this 99% figure is understated, because any of thcse 

remaining loans could meet the points and fees limit by using settlement service 

providers that are not affiliated with the lender, as most loans do, or by financing some of 

the fees into the interest rate. 

B. The CFPB Used Clear, Bright Lines in the Qualified Mortgage Definition. 

In addition to providing a broad QM definition, the CFPB also used clear, bright lines in 

establishing all four of the QM definitions. For example, the first prong ofCFPB's 

definition for a QM loan includes a back-end debt-to-income ratio cut-off of 43% as one 

element of the definition. In establishing this thrcshold, the CFPB notcd that that using a 

specific debt-to-income ratio cutoff"provides a well-established and well-understood 

rule that will provide certainty for creditors and help to minimize the potential for 

disputes and costly litigation over whether a mortgage is a qualified mortgage.,,35 The 

CFPB also pointed to the fact that "[a] specific debt-to-income ratio threshold also 

providcs additional certainty to assignees and investors in the secondary market, which 

32 Freddie Mac, Weekly Primary Mortgage Market Survey (PMMS) (available at 

http://www.freddiemac.com/pmms/). 

33 AB Schnare Associates LLC, Ex Parte Comment on CFPB-2013-002, at 5 (April 5, 2013) (available at 

http://www .regu lations. gov /#! documentDetail:D~CFPB-20 13 -0002-0933.). 

34 Mortgage Bankers Association, Ensuring Housing Recovery: The Challenge of the Ability to Repay and 

Qualified Mortgage Rule to Credit Availability and Affordability for Homeowners, at IS (February 28, 

2012) (available at http://www.fdic.gov/regulations/reformlMBA2-2S-12.pd!). 

35 January 2013 Final Qualified Mortgage Rule, at 6505-06. 

17 
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81767.018

should help reduce possible concerns regarding legal risk and potentially promote credit 

availability.,,36 Additionally, the CFPB's definition relying on whether the loan is eligible 

for purchase or insurance by well-established programs also results in clear, bright line 

standards. 

The CFPB's final rules provide substantial clarity on these definitions, which will enable 

both lenders and borrowers to know upfront when a mortgage is originated whether it has 

QM status. Furthermore, the CFPB is also working to refine and clarify these definitions 

through their implementation process. This includes publishing further guidance to 

clarify issues such as how requested put-backs on Fannie Mae, Freddie Mac and 

government agency mortgages will impact Qualified Mortgage status. 

c. Qualified Mortgage Definition Protects Borrowers with the Riskiest 

Loans. 

Leading up to the CFPB's final rule in January of this year, there was considerable 

discussion from various stakeholders on whether QM status should provide lenders with a 

safe harbor or a rebuttable presumption of compliance with their obligation to reasonably 

determine whcther a borrower can afford to repay a mortgage. CRL and other consumer 

groups supported a QM rule that provided a rebuttable presumption of compliance so all 

borrowers would have the ability to challenge whether a lender had appropriately fulfilled 

its Ability to Repay obligations. Lenders generally supported a rule that provided all QM 

loans with a safe harbor of compliance, meaning that no borrower receiving a QM loan 

could raise a legal challenge. 

The CFPB's final rule establishes a two-tier system where the vast majority ofloans will 

have a safe harbor and others will have a rebuttable presumption, and the threshold 

between the two depends on the loan's annual percentage rate (APR) relative to the 

average prime offer rate (APOR). A loan's APR is a figure that represents the overall cost 

of the loan, including both the interest rate as well as some specified fees. The APOR is a 

calculation that reflects the APR for a prime mortgage, and these figures are released on a 

weekly basis. 

While this provision gives the vast majority of loans a safe harbor of compliance, the 

CFPB's rules do allow borrowers to hold lenders accountable on the riskiest types of 

mortgages. For the general definition using a 43% debt-to-income ratio threshold and the 

definition based on eligibility for purchase or insurance by Fannie Mae, Freddie Mac and 

government agencies, the dividing line between a safe harbor and a rebuttable 

36 ld., at 6527. 

18 
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81767.019

presumption is 1.5% above APOR for a first-lien mortgage and 3.5% above APOR for a 

subordinate lien mortgage. Those loans above the thresholds have a rebuttable 

presumption of compliance whereas those loans below the thresholds have a safe harbor 

of compliance. The CFPB adjusted these figures upward for loans obtaining QM status 

under both the definition for small creditors holding loans in portfolio and for the 

definition for balloon loans, resulting in both first-lien and subordinate lien mortgages 

having a safe harbor up to 3.5% above APOR. 

As stated at the outset, the CPFB's Qualified Mortgage definition has hit the right 

balance of protecting consumers and facilitating compliance with these rules. The broad 

definition using clear, bright lines in addition to providing borrowers in the riskiest 

mortgages with the opportunity to raise a legal challenge when necessary - will create 

incentives to avoid future subprime lending abuses and unnecessary foreclosures. At the 

same time, the four QM standards will also ensure that there is access to responsible 

credit and that lenders are able to comply with these standards. 

Thank you for the opportunity to testify today, and I look forward to answering your 

questions. 

19 
63 


81767.020

June 18, 2013 

Testimony of 

James Gardill 

On behalf of the 

American Bankers Association 

before the 

Financial Institutions Subcommittee 

of the 

Financial Services Committee 

United States House of Representatives 

~I American 

Bankers 

Association 
64 


81767.021

June 18, 2013 

James Gardill 

On behalf ~f the 

American Bankers Association 

before the 

Financial Institutions Subcommittee 

of the 

Financial Services Committee 

United States House of Representatives 

June 18,2013 

Chairman Capito, Ranking Member Meeks, my name is James Gardill, Chairman of the Board 

ofWesBanco. I appreciate the opportunity to be here to represent the American Bankers 

Association (ABA) to present the views of the ABA regarding the new Ability to Repay and 

Qualified Mortgage rules. ABA represents banks of all sizes and charters and is the voice for the 

nation's $14 trillion banking industry and its two million employees. 

Before I discuss the impact of the new rules on mortgage markets, let me describe a bit about 

my bank. We arc a $6.1 billion institution in Wheeling, West Virginia. We have 118 offices in West 

Virginia, Ohio and Pennsylvania. We are active mortgage lenders and currently hold $1.3 billion in 

outstanding home mortgage loans. 

The mortgage market comprises a substantial portion of the GDP in our economy and touches 

the lives of neatly every American household. The new Ability to Repay (ATR) and Qualified 

Mortgage (QM) rule represent a fundamental change in the housing-finance market. It is critical that 

these rules make sense and do not end up hurting creditworthy Americans that want to own a home. 

Unfortunately, the Ability to Repay/QM rule, however well intentioned, will end up restricting 

mortgage credit making it more difficult to serve a diverse and creditworthy population. Under the 

ATR rule, underwriters must consider a borrower's ability to repay a mortgage loan, despite having 

no binding guidance on how to determine ability to repay. Qualified Mortgages arc designed to 

offer a "safe harbor" within which loans are assumed to meet the ATR requirement. However, the 

definition of QM-which covers only a segment of loan products and underwriting standards and 

serves only a segment of well qualified and relatively easy to document borrowers-could 

undermine the housing recovery and threaten the redevelopment of a sound mortgage market. 

.~ I American Bankers Association 
65 


81767.022

June 18. 2013 

The problem is three-fold: First, the general non-QM segment is very unclear and compliance 

is uncertain. More pointedly, the heightened penalties and liabilities applicable in the Ability to 

Repay rule are tremendously burdensome. Given the legal and reputational risks imposed by this 

regulation, banks arc not likcly to venture outside the bounds of the QM safe harbors. 

Second, the new rules create a narrowly defined box that consumers must fit in to qualify for a 

QM-covered loan. Since banks will make few, if any, loans that do not meet QM standards, many 

American families across the country that arc creditworthy but do not fit inside the QM "box," will 

be denied access to crcdit. In practice, this also likely mcans thaI less amuent communities may not 

be given the support they need to thrive. These mles may leave many communities largely 

underserved in the mortgage space. 

In particular, I am concerned that our bank will be unable to continue a charitable plan we 

administer designed to promote homeownership among families that would othcrwise not be able to 

own a home. Loans made under our Laughlin plan, which I will discuss in greater detail below, 

would likely not qualify for QM status, and at least some of the loans made under the plan will not 

meet A TR requirements, meaning we would not be able to make them at all. 

Third, even if banks choose to make loans only inside the QM framework, thcy will still face a 

number of risks and uncertainties that create disinccntives to lend. Some loans that fit within the 

QM framework are only partially covercd by the proteetions offered by QM. These loans, 

specifically higher interest rate loans, still carry both higher credit risk and now, under QM's 

rcbuttable presumption, liability risk, and as a result, banks will be hesitant to offer them. This 

means that banks will be limited to offering loans to only the best qualified borrowers. The end 

result of this will bc limiting credit to credit-challenged communities or demographics. Thus, in 

practice, thc QM box ironieally may conflict with fair lending rules and goals ofthe Community 

Reinvestment Act. 

The rulemaking has left banks little time to eomply with the QM regulations despite the widereaching market implications and tremendous amount of work banks must undertake to comply with 

these rules, Currently, these rules are scheduled to go into effect in January of2014. Between now 

and then hanks must fully review all of the final mles; implement new systems, proeesses and 

forms; train staff; and test these ehanges for quality assurance before bringing them online. We 

must get this right, for the sake of our customers, our banks' reputations, and to promote the nascent 

recovery of the housing market. For some institutions, stopping any mortgage lending is the answer 

~! American Bankers Association 
66 


81767.023

June 18, 2013 

to this unreasonable deadline because the consequences arc too great if the implementation is not 

done correctly. 

These rules need to be revised so that they help the economy and at the same time ensure that 

the largest number of credit worthy borrowers are able to access safe. quality loan products. In order 

to do this, we need to extend the existing deadlines as well as address outstanding issues to ensure 

that all creditworthy borrowers have access to credit: 

In my statement today. I would like to make three key points. 

>- The QM rule will limit mortgage lending because the QM guidelines narrow lending 

parameters and impose high risks on those lending outside of these parameters; 

>- Even within the QM framework. the ability to lend to a diverse group of consumers may be 

difficult and may lead to fair lending and Community Reinvestment Act concerns; and 

>- Because of the wide reaching implications for the mortgage business and credit availability, 

the implementation date should be delayed to assure that banks have the time to fully 

comply with the rule's requirements. 

I. The QM rule will limit mortgage lending because the QM guidelines narrow lending 

pardmeters and impose high risks on those lending outside or these panmeters 

The Dodd/Frank Act requires that lenders show that a borrower has an ability to repay a loan, 

which is a practice that all good lenders, and certainly any that intend to remain in business for the 

long-term have always followed. Unlike many prior federal actions in this area, the new ATR 

requirement and the QM provisions do not merely impact disclosures or timing. The rules create a 

fundamentally new paradigm for residential mortgage lending by creating a narrow framework, 

outside which there are significantly higher risks to lenders. 

ABA believes that the Ability to Repay standard in Dodd/Frank has the very commendable 

goal of driving out bad products and bad lenders from the marketplace. But the ATRJQM rule 

achieves that goal at a significant cost. It takes away some necessary flexibility for good lenders to 

make some loans because they simply will not meet Ability to Repay standards. The Consumer 

Financial Protection Bureau (CFPB) has recognized this, and tried to make accommodations for at 

least some ofthe instances where Ability to Repay can stifle good lending. On May 29, 2013 the 

CFPB exempted certain non-profit lenders serving specific populations from Ability to Repay 

~ I American Bankers AssDciation 
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June 18, 2013 

requirements. This was a step in the right direction. but much more is needed. Take for example a 

loan made by a community banker to a customer, who may not meet traditional underwriting 

requirements, but who is known and trusted by the banker from years of personal interaction. Under 

the Ability to Repay standard, that loan most likely will not be made. The regulatory, litigation and 

reputational risk will simply be too great. While it is true that loans like that are the exception and 

not the rule, they do matter, especially to the borrower in need of that type of loan. 

In crafting the QM, the CFPB did manage to encompass the majority ofloans being made 

today. A loan that is eligible for sale to Fannie Mae or Freddie Mac is a QM loan. With further 

refinements recently made by CFPB, many balloon loans made by an institution of $2 billion in 

assets or less will be considered QM, so long as that institution holds the loan in portfolio and does 

not make more than 500 mortgage loans per year. But not all loans will be QM loans. A loan 

exceeding Fannie and Freddie conforming loan limits, even if it meets all other GSE eligibility 

standards, is not a QM loan. Many loans made by a portfolio lender with more than $2 billion in 

assets, and otherwise equivalent to a QM loan made by a lender with less than $2 billion in assets, 

will not be considered a QM loan unless the borrower's debt-to-income ratio is at 43 percent or 

lower. Similarly, a loan made by a portfolio lender under $2 billion in assets who made 480 

mortgage loans in the last year may qualify as a QM loan, but the same loan, made by a lender with 

$1 billion in assets but who made 502 loans in the last year, would not qualify as a QM loan. As you 

can see, these arc arbitrary standards and their complexity is likely to lead to some very strange 

outcomes. 

The increased risks associated with making loans that fall outside of the QM framework mean 

that many banks, including mine, will not lend outside ofQM and many borrowers will be unable to 

find lenders wjlJing to make them loans. The QM rule establishes strict guidelines under which 

mortgage loans are granted protection from certain lawsuits. Banks that choose to lend outside of 

this framework face significantly increased risks oflawsuits related to ATR requirements. As a 

result of these increased risks, these loans are much less likely to be made, leaving many potential 

borrowers without access to credit. In the event that these non-QM loans are made, they will be far 

costlier, burdening the families least able to bear the expense. The limits on credit availability will 

be felt keenly by those borrowers who arc unable to obtain a loan, but may also be felt by the 

broader economy. Cutting credit to this market now, just as it is showing signs of a recovery, could 

prove a sharp blow to an already struggling market. A further delay in the housing recovery would 

''& I f\'merican Bankers Association 
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June 18, 2013 

be felt by all Americans, both through the value of their homes and the impact of housing on the 

broader economy. 

Risks Posed to Lenden; from ATR and QM 

The ATR Requirement prohibits lenders from making a covered residential mortgage loan 

unless the lender has made a good faith detelmination that the consumer will have a reasonable 

ability to pay the loan according to its terms. Lenders must take the following eight faclors inlo 

consideration when assessing a borrower's A TR: 

-Current or reasonably expected income or assets; 

'Employment status, if creditor is relying on employment for repayment; 

·Monthly payment on covered loan; 

'Monthly payment on a simultaneous loan secured by the same property; 

'Monthly payment for mortgage-related obligations; 

·Current debt obligations, alimony and child support; 

·Monthly debt-to-income ratio CDTl") or residual income; 

·Credit history. 

Although these eight factors afford much latitude, the concern is that every technical detail of 

the underwriting decision will have to be documented and demonstrably verified. As a consequence 

orthis ATR Requirement, foreclosing on a delinquent borrower will likely become significantly 

more difficult because counsel for many delinquent borrowers will attempt to put the lender on trial, 

by arguing that the borrower is delinquent on the loan because the lender made a loan that it should 

have known the borrower would not be able to repay. A borrower who is able to mount a strong 

challenge in this regard effectively may be able to prevent a foreclosure or negotiate more favorable 

terms on a modified loan. While that is appropriate if in tact a lender did not appropriately consider 

a borrower's ability to repay, it should not be the outcome if ability to repay was properly 

determined, but the lender cannot, years later, prove that they met every element of the guidelines. 

Whether an A TR determination is reasonable and in good faith will depend not only on the 

creditor's underwriting standards, but on the facts and circumstances of a particular loan and how 

the creditor's standards were applied to those facts and circumstances. The authorization of the use 

of oral evidence and post-closing factors in judging such decisions opens lenders to new challenges 

thaI cannot be mitigated. This provides a borrower the opportunity to argue that a creditor's 

underwriting standards were too lax and that the creditor failed to appropriately apply its standards 

~ I American Bankers Association 6 
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June 18. 2013 

to the specific circumstances of the borrower. It also puts a burden on the lender to demonstrate the 

appropriateness of its policies and the strength of its controls. 

Some specific risks associated with making loans outside of QM are as follows: 

Litigation Risk 

There are many and varied ways to demonstrate an ability to repay a loan. There are 

also many and varied ways to challenge a showing of ability to repay. The statute 

recognizes that, and appropriately did not try to codify all underwriting decisions. But that 

also means that challenges based on Ability to Repay grounds will be litigated, and there is 

much uncertainty associated with potential litigation. 

The CFPB did not adopt any binding regulations regarding the adequacy of an A TR 

determination. According to the regulations, the underwriting standards must be 

"reasonable." Given the rule's abstract guidance, this issue will ultimately be detennined in 

court proceedings relating to individual loans. In those cases, the court will have to 

determine the nature and extent of discovery that it will permit, and then make individual 

substantive decisions as to whether the A TR requirement was satisfied in a particular case. 

Over time, it can be expected that courts will develop standards for both of these issues to 

which lenders will have to adjust. But in the near term, lenders will face a significant level 

of uncertainty when they are presented with borrower A TR claims. They are essentially on 

their own when it comes to implementing the rules and adopting policies and controls. That 

creates a significant responsibility on banks, their managements and boards of directors. 

Statutory Liability for an ATR Requirement Violation 

A lender that is found to have not complied with the A TR requirement is subject to 

general Truth in Lending Act damages and special ATR statutory damages that may be up 

to the sum of all finance charges and fees paid by the consumer. Furthermore, when a 

lender or an assignee initiates a foreclosure action, a consumer may assert an A TR violation 

as a basis for recoupment or seton: Thus, from a practical perspective, an undeniably 

delinquent borrower may be able to prevent a foreclosure. Borrower's counsel, in many 

instances, will use the prospect of an A TR challenge to seek to arrive at a resolution with a 

creditor that leaves the borrower in possession of the property on new loan terms. In short, 

in light of the potential for a proven violation, it is possible that the lender may find it more 

'&J I American Bankers Association 
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June 18. 2013 

advantageous to actually forgive a significant portion of the remaining indebtedness~ 

thereby raising issues as to the value of a portfolio of loans with the same characteristics. 

Safety and Soundness Concerns 

A bank is subject to enforcement action if it violates laws or regulations or engages in 

unsafe and unsound practices. The question therefore arises-will non-QM loans be 

deemed "safe and sound"? Will such loans carry higher risk weights or be weighed as 

"inferior" to QM loans? In addition, banks that make non-QM loans may be subject to 

claims that certain loans do not meet the ATR requirement and, thus, violate the Truth in 

Lending Act and the CFPB's ATR Rules. These claims may be made by borrowers as well 

as regulators. Widespread claims of this type could potentially be viewed as constituting an 

unsafe and unsound practice. Finally, to the extent that banks lend beyond the limits of a 

QM, any weakness in the portfolio of the bank may be attributed to unsafe and unsound 

lending practices. These and other issues related to the ATR Rules could form the basis for 

an enforcement action against a bank. 

II. Even within the QM framework, many concerns remain that could limit credit 

availability to a diverse group of consumers 

Even banks making loans exclusivcly within the QM framework face a number of risks and 

remaining questions that could limit the availability of credit to a diverse group of consumers. 

Banks cannot simply eliminate the risk introduced by the ATR requirement by exclusivcly making 

QM loans. Some loans made within the QM framework, specifically at higher interest rates, arc 

only partially covered by QM's protections 

Potentially, it also means that my bank will face risks associated with NOT lending outside of 

the QM, including diffieultics meeting our Community Reinvestment Aet obligations, and 

potentially even fair housing and fair lending claims based upon "disparate impact" analysis. It is 

quite the "Catch-22" when a bank attempts to limit its regulatory, litigation and reputational risk by 

staying within government prescribed rules, only to be subject to possible regulatory, litigation and 

reputational risks for NOT straying outside those rules. 

A bank's compliance with the fair lending laws is an important concern. Since QM loans 

naturally will ereate tighter underwriting standards that may narrow the range of qualified 

'&1 American Bankers Association 
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June 18. 2013 

borrowers, how a bank approaches compliance with the ATR Rules could have an adverse impact 

on the bank's ability (0 respond to a governmental fair lending inquiry, or to a private party claim 

under the fair lending laws, Le., the Equal Credit Opportunity Act and the Fair Housing Act. 

Limiting loans to QM loans will also have a large impact on the communities we serve, 

limiting credit to families that may need it the most. If banks are only making loans within the QM 

structure, many lower-income borrowers may be unable to get thc credit they need to purchase a 

home. At my bank in particular, we havc a charitable program, the Laughlin Plan, designed (0 

encourage the heads of large families to own their own homes. This is a charitable program created 

under the Will of George A. Laughlin, and administercd by the bank, which provides financial aid 

to the heads offamilies residing in Ohio County, West Virginia. Under the terms ofMr. Laughlin's 

Will, applicants must be "sober, industrious, and have good general character." This aid is made 

available only to those who, without the aid of such assistance, would find it difficult, if not 

impossible, to acquire homes on their own. The Plan provides interest free loans and insurance to 

these families. The Plan has been in place since 1951 and has helped hundreds offamilie, achieve 

home ownership in Ohio County, West Virginia. We currently have approximately 100 active loans 

under this program, providing homes to families who otherwise would not be able to afford one. We 

are concerned that, under the new rules, loans like these will not qualify for QM status, and as a 

result it will be very difficult to continue this program that has given so much back to the 

community. Of even greater concern is the fact that some borrowers served by this program would 

not meet the Ability to Repay standards and thus could not be helped by this, or any other bank 

program going forward. 

III. Given the complexity of the risks and the new systems associated with QM, 

implementation deadlines must be extended. 

Given the complete reshaping of the relationship between mortgage borrowers and lenders 

compelled by these new rules, there is much work to be done before banks can be ready to 

implement them. These ATRlQM rules do not come alone-there are currently 6 rules that are 

being finalized simultaneously, and these new rules are thousands ofpagcs in length and establish a 

broad new regulatory framework for mortgage lending and servicing activities. These rules affect 

the entire mortgage-lending industry. including lenders, service providers, appraisers, escrow 

agents, and virtually anyone with a relationship to the mortgage lending process. The new rules will 

.~ \ American Bankers Association 
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June 1B. 2013 

significantly reshape the housing-finance market, which comprises a substantial proportion of our 

country's gross domestic product and touches the lives of nearly every American household. If we 

do not get this right it will have a negative impact on banks, our customers, and the nascent 

recovery of the housing market. 

Our most urgent concern right now is ensuring we have sufficient time to fully review an ofthc 

final rules; implement new systems, processes and forms; train staff and test these changes for 

quality assurance before bringing them online. Although most of the changes mandated by the new 

rules call for a 12-month implementation period, the actual amount of time available to financial 

institutions to comply is in fact much shorter. In order to manage year-end regulatory and tax 

reporting requirements, many institutions have an information technology '''freeze'' between 

November and early January. Because it is not possible to test or revise the new mortgage 

compliance systems during the lock-down period, the compliance deadline will effectively be 

November, 2013. 

Regulatory implementation is further complicated by the fact that many banks commonly rely 

on vendors for software updates and system upgrades. Many banks report their vendors are not yet 

ready to provide the necessary updates to the individual institutions and some vendors may not do 

so until late summer or early fall. 

A vendor recently told its community bank client that it will not have the majority of its 

updates out until November 22nd. This means that the vendor's customers will have 7 weeks to 

customize, update, and train - with the Thanksgiving, Christmas, and New Year's holidays 

sandwiched in between, along with the year-end freezes for purposes of regulatory reporting. 

In addition to these challenges, financial institutions face the difficult prospect of implementing 

the new mortgage rules with important provisions of the Ability to Repay/Qualified Mortgage rule 

still outstanding and many significant questions yet unanswered. Since the release of the final 

mortgage rules, ABA and a group of other trade associations have provided the CFPB with detailed 

requests for guidance on specific provisions of the rules which the industry finds unclear or 

confusing. These requests are not a complete Jist, and it is very likely other issues will emerge as 

financial institutions, and their third-party vendors, progress through their implementation plans. 

However, clarity on these issues is a necessary prerequisite for our members to fully implement the 

changes mandated by the new rules. 

~ i American Bankers Association 10 
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June 18. 2013 

CFPB has, as recently as May 29th issued additional revisions to the mortgage rules and 

accompanying staff commentary, and other CFPB proposals are pending, We anticipate these 

clarifications will provide important information to help our members make strategic decisions 

regarding their business models and with regulatory implementation. Bankers are very concerned 

about the prospect of making such decisions while the mortgage rules and commentary are in the 

process of being revised and each revision issued requires further complianee cfforts by our 

members, their vendors and others, all of which takes additional time. 

For the reasons outlined above, we ask Congress to urge the CFPB for quick action on 

providing the industry with guidance and for more time than the allotted 12-month period to comply 

with the new mortgage rules. The requirements mandated by the new rules are overwhelming and 

the short implementation period, along with the lingering uncertainty surrounding the final rules, 

poses additional compliance challenges. While we welcome the CFPB's recent issuance of the 

Small Entity Compliance Guide for the Ability to Repay and Qualified Mortgage Rule, as well as 

recent final clarifying rules on points and rees and halloon loans, these do not obviate the need for a 

longer implementation period. The industry needs adequate time to review and implement the 

underlying final mortgage rules and their continuing modifications in order to be in full compliance. 

We have suggested in the past, and we repeat this request now, for the CFPB to use its 

exemption authority to extend implementation of the mortgage rules by 12 months in order to 

facilitate an orderly compliance process. Without more time to comply, we are concerned certain 

lenders may choosc to mitigate thc resulting operational risks by reducing, or even eliminating, their 

mortgage lending activities in the short-term. This will be devastating to the industry and reduce 

mortgage loan options for consumers at a time when all agree there should be an increase in 

responsible mortgage lending. Lacking that action by CFPB, we urge Congress to statutorily extend 

the implementation date for the mortgage rules by one year, to January of2015. 

Conclusion 

Despite the good intentions behind the QM rules, as currently designed, these rules will restrict, 

rather than facilitate, credit to mortgage borrowers, and most particularly, borrowers on the margins. 

The A TR and QM rules represent a fundamental change in housing finance. This is an important 

market, representing a substantial portion of GOP. As such, it is critical that we get these rules right. 

Although the QM rule provides a necessary "safe harbor," its relatively narrow scope will reduce 

availability of housing credit. The risks associated with lending outside of QM standards mean few 

.& I American Bankers Association 11 
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June 18. 2013 

loans will be made outside of the QM designation. The result will be limited credit availability to 

many households across the country. Even ifbanks make loans exclusively within the QM 

framework, they face a number of risks that could discourage them from making loans. Moreover, 

the short timeline to comply with these rules will leave many banks scrambling to meet the new 

regulations, and may reduce the credit availability further unless timelincs are extended. 

'&J I American Bankers Association 12 
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fl, 

CUNA 

("'ditU~lMNltiQnillhS~llilIQn : 601 Pennsvlvania Ave., NW ! South Building, Suit .. 600 r Washingfon, DC 20004·2601 ! F'tIoNE: 202·638·5777 I FAX: 202·638·7734 

cuna.org 

TESTIMONY 

OF 

MR. JERRY REED 

CHIEF LENDING OFFICER 

ALASKA USA FEDERAL CREDIT UNION 

ON BEHALF OF THE 

CREDIT UNION NATIONAL ASSOCIATION 

BEFORE THE 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT 

COMMITTEE ON FINANCIAL SERVICES 

UNITED STATES HOUSE OF REPRESENTATIVES 

HEARING 

ON 

"EXAMINING HOW THE DODD-FRANK ACT HAMPERS HOMEOWNERSHIP" 

JUNE 18,2013 
76 


81767.033

Testimony of 

Mr.lerry Reed 

Chief Lending Officer 

Alaska USA Federal Credit Union 

On behalf of the 

Credit Union National Association 

Before the 

Subcommittee on Financial Institutions and Consumer Credit 

Committee on Financial Services 

United States House of Representatives 

Hearing on 

"Examining How the Dodd-Frank Act Hampers Homeownership" 

June 18,2013 

Chainnan Capito, Ranking Member Meeks, Members of the Subcommittee: 

Thank you very much for the opportunity to testify at today's hearing. My name is Jerry 

Reed, and I am the Chief Lending Officer of Alaska USA Federal Credit Union, a federally 

charted credit union, headquartered in Anchorage, Alaska, serving 471,000 members. I am 

testifying today on behalf of the Credit Union National Association (CUNA), the largest credit 

union advocacy organization in the United States, representing America's state and federally 

chartered credit unions and their 96 million members. 

Earlier this year, the Consumer Financial Protection Bureau (the Bureau) issued a final 

"Ability to Repay" rule to implement provisions of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act regarding the borrower's ability to repay a residential mortgage loan 

and establishing requirements for a qualified mortgage (QM) under the Truth in Lending Act, 

which is implemented by Regulation Z. On May 29, 2013, the Bureau finalized additional 

amendments to the rule. J The amended rule extends the qualified mortgage definition to loans 

made by and held in the portfolio of a credit union that originates 500 or fewer first-lien loans 

per year and has less than $2 billion in total assets, even if the consumer's debt to income ratio 

exceeds 43%. 

1 http:Ufiles.consumerfinance.gov!f/20130S dpb final-rule atr-concurrent-final-rule.pd! 

2 
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81767.034

These amendments made needed changes to the QM rule and were well received by 

credit unions. At the outset, America's credit unions want to commend the Bureau for listening 

to the concerns of credit unions, and for incorporating many of our concerns into the new rule. 

The Bureau has always had an open door policy and encouraged credit unions to voice their 

concerns, for which CUNA is grateful. Nevertheless, credit unions continue to have serious 

apprehensions about how the QM rule will be implemented and believe that it could have the 

unintended effect of reducing credit union members' access to credit. 

While we appreciate the fact that the Bureau has provided a modest exemption for small 

volume originators, we question the need to apply this rule to credit unions in the first place, and 

urge the Bureau to consider exempting credit unions from the rule entirely. Credit unions were 

created to promote thrift and provide access to credit for provident purposes to their members. 

The credit union structure and historical performance of credit union mortgage loan portfolios 

strongly support a full credit union excmption from the QM rule. As not-for-profit financial 

cooperatives, credit unions are owned by the members that they serve. This fundamental 

difference between the for-profit and not-for-profit sector of the financial services industry 

provides a significantly different incentive structure for those managing the institutions. In 

addition, credit unions are primarily portfolio lenders, typically selling less than a third of their 

new originations. The fact that most of the loans they make will be held in their own portfolios 

is further incentive for them to be particularly attentive to the applicant's potential ability to 

repay. 

The value of this difference is clearly seen in the credit unions' historical mortgage 

lending performance. Prior to the Great Recession, annual net charge-off rates on residential 

mortgage loans at both banks and credit unions were negligible, less than 0.1 %. However, as the 

recession took hold, losses mounted. At credit unions, the highest annual loss rate on residential 

mortgages was 0.4%. At commercial banks, the similarly calculated loss rate exceeded I % of 

loans for three years, reaching as high as 1.58% in 2009.2 

Simply put: credit unions have every incentive to evaluate a member's ability to repay 

because their members are also the owners. It is not in the interests of a credit union or its other 

2 Based on FDIC and NCUA data. 

3 
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81767.035

members to lend money to a member likely to default. As a result, credit unions employ strong 

underwriting standards, consistent with the spirit of the QM rule. Credit unions also have a 

history of tailoring lending products to meet the needs and demands of their members. Credit 

unions have proven they can provide credit on fair terms to borrowers who cannot meet QM 

standards, but are good credit risks nevertheless. Congress and the regulators should encourage 

financial institutions to offer loan products focused more on the individual. Unfortunately, 

depending upon how the QM rule is interpreted by the prudential regulators and how it is utilized 

within the marketplace, the QM rule may stop this from happening. The unfortunate result will 

be that some members who would otherwise have qualified for a mortgage from their credit 

union may not receive loans. 

Credit unions worry that the QM rule will make it all but impossible for credit unions to 

write non-QM loans because the standard, designed to be an instrument of consumer protection, 

may serve as an instrument of prudential regulation, effectively setting a bureaucratic standard 

for loan quality. Further, we have concerns that there may not be a viable secondary market into 

which credit unions can sell non-QM loans. If the prudential regulator will not permit credit 

unions to hold non-QM loans and the secondary market will not accept them, credit unions will 

not be able to write them. To the extent that happens, credit unions will not be able to meet the 

mortgage lending needs of a sizeable segment of their membership. In addition to these 

concerns, we also have specific views and concerns regarding the 43% debt-to-income ratio 

requirement, the 3% limitation on points and fees, the definition of rural and underserved area, 

and the bifurcated approach to the QM rule. 

An Instrument o(Consumer Protection Becomes an Instrument o(Prudential Regulation 

As this rule is implemented, it is important that Congress and the Bureau work closely 

with prudential regulators to ensure that this instrument of consumer protection does not hccome 

an instrument of prudential regulation. We have significant concerns that the National Credit 

Union Administration (NCUA) examiners will want to severely restrict the ability of credit 

unions to keep non-QM loans in their portfolio after the rule goes into effect. The possibility 

exists that NCUA examiners will determine that mortgages that do not enjoy the benefit of the 

qualified mortgage rule's safe harbor are a safety and soundness concern. Examiners may also be 

4 
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critical of credit unions and assess their CAMEL ratings accordingly if credit unions make 

mortgages that do not meet the QM standards. 

The potential for negative supervisory actions are a real concern for credit unions, and 

will contribute to the decline or elimination of non-QM lending unless Congress and the Bureau 

send a strong message to examiners. 

Bureau Director Richard Cordray has noted the importance for the continued availability 

ofnon-QM loans. Recently, he told a gathering at the National Association of Realtors: 

Qualified Mortgages cover the vast majority of loans made in today's market, but they 

are by no means all of the mortgage market. This point is quite important, and it should 

not be misunderstood. Those lenders that have long upheld strong underwriting standards 

have little to fear from the Ability-to-Repay rule. These lenders, including many of our 

community banks and credit unions, have seen the strong performance of their loans over 

time. Nothing about their traditional lending model bas changed, and they should 

continue to offer such mortgages to borrowers whom they evaluate as posing reasonable 

credit risk - whether or not they meet the criteria to be classified as Qualified Mortgages. 

We all benefit by recognizing and sustaining responsible lending wherever we find it in 

the mortgage market.) 

It is important that other regulators follow the lead of the Bureau on this matter. Non-QM loans 

and the availability of credit to worthy-borrowers should be encouraged and not viewed 

negatively by examiners. 

Recent FHFA Action Raises Concern That a Viable Market Mav Not Exist (or Non-OM 

Loans 

Traditionally credit unions have been portfolio lenders, meaning they hold mortgages 

they make on their books. However, in recent years, this trend has begun to change as credit 

unions have sold more mortgages to Fannie Mae, Freddie Mac and other secondary market 

participants in order to diversify their portfolio and manage interest rate risk, consistent with 

directives from examiners. In many cases, credit unions retain the servicing rights on loans they 

sell into the secondary market. 

3 http://www.consumerfinance.gov/soeeches/director-ri ch ard-cordray-at -the-n ation ai-associ at ion-of -realtorsl 

5 
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81767.037

Selling mortgages into the secondary market allows credit unions to unlock much nceded 

funds in-order to make more mortgages. It also serves an important function of mitigating 

interest rate risk. When interest rates are low, it is risky for a credit union to hold too many 30-

year mortgages in portfolio. We believe credit unions should retain the flexibility they currently 

have to either hold a loan in portfolio or sell it on the secondary mortgage market based on the 

needs of the credit union to manage its assets and obligations. While nothing in the rule would 

prohibit credit unions from selling non-QM loans into the secondary market, if there is a viable 

secondary market for these loans, we have concerns that the market for these loans may not exist. 

Tn May, the Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie 

Mac not to purchase certain non-qualified mortgage loans after the effective date of the 

rule:~ Fannie Mae and Freddie Mac will continue to purchase loans that meet the underwriting 

requirements stated in their respective selling guides, including loans with debt-to-income ratios 

above 43 percent; however, other loans issued with terms that are outside the Bureau's QM 

definition, such as 40-year term loans, or loans with points and fees exceeding the thresholds 

established by the rule, will not be purchased by Fannie Mae or Freddie Mac. This decision by 

FHF A may at the very least send a negative signal that creativity in the secondary market is not 

welcome, thus limiting the ability of credit unions to meet the variable needs of their credit 

worthy members. We ask the Subcommittee to ensure into the future that Fannie Mae and 

Freddie Mac will purchase loans originated by a credit union even if they do not meet the QM 

definition if they otherwise meet GSE standards. 

The ability of credit unions to customize their products to meet the needs of their 

individual members is important because credit unions understand that every member is 

different; therefore, creating a loan product that fits the needs of the individual or circumstance 

will, at times, fall outside of the QM boundaries. One need only to look to the origin of credit 

unions in order to have a better understanding of why being forced to follow the QM rule 

encounters resistance. Credit unions were created by citizens of similar backgrounds with the 

mission to extend credit to their member-owners and always look to exhaust every option in 

order to satisfy a member's needs. This is what makes the credit union experience different. 

4 http://www.fhfa.gov{webfiles{25163{QMFINALrelease050613.pdf 

6 
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81767.038

Nevertheless, the FHFA decision leaves the impression that this kind of individualization should 

be abandoned. As credit unions evolve with the financial markets and member needs, FHF A has 

essentially thrown a monkey wrench into credit unions' ability to serve their members, adversely 

affecting consumer's ability to access credit. 

The Bureau Should Expand the Small Loan Originator Exemption to Treat All Credit Union 

Loans as OM Loans 

In addition to ensuring that regulators do not treat loans that do not meet QM standards 

as unsafe loans and ensuring that the FHF A permits Fannie Mae and Freddie Mac to purchase 

loans that do not meet QM standards, Congress should encourage the Bureau to treat all 

mortgage loans made by credit unions as QM loans, as we have urged to the agency. 

Ability to repay is one of many factors that determine a loan's performance, but it is a 

critical factor because, without it, the loan certainly wilt not perform. The Bureau recognized 

this when it cited a November 2012 Federal Reserve Board report entitled, "Charge-Off and 

Delinquency Rates on Loans and Leases at Commercial Banks," to make the point that 

"mortgage loan delinquency and charge-off rates are significantly lower at smaller banks than 

larger ones."s However, we were disappointed that the Bureau did not take into consideration 

the differences in delinquency and charge-off rates between banks and credit unions when 

considering which classes of transactions and institutions to exempt from the QM rule. 

As most have acknowledged, credit unions did not create or exacerbate the financial 

crisis; rather, credit unions continued to extend mortgage credit to their members throughout the 

crisis, while many other lenders retracted their lending. As the financial crisis took hold and 

secondary markets dried up, credit unions increased their first mortgage originations from $54 

billion in 2006 to $60 billion in 2007, $70 billion in 2008 and $95 billion in 2009. Despite this 

strong lending in a very turbulent economy, credit union net charge-off rates for mortgages 

remained very low. 

5 Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act, Regulation Z, 12 CFR Prt 1026, 

Docket No. CFPB-2013-0002, RIN 3170-AA34. Page 28. 

7 
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81767.039

Credit unions have proven they can appropriately mitigate risk even while tailoring 

certain loan products to meet members' needs. Appendix I describes first mortgage loan charge 

off rates at credit unions and banks over the last seven years. As shown in the chart. credit 

unions of all sizes have remarkably low net charge-off rates, and bank losses have been more 

than double those of credit unions. In fact, aggregate credit union mortgage losses have never 

gone above 0.45%. What this demonstrates is that credit unions across the board are already 

making mortgage loans that their members have the ability to repay - without having to be 

directed to do so by the federal government and they should not be subjected to additional 

regulatory burden that would hinder their ability to meet their members' needs or reduce their 

members' responsible access to credit. Credit union mortgage loans are not the loans with which 

the Bureau or others should be concerned. If anything, our regulators and Congress should 

applaud not-for-profit, member-owned credit unions for their conservative lending practices 

before, during and after the financial crisis. 

As the economy recovers, the credit union model continues to serve credit union 

members well, but the QM rule has the potential to fundamentally alter that relationship. In fact, 

had this rule been in effect during the crisis, it is very likely that as the crisis worsened, NCUA 

examiners would have increasingly frowned on non-QM loans, making it that much more 

difficult for credit unions to continue to lend when other providers did not. 

We believe it is reasonable for this Subcommittee to urge the Bureau to reconsider why 

credit unions, in light of the strong performance of their mortgage loans, should be subject to this 

rule in the first place. All loans originated by a credit union, regardless of its asset size, should 

enjoy qualified mortgage status. 

Other Issues 

Debt-to-income Ratio 

In order for a loan to be considered a "qualified mortgage" the consumer's total monthly 

debt to total monthly income at the time the loan is made cannot be higher than 43%. The Bureau 

has taken steps to provide clarity in this area and Director Cordray has indicated his support of 

non-qualified mortgage loans. IIowever, there is a concern about the way in which non-qualified 

mortgage loans will be treated by prudential regulators. Credit unions often write mortgage 

loans for members that have a 45% debt-to-income ratio and may even go as high as a 50% debt8 
83 


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to-income ratio under certain limited circumstances. Even so, our mortgage losses remain very 

low. 

The Bureau acknowledges that a higher debt-to-income ratio is warranted in some 

instances and the amended QM rule providcs assurances that lenders with less than $2 billion in 

assets and make 500 or fewer first-lien mortgages per ycar have the ability to serve a credit 

worthy borrower. The rule would allow a consumer's debt-to-income ratio to exceed 43% in 

thesc limited instances. In short, exempting institutions of $2 billion in assets that originate 500 

or fewer first-lien mortgages is not meaningful for thc credit union system. Credit unions have 

proven their worth to thc mortgage market in their high perfonnancc rates of their first-lien 

mortgage products. Accordingly, all first-lien mortgages originated by a credit union should 

enjoy qualified mortgage status. 

Points and Fees 

For a mortgage to be considered a "qualified mortgage," total points and fees generally 

may not exceed 3% on a loan of $100,000 or greater. These fees include affiliate and nonaffiliate charges such as title insurance, surveys, appraisal fees, underwriting, processing and 

application fees. While these amounts are indexed for inflation, these limitations may be 

problematic for some credit unions. As the loan amount decreases, certain fees cannot decrease 

as some fees are fixed and not dependent upon the size of the loan. The smaller the loan amount, 

the easier it is for fees to constitute a higher percentage of the total loan. This is especially true 

as the fees are currently defined as including loan originator compensation, and affiliate fees. 

Many credit unions work with affiliated title companies, for example, to provide the lowest costs 

for members on title insurance products. However, since affiliated title company fees under the 

current rule would be included in the points and fees calculation, it may appear to a consumer 

that an estimate from a non-affiliated title insurance provider is less expensive than the title 

insurance under the credit union's affiliate arrangement, which is in fact not the case. 

The revised rule the Bureau issued does provide some relief to small financial institutions 

in regard to this points and fees concern, but we do not believe the rule goes far enough. If the 

Bureau wants to provide borrowers with an easy way to compare a mortgage loan APR betwecn 

providers in their market then this proposed change will not accomplish that objective. It will 

mislead borrowers by not being able to compare APR rates between affiliated and non-affiliated 

9 
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companies, put affiliated title companies at a competitive disadvantage, and potentially cause 

borrowers to incur higher closing costs. 

Rural and Underserved Areas 

While CDNA is disappointed that the Bureau has not already adjusted its definition of 

rural and underserved areas, we are encouraged that they are still examining "definitions to 

determine among other things whether these definitions accurately identity communities in 

which there are limitations on access to credit and whether it is possible to develop definitions 

that are more accurate or more precise.,,6 The Bureau may consider making changes based on 

the results of this inquiry. We encourage the Bureau to consult with our prudential regulators 

with regard to their definitions of these terms. The concern CDNA has with the definition in the 

current rule is that many credit unions make loans to those in rural and underserved communities 

but the credit union itself may not be based in those communities. Also, underserved individuals 

may live in areas that would not meet the CFPB's definition of a "rural" or an "underserved" 

area. If the definition of rural and underserved does not change, these institutions will be limited 

in the types of products they can otfer their members in these areas. 

Bifurcated Approach 

QM's that are not "higher-priced" receive the full safe harbor, meaning that they are 

conclusively presumed to comply with the ability to repay requirements. QM's that are "higherpriced" have a rebuttable presumption that they comply with the ability to repay requirements, 

but consumers can rebut that presumption. 

Under the rebuttable presumption, a court could find that a mortgage originated by a 

creditor originated as a higher-priced QM, and the consumer can argue that the creditor violated 

the Ability to Repay rule. To prevail on that argument, the consumer must show that based on 

the information available to the creditor at the time the mortgage was made, the consumer did 

not have enough residual income left to meet living expenses after paying their mortgage and 

other debts. 

6 Ibid, 220-221. 

10 
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A QM is higher-priced if it is a first lien loan, where, at the time the interest rate on the 

loan was set, the APR was 1.5% or more over the Average Prime Offer Rate (published weekly 

by FHLMC), or if it is a subordinate lien loan with an APR that exceeds the APOR by 3.5% or 

more, using the same test of when the interest rate was set on the loan. 

As part of the recently finalized amendments (0 the Ability to Repay rule, the Bureau has 

raised the threshold defining which QM loans receive a full safe harbor for loans that are made 

by small creditors under both a balloon loan and the small creditor categories of QM. The new 

threshold is now 3.5% (as opposed to 1.5%) for first-lien loans, which is a significant 

improvement, but only for those that meet the definition of "small creditor," which is under $2B 

in assets and makes 500 or fewer first-lien loans each year. The balloon loan category rcquires 

institutions to meet the definition of "small creditor" and provides that these lenders can make 

balloon loans for a two-year transition period, even if they are not located in a "rural" or 

"underserved" area as defined by the Bureau. (The original QM rule provided that only creditors 

operating predominantly in rural or underserved areas would be eligible for the balloon loan QM 

exemption). 

Conclusion 

In conclusion, America's credit unions appreciate the improvements that the Bureau has 

made to the QM rule; nevertheless, we continue to have significant concerns with respect to how 

other regulators will use the Bureau's regulation to impact credit union mortgage lending, and 

we question whether the rule should apply to credit unions in the first place. The Bureau has 

made great improvements but in other areas the Bureau has not done enough to address credit 

unions' concerns that being subjected to the rule will actually reduce credit availability. We are 

hopeful that when the Bureau completes its review of the rural and underserved definition, the 

changes it makes will reflect our concerns. We urge the Subcommittee to address these issues 

with the Bureau, NeUA, and FHFA. We further ask this Subcommittee to scrutinize the work of 

the Bureau and urge them to recognize, under the full extent of the law, the characteristics of 

credit unions and reflect those in the rule making process and, where appropriate, exempt credit 

unions from their rules. Thank you very much for the opportunity to testify at this hearing. 

11 
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Appendix I 

First Mortgage Loan 

Net Chargeoffs 

2.5% ".-------------r-------------------, 2.5% 

--.- Bank 1-4 Family 1st Mortgage 

2.0% ........a..- Credit Union 1 st Mortgage f----+t--------------+ 2.0% 

1.5% +---------------F'--~__,A__----------+ 1.5% 

1.0% +-____________ -;c-_______ -=~::.-_:_----+ 1.0% 

0.5% -1------------.1--------------------+ 0.5% 

0.0% ~i*T*:;:i~:;:i:;;t;;;;I.:;:;~"""~~~,._,_r_,_..,_,......,._,_,_...,_.,..._,r_T___,.,_..._r_r_,__.__l_ 0.0% 

05:1 06:1 07:1 08:1 09:1 10:1 11:1 12:1 13:1 

Source: FDIC & I\O.JI\ 

12 
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81767.044

MORTGAGE 

BANKERS 

ASSOCIATION 

Investing in communities 

Statement of Debra Still 

On behalf of the 

Mortgage Bankers Association 

House Financial Services Committee 

Subcommittee on Financial Institutions and 

Consumer Credit 

"Examining How the Dodd-Frank Act Hampers 

Homeownership" 

June 18,2013 
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2 

Chairwoman Capito, Ranking Member Meeks and members of the subcommittee, my 

name is Debra W. Still and I currently serve as President and Chief Executive Officer of 

Pulte Financial Services, which includes Pulte Mortgage LLC, PGP Title and PCIC 

Insurance and employs 750 individuals throughout the United States. I am also 

President and CEO of Pulte Mortgage, a nationwide lender headquartered in 

Englewood, Colorado, which has helped more than 400,000 homebuyers finance their 

new home purchases since 1972. Pulte Financial Services is a part of PulteGroup, 

America's largest homebuilder with operations in 30 states and the District of Columbia. 

I appreciate the opportunity to testify again before this subcommittee, this time in my 

capacity as Chairman of the Mortgage Bankers Association 1 and as a Certified 

Mortgage Banker (CMB). MBA uniquely represents mortgage lenders of all sizes from 

the largest federally-chartered institutions to the smallest community lenders who serve 

the mortgage financing needs of families and neighborhoods throughout the nation. 

Background 

Your decision to hold a hearing on the residential mortgage lending standards in DoddFrank could not be more timely. During the last several months the Bureau of Consumer 

Financial Protection (CFPB or Bureau) issued the Ability to Repay and Qualified 

Mortgage Rule (QM) that will profoundly affect mortgage borrowers and those who hope 

to one day be able to buy a home. The industry is now fully vested in understanding 

and implementing this rule, building new policies and procedures, re-engineering loan 

processes, reprogramming mortgage origination systems, and training our personnel 

before the rule takes effect in January 2014. 

In reviewing the Ability to Repay Rule, context is important. Over the past several 

years, lenders serving homebuyers in America have experienced high levels of 

uncertainty in the housing markets and in the regulatory landscape. 

The good news is we are making progress. By almost any measure, housing is making 

a recovery. Home starts are up. Home sales are up. Sales prices are increasing in 

many areas across the country and home affordability remains at historic highs. 

l1The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, 

an industry that employs more than 280,000 people in virtually every community in the country. Headquartered in 

Washington, D.C., the association works to ensure the continued strength of the nation's residential and commercial 

real estate markets; to expand homeownership and extend access to affordable housing to all Americans. MBA 

promotes fair and ethical lending practices and fosters professional excellence among real estate finance 

employees through a wide range of educational programs and a variety of publications. Its membership of over 

2,200 companies includes all elements of real estate finance: mortgage companies, mortgage brokers, commercial 

banks, thrifts, Wall Street conduits, life insurance companies and others in the mortgage lending field. For additional 

information, visit MBA's Web site: www.mortgagebankers.org. 
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While housing is improving generally, research shows that the higher end of the market 

is fueling growth while the lower end of the market is actually shrinking. Access to 

credit is clearly constrained with first-time and low-to-moderate-income borrowers 

unable to qualify for a mortgage. 

As anticipated, 2013 marks the final publication of many key Dodd-Frank rules. MBA 

applauds the CFPB for getting a great deal right and for their deliberative and inclusive 

approach. 

Having the rules in place has eased uncertainty to some degree but concerns persist 

that certain aspects of the rules - particularly the Ability to Repay rule - will further 

tighten credit to otherwise qualified consumers. The 3500 pages of new rules introduce 

new levels of complexity that could force lenders to be even more cautious than they 

are today. We are experiencing a marked shift in real estate finance - a shift from 

regulatory uncertainty to regulatory complexity. Given this prospect, we should all be 

concerned about the cumulative effect of the new rules on the availability of credit to 

qualified consumers. 

To avoid or at least lessen this possibility, there is considerable work to be done. 

First, we need to work collaboratively with both the CFPB and Congress to make sure 

that the new rules are "right" and that they support access to credit. 

Second we must also make certain these rules are aligned with each other and with 

other regulations so that the totality of the rules fosters rather than frustrates the 

availability of sustainable credit to all qualified borrowers. 

Third, and of upmost importance, the industry needs clear guidance from the CFPB and 

adequate time to implement the rule. 

The Ability to Repay Rule and QM 

MBA has consistently supported reasonable ability to repay requirements that will 

prevent a reemergence of the competitive excesses of the housing bubble. 

Even though the mortgage industry has implemented some of the most conservative 

underwriting standards in decades and riskier mortgage products are no longer 

available, we appreciate the value of embedding sound product and underwriting 

standards into law to assure consumers are protected going forward. Establishing an 

ability to repay requirement, along with an unambiguous set of standards in the form of 

a clear safe harbor, is a reasonable way to accomplish this. 

Nevertheless, as this process moves forward, we must be mindful of the fact that these 

new rules are arriving amidst some of the tightest credit standards in decades. It is 

crucial that these rules do not unnecessarily exacerbate the situation. 

3 
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4 

Dodd-Frank requires that a lender may not make a residential mortgage loan unless the 

lender makes a reasonable and good faith determination based on verified and 

documented information that, at the time the loan is consummated, the consumer has a 

reasonable ability to repay the loan, according to its terms, and all applicable taxes, 

insurance (including mortgage guarantee insurance), and assessments. 

The law provides steep liability, stiff remedies and severe financial penalties for 

violations. For example, a mortgage lender who fails to comply with the ability to repay 

requirement for a hypothetical $200,000 loan would face liability on the order of: 

(1) Statutory damages of up to $4,000; 

(2) All loan fees and up to three years of finance charges paid by the 

consumer, which on an average loan of $200,000 at 4.5 percent may be 

approximately $25,000; 

(3) Actual damages, which could include, for example, the borrower's 

down payment (e.g., $20,000 if the down payment was 10%); and 

(4) Court costs and reasonable attorney fees associated with the claim, 

which could be anywhere between $26,000 and $155,000 (depending on 

how protracted the court proceedings are). 

Dodd-Frank also extends the statute of limitations for a claim based on a violation of the 

ability to repay requirement from one year to three years. The law also allows a 

consumer to assert a violation as a claim in foreclosure whenever it occurs, even if the 

claim arises far beyond three years. The claim may be made against any creditor, 

assignee or holder of the mortgage as well. This "defense to foreclosure" provision is a 

major factor in driving investors' and lenders' extreme caution on credit standards. 

Against the backdrop of this potential liability and with an eye towards how 

unpredictable litigation can be, Dodd-Frank provided a principled avenue for 

compliance. Lenders who make OM loans, which under the law cannot have risky 

features, must be well underwritten and meet other restrictions (including limits on 

points and fees), will have assurances that their loans meet the ability to repay 

requirements. 

For this reason, great attention was focused on how OM would be defined. 

The Rule Must Support Access to Credit 

MBA's Overall View of the OM Rule 

As I articulated in my testimony last year, MBA arrived at four principles that we 

believed should guide the completion of the OM: 
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First, the OM needs to be broadly defined in order to reach as many borrowers 

as possible with safe, affordable and sustainable financing. 

• Second, the rule must include clear, specific and objective standards, by 

incorporating unambiguous requirements. 

• Third, the OM should provide lenders and borrowers the legal certainty that 

meeting the standards will provide them a clearly defined safe harbor so that 

claims against a loan are limited to examining whether or not the loan is a OM. 

• Finally, given the OM's massive effect on the existing market, the rule should be 

designed in a way that avoids unintended consequences. 

5 

We appreciate the efforts of the Bureau that, to a large extent, addressed these 

concerns. 

The rule is relatively broadly defined and temporarily offers the choice of either a 43 

debt-to-income ratio or eligibility for GSE purchase or agency insurance or guarantee 

eligibility. Either pathway to OM qualification remains subject to the rigorous 

requirements and product feature restrictions embodied in Dodd-Frank and the OM rule. 

As I pointed out last year, because of the very significant liability under Dodd-Frank, it is 

not clear whether and to what extent there will be any SUbstantive non-OM lending 

particularly lending at affordable prices for creditworthy middle-class families. Some 

believe non-OM loans will be made but only to the most qualified, wealthiest borrowers 

and kept in institutions' portfolios. Others believe there will be non-OM lending with 

significant pricing premiums that will raise costs to borrowers, particularly those least 

able to afford them. Neither of these outcomes alleviate the need for a broadly defined 

OM that serves as many creditworthy borrowers as possible. 

The rule also offers a legal safe harbor for what the Bureau regards as prime OM loans 

- those with an APR that is less than 150 basis points over a benchmark rate known 

as the Average Prime Offer Rate (APOR). Loans with an APR that is 150 or more basis 

points greater than the benchmark rate are given a less conclusive rebuttable 

presumption of compliance. 

The difference between the safe harbor and rebuttable presumption standards is 

critically important. A safe harbor simply means that if a lender complies with the exact 

standards embedded in the rule compliance will be presumed and any litigation will be 

confined to whether or not the loan is in fact a OM. A safe harbor is not in any way a 

"pass" from liability for lenders, nor does it deprive consumers of an opportunity for court 

review. Under either a safe harbor or a rebuttable presumption of compliance, a 

borrower can seek judicial review of an alleged violation, but in the former instance the 

review is focused on whether the rule's standards were met. 
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81767.049

Under a rebuttable presumption of compliance, however, the scope of the inquiry is 

potentially far more wide-ranging, with significant variations from one court to another 

on how the presumption is applied, including when and how extrinsic evidence may be 

considered beyond the standards. Such an inquiry is more open-ended, unpredictable 

and far more costly to defend. 

Although we appreciate that the Bureau ultimately chose to establish a safe harbor for 

most of the market, we think it would be beneficial for the CFPB to establish a safe 

harbor for all loans that meet QM standards. 

Given that the CFPB has chosen to bifurcate the QM protections, we believe that the 

safe harbor should be broadened to cover a larger share of the high quality, well 

underwritten QM loans that are being made today. In addition, with respect to the 

rebuttable presumption standard, the CFPB should provide clearer guidance regarding 

how consumers can rebut the presumption of compliance based on a lack of residual 

income or how lenders can defend a loan based on a sufficient payment history. 

6 

Further explanation would facilitate the availability of credit to qualified borrowers whose 

QM loans do not meet safe harbor standards. 

Facilitating Credit to Creditworthy Low and Moderate Income Borrowers 

Dodd-Frank limits the points and fees that can be charged to borrowers for a QM loan. 

The statute specifies 3 percent of the loan amount as the limit but permits adjustments 

for smaller loans. 

Under the final rule in addition to what is traditionally included in points and fees, the 

definition of points and fees also includes: 

(i) charges to lender affiliated (but not unaffiliated) title companies, 

(ii) compensation paid to loan originator companies, such as mortgage 

brokerages, 

(iii) amounts for insurance held in escrow and 

(iv) loan level price adjustments in the form of additional closing costs. 

MBA believes this definition is overly inclusive and will create competitive 

disadvantages for various business models, reducing choice and ultimately harming 

consumers. The effects of the overly inclusive points and fees definition will be 

particularly severe for low-balance loans to low and moderate income borrowers. 

Smaller Loans 

Under Dodd-Frank, the CFPB has broad discretion to adjust the points and fees limit so 

that lenders making smaller loans do not exceed the points and fees trigger. The 

smaller a loan balance, the more difficult it is to meet the 3 percent limit on points and 

fees. 
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7 

The OM rule defines a smaller loan as a loan under $100,000 and only permits an 

increase in the points and fees limit for loans below that amount. However, the average 

loan size currently is $220,000. 

Consider a $150,000 loan, which is typical in many markets in the country. Applying a 3 

percent limit to such a loan, only $4,500 would be available to cover fees reflecting the 

costs of the lender, compensation to a mortgage brokerage, some escrowed amounts 

and all third party fees of affiliates including title insurance and title services. 

Based on this example, many loans are likely to exceed the 3 percent limit and fail to 

qualify as OMs (even though they meet all other OM requirements). Perversely, the cap 

on points and fees and the threshold for smaller loans may result in OMs being 

unavailable to many low and moderate income borrowers, a result we believe is 

contrary to the statute's purpose. 

We believe there are good alternatives to solve this problem, including: 

• Removing affiliated title fees, compensation to mortgage brokers and escrow 

amounts from the points and fees calculation by passing H.R. 1077, the 

Consumer Mortgage Choice Act; or 

Increasing the dollar amount defining small loans. 

Fees of Affiliates 

The rule includes in the points and fees calculation charges paid to an affiliate of the 

lender, including title charges, but excludes charges paid to an unaffiliated company. 

The rationale behind this decision is not clear and we believe it will end up raising prices 

and undermining consumer choice. 

Some lenders choose to affiliate with title and other service providers to ensure that 

services are efficient, charges are as estimated and the consumer experience from loan 

application to closing is seamless, predictable and positive for the consumer. National 

consumer surveys demonstrate that consumers who take advantage of the one-stop 

shopping that affiliated businesses report a satisfactory home purchase experience. 

Title and title related services are the largest third party settlement cost. Affiliated 

providers offer services that are competitive in cost with those of unaffiliated providers. 

The fact that affiliated providers attract business from non-affiliated lenders supports 

this fact. As might be expected, studies have shown that when affiliates have been 

excluded from the market, title insurance charges have risen. 

In all cases, consumers are free to choose not to use affiliated providers. The Real 

Estate Settlement Procedures Act (RESPA) requires a clear disclosure of affiliated 

relationships and their cost and does not permit a consumer to be required to use an 
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affiliated entity. There are clear penalties for forcing a consumer to use a particular 

affiliate or providing improper inducements to persuade a consumer to do so. 

Concems that lenders may augment their fees through the charges of affiliated 

companies are not valid. Title insurance premiums, and in many cases fees for title 

services, are regulated. Forty-four states and the District of Columbia require that title 

premiums be set by the state, approved by the state, or filed with the state (23 states 

also include title examinations and searches). 

In short, there is no reason for Congress to deny consumers the ability to use affiliated 

service providers or make it more expensive to do so. 

Compensation to Loan Originators from Creditors 

We appreciate that with the issuance of its most recent revisions to the OM, the Bureau 

has modified the rule to exclude from points and fees compensation paid by a lender to 

its individual employee loan originators. Nevertheless, MBA continues to object to the 

rule's inclusion of compensation paid by lenders to entities such as community banks, 

credit unions, local independent businesses and others that broker mortgage loans. 

8 

Consumers today obtain the financing they need from lenders with a range of business 

models. Some consumers use creditors who employ and compensate their own loan 

officer originators. Others use entities acting as mortgage brokers who may be 

compensated by wholesale lenders for their origination services. A combination of 

business models and varying market conditions determine whether consumers may pay 

some of these costs through direct fees or through their interest rates. 

Paying loan originators to steer a borrower into a higher rate or otherwise unfavorable 

loan has been prohibited under a Federal Reserve rule the CFPB now enforces. The 

risk of steering consumers to higher cost loans also has been eliminated through these 

rules, CFPB enforcement powers and the significant new liability provisions. Finally, 

competition ensures that the costs of loans to consumers through both the retail and 

wholesale channel are essentially the same. 

Under the OM, if two consumers get the same loan, one from a broker and the other 

from a retail lender, the brokered loan could exceed the points and fees trigger, while 

the retail loan would be treated as a OM. This perverse result means that the consumer 

would lose the ability to choose between two loans, from different businesses, that are 

essentially identically priced. 

Notably, for many moderate income borrowers - particularly those with smaller loans or 

in areas where credit has been scarce such as in rural and certain urban areas 

entities offering brokered loans have proven to be the best sources of needed credit. 

The CFPB's continued discrimination against commissions to entities that broker loans 

will make these services far less feasible, depriving many consumers of the ability to 

obtain mortgage financing. 
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We believe Dodd-Frank was intended to ensure consumers receive sustainable loans, 

not to pick winners and losers among business models and, as a result, deprive 

consumers of credit. 

Escrow Amounts 

Dodd-Frank is ambiguous regarding whether amounts paid to lenders at closing and 

deposited into an escrow account for the payment of insurance and taxes also are 

included in the points and fees calculation. 

We urge the CFPB to make clear that amounts held for escrow are excluded from the 3 

point QM cap. 

There is no sound public policy rationale for these fees to be included. Amounts for 

insurance and taxes are not retained by the lender or its affiliates; they are paid to 

insurance companies and governmental entities. Additionally, under RESPA, amounts 

held in escrow that exceed specified limits are returned to the consumer. 

A Solution: H.R 1077, the Consumer Mortgage Choice Act 

MBA has repeatedly urged the Bureau to amend the definition of points and fees to 

exclude affiliated title fees and clarify that loan originator compensation from lenders to 

brokerages and escrowed amounts be excluded from the calculation for purposes of 

applying the 3 percent limit. 

Despite our belief that the CFPB can make these revisions under existing law, we 

strongly urge Congress to pass H.R. 1077, the Consumer Mortgage Choice Act. This 

bipartisan legislation was introduced by Representatives Bill Huizenga, David Scott, Ed 

Royce, and William Lacy Clay, and cosponsored by over 40 members of the U.S. 

House of Representatives. The bill addresses each of these items by clearly excluding 

them from the 3 point QM cap. 

Raising the Smaller Loan Threshold 

The QM rule provides that loans will be subject to a higher points and fees cap only if 

the loan amount is less than $100,000. The $100,000 cutoff is insufficient and will deny 

affordable mortgage credit to families who take out lower balance loans. Smaller loans 

are particularly a feature of rural and underserved communities. 

Under the CFPB's final rule, a covered transaction is not a qualified mortgage unless 

the transaction's total points and fees do not exceed: 

(A) For a loan amount greater than or equal to $100,000 (indexed for 

inflation): 3 percent of the total loan amount; 

9 
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81767.053

(B) For a loan amount greater than or equal to $60,000 (indexed for 

inflation) but less than $100,000 (indexed for inflation): $3,000 (indexed for 

inflation); 

(C) For a loan amount greater than or equal to $20,000 (indexed for 

inflation) but less than $60,000 (indexed for inflation): 5 percent of the 

total loan amount; 

(D) For a loan amount greater than or equal to $12,500 (indexed for 

inflation) but less 20 than $20,000 (indexed for inflation): $1,000 (indexed 

for inflation); 

(E) For a loan amount less than $12,500 (indexed for inflation): 8 percent of the 

total loan amount. 

These amounts are to be adjusted annually on January 1 by the annual percentage 

change in the Consumer Price Index. 

10 

There is broad discretion under Dodd-Frank for the CFPB to adjust the 3 percent limit 

on points and fees further, and MBA has recommended such an adjustment to the 

Bureau. However, at this writing, it does not appear the CFPB is prepared to address 

concerns about small loan access. Consequently, MBA would support modification of 

H.R. 1077 to increase the small loan threshold to $200,000 and increase the points and 

fees limit for loans falling under it to 4 percent. This approach would solve the problem 

of smaller loans becoming unavailable or more costly to low and moderate income 

families. 

Right Sizing the APRIAPOR Definitions to Extend OM Credit to Creditworthy Borrowers 

MBA believes that most lenders and mortgage investors, at least for the immediate 

future, will confine themselves to OM safe harbor loans. Importantly, these loans will 

come with the most favorable, affordable rates. OM rebuttable presumption loans will 

be more challenging and costlier simply because the risks are greater. 

Under the rule, only mortgages where the APR is less than the 150 basis points over 

the benchmark APOR qualify for the OM safe harbor. Having analyzed the 

methodology underlying the determination of the APOR and the components of the 

points and fees test, an increase in the spread to 200-250 basis points for all loans is 

warranted. 

The APOR is calculated based on the Freddie Mac Primary Mortgage Market Survey 

(PMMS). In recent quarters, the PMMS has fallen well below MBA survey rates, at times 

by as much as 20 basis points. At least two-thirds and possibly as much as 80 percent 

of the rate quotes that are included in the PMMS are for purchase loans. However, 

purchase loans are typically quoted at lower mortgage rates than those for refinances, 

with the spread between the two ranging up to 25 basis points for some lenders. 

This causes the PMMS to be systematically biased against refinance mortgages. This 

bias is particularly troublesome in markets like today's, where approximately 70 percent 

of mortgage applications and a similar percentage of mortgage originations are for 

refinance loans. 
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11 

In today's market, if refinance loan rates are benchmarked against an APOR based on 

the Freddie Mac PMMS as in the CFPB's rule, it can be anticipated that a large number 

of these refinance loans could exceed the OM's 150 basis points limit for the safe 

harbor even if they met exactly the same standards as purchase loans that fell within 

the spread and were being offered at prevailing rates. 

There are also issues with the applicability of a particular APR-APOR comparison to 

some of the loan products currently being offered. APORs are calculated taking into 

consideration whether the rate is fixed or adjustable, lien status, and the length of the 

loan term. There is a significant weakness in the comparability of APORs for ARM 

loans because they are not necessarily calculated the same way. For instance, if the 

APR is calculated using an initial rate that is higher than the fully-indexed rate, the 

APOR should be calculated the same way. Also, if the APR is calculated using the 

greater of the initial rate or the fully-indexed rate using the maximum margin the APOR 

should be calculated the same way. 

Finally, there is an additional methodological problem with the PMMS around 20-year 

loans. These loans are compared to survey rates for 15-year loans, which tend to have 

significantly lower rates. Twenty year maturities tend to track 30-year rates more 

closely, leading to the result that many common 20-year loans could exceed the 150 

basis points over APOR safe harbor definition simply due to a fault with the underlying 

APOR calculation, not any feature or aspect of the loan. 

While these issues are significant, PMMS stilt provides a unique data set stretching 

back decades that could be compromised by methodological changes today. As I have 

testified, however, we believe lenders will be extremely wary of originating loans that fall 

outside of the safe harbor for the foreseeable future following the rule'S implementation. 

For these reasons, rather than completely reworking the PMMS or seeking to establish 

a new survey, MBA believes the CFPB should resolve these issues by adjusting the 

spread which defines safe harbor and rebuttable presumption OMs. 

Accordingly, the safe harbor for all loans should extend to APRs that are 200-250 basis 

points over their comparable APOR. This is a better solution than introducing a variety 

of disparate calculations for different products that will increase regulatory burden and 

confusion. The CFPB itself has repeatedly noted the safe harbor does not provide 

immunity from borrower claims and its expansion to account for infirmities in the APOR 

calculation is appropriate. 

Clearer Guidance on Rebuttable Presumption OMs to Facilitate Lending 

Even if the points and fees and APOR issues are fixed as we suggest, MBA believes 

additional guidance from the Bureau is necessary for the market to provide reasonably 

priced rebuttable presumption OMs. 

MBA appreciates that the Bureau provided some additional guidance in its final rule in 

this area. Specifically, the rule provides that consumers may show a violation and rebut 
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12 

the presumption of compliance for a OM where the APR exceeds the APOR by 150 bps 

or more by showing that, at the time the loan was originated, the consumer's income 

and debt obligations left insufficient residual income or assets to meet living expenses. 

Guidance accompanying the rule also notes that the longer the period of time that the 

consumer has demonstrated actual ability to repay the loan by making timely payments, 

without modification or accommodation, after consummation or, for an adjustable-rate 

mortgage, after recast, the less likely the consumer will be able to rebut the 

presumption based on insufficient residual income. 

While these points are useful, it would be far more useful in facilitating efforts to 

encourage lenders to originate rebuttable presumption loans if there were clear 

guidance about what is meant by residual income and what is meant by a good 

payment history. For instance, "residual income" can be calculated using Department 

of Veterans Affairs or several other standards. "Good payment history" is a vague and 

subjective standard without definition. 

MBA has asked the Bureau to provide further guidance in this area and the Bureau has 

indicated it will not do so, urging instead that lenders use common sense to determine 

the sufficiency of residual income. While we agree with the CFPB that common sense 

is a critical part of any underwriting decision, it is not always the standard followed by 

counsel when an action is brought. Therefore, to give lenders and investors greater 

legal certainty, guidance is essential if QM rebuttable presumption loans are to be made 

in great numbers across the spectrum of qualified borrowers. 

The Rules Must Be Aligned With Each Other 

HUD's New Disparate Impact Rule Under the Fair Housing Act 

HUD's recently finalized Discriminatory Effects or disparate impact rule under the Fair 

Housing Act typifies the need for the CFPB's ATR/OM rule to be aligned with other 

federal regulations. 

HUD's rule expressly provides a legal basis for liability under the Fair Housing Act for a 

facially neutral mortgage lending or servicing practice that has a disparate impact or 

"discriminatory effect" upon a protected class even in the absence of any intention to 

discriminate. 2 

Yet rules implementing Dodd-Frank, including the ATR/QM rule and the forthcoming risk 

retention rule, will in fact tighten credit standards through facially neutral requirements 

and can be expected to lead to disparate outcomes for some categories of borrowers. 

Requirements for the OM, for example, include a 43 percent debt-to-income 

requirement or eligibility for Fannie Mae and Freddie Mac purchase or guarantee. 

224 C.F.R. § 100.500. 
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HUD has issued no guidance on whether and to what extent a lender's policies in 

making only OM loans, or taking similar actions, in compliance with the ATR/OM 

requirements amounts to "Iegally sufficient justification" or business necessity that 

would avoid liability. Similarly, there is little guidance on assessing less discriminatory 

altematives under the rule's burden shifting test in the context of complying with other 

federal requirements. 

13 

We support prohibition of illegal discrimination in mortgage lending under the Fair 

Housing Act. And while we have questioned the legal foundations underlying the 

disparate impact theory under the Fair Housing Act, if this rule is to apply, it is essential 

that it offer clarity on how the rule interacts with the ATR/OM rule and other govemment 

requirements. 

On June 4, MBA, several other financial trade associations, and the U.S. Chamber of 

Commerce all wrote to CFPB Director Cordray and HUD Secretary Donovan setting 

forth these concems and urging written guidance that makes clear that a lender will not 

be subject to disparate impact liability based on specific policies undertaken to avoid 

liability under the Dodd-Frank rules. A lack of guidance in this area will create a 

regulatory double bind for lenders and ultimately result in higher prices to account for 

risk and less available credit for consumers. 

The Ability to Repay Rule's QM Should Be the Same as the Risk Retention Rule's 

Qualified Residential Mortgage (QRM) 

Another key piece of aligning the rules in MBA's view is aligning OM and ORM 

definitions. 

While the OM is the responsibility of the CFPB and the ORM is the joint responsibility of 

six financial regulators, excluding the CFPB, both provisions have at their heart the 

same objective. One seeks to outline the design of a sustainable mortgage as a means 

of satisfying the ability to repay requirements and the other provides an exception to the 

requirement for risk retention. Notably, Section 941 of the Dodd Frank Act, which 

establishes the ORM exemption, also requires that the ORM definition be no broader 

than the definition of OM. 

Considering these points, MBA shares the view of an array of stakeholders that the 

definitions should be synchronized. 

Regrettably, however, the ORM proposal issued in 2011 established the ORM in a 

manner that would serve an extremely narrow segment of the mortgage market for 

which few middle income families would be eligible. Unlike the OM, the ORM proposal 

contained a 20 percent down payment for purchase loans and even higher equity 

standards for refinances. In addition to these standards, the ORM proposal included 

minimum debt-to-income requirements that were far tighter than those in the 

marketplace. The proposal engendered a negative reaction from virtually every 

stakeholder in the consumer advocacy, lending and real estate communities. 
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Percent of n""fo,mi"" markel, alternate LTV and 

FICO del'ln!!:ion", raceletl1nicity, 20CI4'2:00~ originalil3!lS 

70 

60 

29 

o 

3% Oownpaymenl 10% Downpaymenl FICO 660 

III Non,Hlspanlc WIllte Ii! African American , Latino iii Asian 

Since the aRM rule was proposed, the OM rule has been finalized. While We have 

concerns that are discussed extensively above, we believe both definitions should be 

based on the OM. 

14 

As finalized, the OM definition provides strong underwriting, documentation and product 

standards that will demonstrably lower the risk of defaults consistent with the statutory 

requirements for the aRM. At the same time, the QM definition precludes the riskier 

features and products that likewise should be ineligible for aRM treatment. Finally, it 

does so without restricting credit to low, and moderate income families who no matter 

how worthy their credit lack the wealth for significant down payments. 

There is no need for two different definitions of a sustainable loan, In fact, such 

variations will only increase costs and confusion to the industry and consumers. 

Aligning the aRM and OM standards would ensure that strong incentives for safe and 

sound lending are in place, while inviting the return of private capital and lower 

mortgage rates to the widest array of qualified families. 
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FHA andQM 

The OM encompasses govemment loans including FHA loans. The CFPB's OM rule 

will govern FHA loans until FHA writes its own OM regulation, which is expected within 

the next several months. 

15 

Consumers would be better served if OM safe harbor loans were made available to 

more creditworthy borrowers by adjusting the APOR benchmark upward to 200-250 

basis points. The rule's 150 basis points benchmark is particularly troublesome for FHA 

loans. 

FHA's upfront mortgage insurance premium (MIP) has recently been increased. The 

MIP is included in the APR and consumes a substantial amount of the 150 basis points. 

Specifically, analysis from a major FHA lender suggests that the FHA's MIP changes 

will add 40 to 70 basis points to FHA APRs, depending on loan amount and LTV. This 

problem with the benchmark is further exacerbated by the fact that the PMMS 

underlying the APOR only includes conventional not government loans. 

If the threshold is not at least expanded - and we urge it be expanded for all loans 

the availability of FHA credit to first-time, minority, and low and moderate income 

borrowers will be jeopardized. The importance of FHA lending to underserved 

populations is depicted below: 
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16 

For these reasons, it is vital that FHA's forthcoming QM rule include appropriate triggers 

for QM loans. In the interim, until FHA's QM rule takes effect, we hope Congress will 

urge the CFPB to adjust the metrics so FHA loans are not treated as rebuttable 

presumption QM loans. 

Guidance and Time to Implement the Rules 

As I indicated, implementing the ATR/QM rule along with the other rules issued in 

January is an enormous task that includes developing new policies and procedures, 

reengineering loan application and origination processes, building new systems and 

audit protocols, and training employees, to name just some of the many steps. 

To aid in our work, the CFPB's efforts to provide implementation guidance are essential. 

In this regard, we appreciate that the Bureau has assigned an experienced professional 

to lead its implementation process and that Bureau representatives have participated in 

key industry conferences to facilitate stakeholder understanding of the rules. We also 

appreciate that the CFPB is consulting with lenders, technology providers and others to 

help operationalize the rules. 

Going forward, we urge that questions be answered in writing and publicized widely. 

This will allow for standard or frequently requested interpretations to be widely known 

and clearly understood. 

Finally, it is imperative that the CFPB be encouraged to make further refinements to the 

QM rule during the next few months. There are several areas, including the points and 

fees calculation, the small loan limits and the APOR/APR spread that should be 

addressed further. 

We recognize there is concern at the Bureau about extending compliance deadlines 

beyond January 2014. We have, however, urged that the Bureau exercise its exemption 

authority as needed to provide additional time for compliance. 

We urge Congress to encourage such an action by the CFPB as needed. Rigid 

adherence to time limits should not be allowed to dictate implementation if it will 

frustrate the interests of the consumers that the limits are designed to protect. The 

stakes are simply too high. 

Conclusion 

We appreciate the efforts of the subcommittee to examine these enormously important 

regulations. No matter how well intentioned these rules may be, we remain concerned 

that the ATR/QM rule harms competition and does not yet ensure credit opportunities to 

all qualified borrowers. 

We urge your support of H.R. 1077 to revise the point and fees provisions and to adjust 

the small loan limits as needed. 
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I look forward to your questions. I also look forward to continuing to work with this 

subcommittee to ensure that our nation has a vibrant mortgage market for as many 

qualified borrowers as possible, for generations to come. 

17 
104 


81767.061

[B NATIONAL 

ASSOCIATION of 

REALTORS@ REALTOR" 

500 New Jersey An'nne, N.W. 

Washington, DC 20001 ~202() 

STATEMENT OF THE 

Date A. Stiototl 

GOVERNi\fENT AFFAIRS 

NATIONAL ASSOCIATION OF REALTORS® 

SUBMITTED FOR THE RECORD TO 

THE UNITED STATES HOUSE OF 

REPRESENTATIVES COMMITTEE ON FINANCIAL 

SERVICES SUBCOMMITTEE ON FINANCIAL 

INSTITUTIONS AND CONSUMER CREDIT 

HEARING TITLED 

"EXAMINING How THE DODD-FRANK ACT HAMPERS HOME 

OWNERSHIP" 

JUNE 18, 2013 

REALTOR~' IS a registered collective membership mark whIch may be used only by real estate 

professionals who are members of the NATIONAL ASSOCIA nON OF REALTORS~ 

and subscnbe to Its stnct Cooe of Ethics 

O!',IHTVl1IH 

--~ 
105 


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INTRODUCTION 

Madam Chairwoman, Rnnking Member Meeks, and members of the Subcommittee, r am Gary 

Thomas, President of the National Association of REALTORS® (NAR) from Orange County, CA. 

r have more than 35 years' experience in the real estate business and I am the Broker/Owner of 

Evergreen Realty in Villa Park, California. In 2001, I served as president of the California 

Association of REALTORS® and have had the honor of serving on NAR's Real Estate Settlement 

Procedures Act Presidential Advisory Group for a number of years. I thank you for the 

opportunity to participate in this hearing on behalf of the 1 million members of the National 

Association of REALTORS®. NAR represents a wide variety of housing indnstry professionals 

committed to the development and preservation of the nation's housing stock and making it 

available to the widest range of potential homebuyers. 

In my testimony today, I will address several key issues regarding the Ability to Repay Qualified 

Mortgage (QM) rule. The Dodd-Frank Wall Street Reform Act established the QM as the primary 

means for mortgage lenders to satisfy its "ability to repay" requirements. NAR has been generally 

supportive of the Consumer Financial Protection Bureau's (CFPB or the Bureau) efforts to craft a 

QM rule that is not unduly restrictive and provides a safe harbor for lenders making QM loans. 

NAR has had policy supporting the idea that lenders measure a consumer's ability to repay a loan 

since 2005. 

3% Cap on Fees and Points 

However, Dodd-Frank also provides that a Qualified Mortgage (QM) may not have points and fees 

in excess of 3 percent of the loan amount. As currently defined by Dodd Frank and in the 

Consumer Financial Protection l\gency's (CFPB) final regulation to implement the "ability to repay" 

requirements, "points and fees" include (among other charges): (i) fees paid to affiliated (but not 

unaffiliated) title companies, (ii) amounts of homeowner's insurance held in escrow, (iii) loan level 

price adjustments (LLPAs), and (iv) payments by lenders to correspondent banks and mortgage 

brokers in wholesale transactions. 

As a result of this problematic definition, many loans made by affiliates, particularly those made to 

low- and moderate-income borrowers, would not qualify as QMs. Consequently, these loans would 

be unlikely to be made or would only be avaihble at higher rates due to heightened liability risks. 

Consumers would lose the ability to choose to take advantage of the convenience and market 

efficiencies offered by one-stop shopping. H.R. 1077, "The Consumer Mortgage Choice Act," has 

been introduced by Reps. Huizenga (R-MI), Bachus (R-AL), Royce (R-CA), Stivers (R-OH), Scott 

(D-GA), Meeks (D-NY), Clay (D-MO), and Peters (D-MI) to address the inequitable treatment 

inherent in the fees and points calculation. Similar legislation (S. 949) has been introduced by 

Senators Manchin (D-W\') and Johanns (R-NE) in the Senate. 

It has been argued that CFPB has the authority to fix this problem. The Bureau has partially 

addressed some of the original concerns ,vith the counting of loan officer compensation towards the 

3% cap. However, as the CFPB noted in their final rule and intimated in recent testimony, they do 

not believe they have the authority to fix the issue of aHiliate charges and do not plan to address 

2 
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81767.063

further other matters. For this reason, NAR believes that ooly Congress can fully rectify the law's 

discrimination against affiliates, small and mid-size lenders, community banks, and credit unions in 

the calculation of fees and points. 

Key Components of H.R. 1077 

The key components ofB.R. 1077 include: 

• The bill removes aHiliate title insurance charges from the calculation of fees and points. The 

title industry is regulated at the state level and competitive. It does not make sense to 

discriminate against one type of provider, i.e. afiiliates, on the basis of these regulated fees. 

To do so would only reduce competition and choice in title services and providers to the 

detriment of consumers. In a recent study of transactions by one real estate firm with 

affiliate mortgage and title operations, title and related charges were actually found to be 

$500 less than that of its unaffiliated competitors in the market. 

Furthermore, owners of aHiliated businesses can earn no more than a proportionate return 

on their investment under the Real Estate Settlement Procedures Act (RESPA). RESPA 

also prohibits referral fees or any compensation at all for the referral of settlement services. 

As a result, there is no steering incentive possible for individual settlement service providers 

such as mortgage brokers, loan officers or real estate professionals. Since the Bureau now 

enforces RESP A and has enhanced authority under the statute, the Bureau has all the power 

necessary to prosecute kickback situations and other violations of RESP A. Instead of 

applying a double standard to affiliates, the Bureau should use its RESPA authority to ensure 

that both afiiliated and unaffiliated companies of all sizes comply with RESP A. 

The bill removes a manner of counting fees and points that would unfairly discriminate 

against Mortgage Banking and Mortgage Brokerage entities by only counting as fees and 

points monies paid directly by the consumer to the originator, be they a broker or a 

mortgage bank loan officer. The Bureau partially addressed this issue in a recent rulemaking. 

However, NAR believes the legislative language remains necessary to ensure now and in the 

future that certain business models popular with consumers arc not unfairly discriminated 

against in the calculation of fees and points. 

• The bill removes from the calculation of fees and points Fannie Mae and Freddie Mac Loan 

Level Price Adjustments (LLPAs). This money is not revenue accruing to the lender. These 

adjustments are essentially risk based pricing established by the GSEs, and can sometimes 

exceed 3 points in and of themselves. Including these LLPAs would limit access to 

affordable mortgage credit to many borrowers or force borrowers into more costly FHA or 

non-QM loans unnecessarily. 

3 
107 


81767.064

The bill removes from the calculation of fees and points escrows held for taxes and 

insurance. The tax-related language clarifies imprecise language contained in Dodd-Frank. 

In the case of insurance escrows, these escrows are held to pay homeowners insurance and 

can be a large amount. They are not retained by an affiliate, and cannot be retained under 

RESP A, since RESP A requires excess escrows to be refunded. While the CFPB has stated 

that both taxes and insurance escrows are not to be counted, their guide to the Ability to 

Repay rule and the language defining fees and points both clearly state that insurance is to be 

counted when affiliates are involved with the transaction. While we appreciate the Bureau's 

efforts to address this, NAR believes the legislative fix is tbe most certain way to avoid 

future confusion and legal risk. 

Ascribing additional charges to the affiliated lender is clearly unfair and may in fact lead to greater 

costs for consumers or at the very least, increased consumer dissatisfaction and decreased consumer 

choice. Studies show that consumers see a significant benefit to having their real estate agent and 

broker at the lead in the transaction and using their affiliated businesses for key services such as 

mortgage and title insurance. J n a 2010 Harris Interactive study conducted after enactment of 

Dodd-Frank, buyers said that using affiliates saves them money (78%), makes the home buying 

process more manageable and efficient (75%), prevents things from "falling through the cracks" 

(73%), and is more convenient (73%) than using separate services. The survey also showed that 

buyers who used affiliates tended to be more satisfied than those who did not. Finally, more than 

50% of home buyers who were aware that a firm offered a full range of services reported that it 

positively impacted their decision to use a particular real estate agent and the firm (as opposed to no 

impact or a negative impact.) \Vithout f-LR. 1077, many of these buyers would lose that option. 

This bill is essential to maintain competition and consumer choice in mortgage origination. \Vithout 

this legislation, and based on surveys of large real estate firms with affiliates, one-quarter to as much 

as one-half of loans currently being originated would likely not be eligible for the QM safe harbor. 

Consequently, these loans would likely not be made or would be concentrated amongst the largest 

retail lenders whose business models are protected from the fees and point definition discrimination. 

Therefore, NAR believes that Congress should pass HR 1077 well before the "ability to repay" 

provisions take effect in January 2014 since lenders are likely to begin adjusting their systems in the 

fall of 2013. 

OTHER AREAS OF CONCERN 

43 Percent Debt to Income Limit (DTI) 

Another area of concern with regard to the underwriting standards for QM will be jumbo loans with 

DTI in excess of 43% and other loans, particularly when the exception for GSE loans expires. For 

lower loan amounts, FHA and other government backed loans ,vill be the only loans that ,,,ill satisfy 

the QM safe harbor when DTI exceeds 43%. Even if the GSE exception is maintained, jumbo 

loans and non-GSE or government backed loans ,,,ill be subject to the 4.3% DTI cap making them 

more costly or less likely to he made. 

4 
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81767.065

For jumbo loans in particular, the DTl cap could impose significant restrictions in high cost areas. 

High income borrowers are more likely to obtain jumbo financing. Because o[ their higher residual 

incomes in gross terms, they Can afford to have a higher debt to income ratio. NAR fears that if the 

non·QM market does not emerge or is anemic, credit in high cost areas could be further restrained. 

Therefore, we support greater flexibility with regard to DTI limits and QM. 

QM and Qualified Residential Mortgage (QRM) 

NAR believes that, assuming the concerns with fees and points are addressed, the QIUvf (which does 

not require risk retention by securitizers) should be constructed to match the QM. Dodd·Prank 

establishes that the QRM can be no broader than the QM, but it does not say it cannot be 

substantially the same. NAR has conducted significant research and has determined that further 

imposition of downpayment requirements and tighter debt·to· income and credit standards will 

decrease access to credit and increase costs without creating substantial improvements in loan 

quality. 

In addition to cost concerns, NAR believes that [or regulatoty compliance purposes and to ensure 

consistent and reliable securitizations, having the two standards mirror each other is advisable. It is 

simply far easier to apply one test to a loan than two. It would also prevent possible issues ,vith 

creating another class of loans, i.e. those that are QM but not QRl\1, that might affect their overall 

marketability and cost. 

For these reasons, Congress should support, and regulators should establish, a QRM that 

substantially mirrors the QM. 

CONCLUSION 

NAR supports a broad QM rule that does not discriminate against affiliates, smaller lenders, 

community banks, or credit unions. Furthermore, NAR supports a QM rule that gives consumers 

maximum choice in service providers. Finally, NAR supports a QM and QRM rule that does not 

needlessly cause credit to be more costly or unobtainable. 

We are already in a tight credit environment. The QM and other rules effectively ban the types of 

products and processes that led to the mortgage crisis. Congress and the CFPB should improve the 

QM rule to ensure that consumers who have the ability to repay their loans will have the access to 

affordable credit they deserve. 

NAR thanks the Subcommittee members for their attention to these issues. We look forward to 

working with Congress and the Administra tion on efforts to address the challenges srill facing the 

nation's housing markets. 

5 
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81767.066

TESTIMONY OF 

CHARLES A. VICE 

COMMISSIONER 

KENTUCKY DEPARTMENT OF FINANCIAL INSTITUTIONS 

On behalf of the 

CONFERENCE OF STATE BANK SUPERVISORS 

On 

"THE ABILITY-TO-REPA Y AND QUALIFIED MORTGAGE STANDARD FINAL RULE" 

Before the 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT SUBCOMMITfEE 

COMMITTEE ON FINANCIAL SERVICES 

UNITED STATES HOUSE OF REPRESENTATIVES 

Tuesday, June 18,2013,10:00 a.m. 

Room 2128 Rayburn House Office Building 
110 


81767.067

INTRODUCTION 

Good morning Chainnan Capito, Ranking Member Meeks, and esteemed membcrs ofthc 

Subcommittee. My name is Charles Vice, and I serve as the Commissioner of the Kentucky 

Department of Financial Institutions. I am also the Chainnan of the Conference of State Bank 

Supervisors (CSBS). 

I appreciate the work of this Subcommittee and the full Committee to examine the impact 

of the Ability-to-Repay Rule and the Qualified Mortgage (QM) on the financial services industry 

and consumers. [also appreciate the opportunity to participatc in this important discussion. 

CSBS is the nationwide organization of banking regulators from all 50 states, the District 

of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands. Statc banking regulators 

supervise 5,271 state-chartered depository institutions, most of which are community banks. 

Additionally, most state banking departments regulate a variety of non-bank financial services 

providers, including mortgage lenders. For more than a century, CSBS has given state 

supervisors a national forum to coordinate supervision oftheir regulated entities and to develop 

regulatory policy. 

As part of this work, state banking commissioners have devoted tremendous effort to 

examining the regulatory environment for community banks. Through the CSBS Community 

Bank Steering Group and our policy development committees, we have reviewed community 

bank regulation, supervision, and proposals to address the challenges facing community banks. I 

As a result ofthese efforts, state regulators have identified portfolio lending as a key opportunity 

for policymakers to ensure community banks' ability to contribute positively to the economic 

well-being oftheir local markets. While today's hearing centers around the ability-to-repay rule 

and issues such as rural counties and balloon loans, the broader issue is the problems posed by a 

one-size-fits-all approach to regulating portfolio-based lending by community banks. 

THE COMMUNITY BANKING BUSINESS MODEL 

In my 25 years as both a federal and state bank regulator, it has become abundantly clear 

community banks are vital to economic development, job creation, and financial stability. The 

unique characteristics ofthe community bank business model set these institutions apart from the 

largest, most complex financial institutions. 

For instance, community banks make credit available to individuals in all corners ofthe 

United States, ranging from the largest city to small, rural communities. According to the 

Federal Deposit Insurance Corporation's (FDIC) Community Banking Study, community banks 

are almost three times more likely than their counterparts to operate a banking office outside a 

metro area. 2 In fact, community banks are the only banking presence in 629 counties in the U.S.3 

1 CSBS has identified a series of specific community bank regulatory relief proposals targeted at the key regulatory 

challenges that we see for smaller institutions. The full list of these proposals is included as Exhibit A at the end of 

this testimony. 

2 FDIC Community Banking Study, 3-4 (December 2012). Available at 

http://www.fdic.gov/regulations/resources/cbi!studY·html. 

1 
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By ensuring access to credit throughout the United States, community banks support areas 

otherwise not serviced by the financial services industry and provide a stabilizing force for the 

broader economy through macroeconomic cycles. 

Community banks also fuel America's small businesses by understanding the local 

markets in which their customers operate. According to the FDIC Community Banking Study, 

while holding only 14 percent of banking industry asscts, community banks hold 46 percent of 

the banking industry's small loans to farms and businesses.4 While the nation's largest banks are 

also engaged in small-business lending on a large scale, the types of small business loans 

originated by community banks vary significantly from the small business loans originated at the 

largest banks. By the nature of their scale, the largest banks rely heavily upon model-drivcn 

lending practices, which turn small business loans into commodities. This system allows for 

tremendous volumes of loan origination, but fails to allow for judgment and flexibility at the 

local level. 

Community banks are able to offer individualized credit products because they utilize 

different lending techniques than the largest institutions, engaging in relationship lending that 

considers "soft" data that can be more qualitative than quantitative. This enables community 

banks to originate and hold loans customized for their customers, including mortgages that 

would not qualify for the secondary markct. Community banks make these loans because the 

banks understand the property, borrower, and credit type. This approach to lending supports 

communities in good times and bad, as witnessed by the $36 billion increase in mortgages held 

in portfolio by community banks when the secondary market came to a grinding halt in 2008.5 

PORTFOLIO LENDING 

My fellow regulators, and perhaps everyone in this chamber, agree lenders should 

determine a borrower's ability to repay the loan before extending any form of credit. It is a 

simple tenet of lending that was overlooked as new securitization-based lending models 

developed. As such, an explicit ability-to-repay standard as a response to a structural flaw in the 

originate-to-distribute business model is logical, despite the fact such requirements should be an 

inherent part of every mortgage transaction. However, lenders that hold loans on their books are 

fully incentivized to ensure the borrower can mect the monthly obligations of a mortgage. As 

such, lenders that retain the full risk of a borrower's default should be presumed to have made a 

good-faith effort of determining repayment ability, and it is their regulator's responsibility to 

trust and verify this determination. 

Loans held in porttolio should be regulated and supervised differently than those 

originated tor sale to third parties. 

State regulators have long supported a flexible approach to underwriting for institutions 

that retain mortgages in portfolio because interests are inherently aligned between consumers and 

3 FDIC Community Banking Study at 3-5. 

4 FDIC Community Banking Study at 5-1. 

S The amount of 1-4 Family Loans held in portfolio by banks with less than $10 billion in assets increased over $36 

billion from year end 2007 to 2008. FDIC Statistics on Depository Institutions (March 2013). 

2 
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81767.069

lenders that retain 100 percent of the risk of default. When the consumer defaults, portfolio 

lenders are incentivized to work with the borrower to fix the problem. 

We were pleased to see the Small Creditor QM rule recognizes the portfolio lending 

business model by creating a regulatory framework that supports the retention of mortgages in 

portfolio by community banks. The Consumer Financial Protection Bureau (CFPB, or the 

Bureau) appropriately summarized the aligned interest between borrowers and lenders, stating 

portfolio lenders "have strong incentives to carefully consider whether a consumer will be able to 

repay a portfolio loan at least in part because the small creditor retains the risk of default.,,6 

To memorialize the aligned interests of portfolio lending, the CFPB has conferred QM 

benefits on loans originated by "small creditors." Small creditors are defined as those 

institutions with less than $2 billion in assets and fewer than 500 mortgage originations annually 

who keep those mortgages in their portfolio. These small creditors will be given more flexibility 

in the underwriting process, will not be subject to the prescribed 43 percent debt-to-income ratio 

requirement in the standard QM, and will have a higher cost threshold for the levels of protection 

conferred by QM status. The standard QM confers safe harbor protection from liability for loans 

that cost less than 1.5 percent above the average prime offer rate, and a lower level of legal 

protection - a rebuttable presumption of compliance for those that cost 1.5 percent or more 

above the average prime offer rate. Recognizing that funding for community bank portfolio 

lending can be more expensive than other market participants, the CFPB increased this threshold 

to 3.5 percent for the small creditor QM. This threshold increase appropriately accounts for 

differences in the community bank business model, giving portfolio lenders the flexibility they 

need to originate loans based on consumer needs. 

The policy implications of this regulatory right-sizing are critical for local economies 

across the country. By instilling legal certainty, community bank portfolio lenders will be able 

to make individualized lending determinations based on the credit needs of their customers. This 

is crucial for markets and borrowers who do not fit standardized credit profiles, reassuring 

lenders that properly underwrite loans that they have adequate legal protections when operating 

outside of secondary mortgage market parameters. 

By promulgating a smaller institution-focused rule that recognizes the difference between 

portfolio lending and the originate-to-distribute model, the CFPB has taken the first step in 

appropriately tailoring regulation to the community bank business models. The CFPB Small 

Creditor QM is a starting point for right-sizing regulations as they apply to community banks, 

and CSBS encourages both Congressional and regulatory policymakers to utilize the CFPB small 

creditor concept as a model when moving forward in the development of other laws and rules 

that impact the portfolio loans of small creditors, such as appraisals, escrow, and capital 

requirements. 

6 Ability to Repay Standards Under the Truth in Lending Act (Regulation Z), 78 Fed. Reg. 6622, 6624 (January 30, 

2013). 

3 
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Balloon loans held in portfolio should be considered QMs ifthe creditor has considered 

the borrower's ability to repay on an amortized basis over the lite ofthe loan. 

The treatment of balloon loans is one example where regulation is taking a broad brush 

approach that disadvantages community banks. When used responsibly, balloon loans are a 

useful source of credit for borrowers in all areas. Properly underwritten balloon loans are 

tailored to the needs and circumstances of the borrower, including situations where the borrower 

or property is otherwise ineligible for standard mortgage products. Since the mortgage is held in 

portfolio, community banks must work to ensure that the product is tailored to take into 

consideration all risks associated with the credit in order to avoid default. 

Some have suggested that adjustable rate mortgages (ARMs) provide a suitable substitute 

for balloon loans. While many community banks and borrowers utilize ARMs, they are not 

necessarily the better option for all consumers. Because banks can restructure the terms of a 

balloon loan more easily than an ARM, they are able to offer the consumer more options for 

affordable monthly payments, especially in a rising interest rate environment. As a regulator, I 

prefer that lenders and borrowers in my state have flexibility and options when selecting 

consumer products and mortgages. Consumers and borrowers should not be forced into a 

product because of regulations prompted by the deficiencies of another business model. The 

ability for institutions and consumers to make informed decisions on the best suited product for 

their circumstances, such as a balloon loan, is an important risk-mitigation strategy I would like 

to see preserved. 

In the run-up to the mortgage crisis, much ofthe underwriting for the "exploding" 2128 

and 3/27 teaser loans did not include a consideration of the borrower's ability to repay over the 

life of the loan and relied on the faulty assumption that housing prices would continue to rise. 

This business model did not have the consumer and investor protections inherent in all loans held 

in portfolio. Unfortunately, in addressing the failure of these products, the Dodd-Frank Act 

failed to consider the ramifications for banks that make traditional balloon loans responsibly and 

hold them in portfolio. By limiting balloon loans to those made in rural areas, the ability-torepay and QM standards final rule eliminates a consumer-enabling product from being originated 

by lenders who retain 100 percent of the risk of default by holding the loan in portfolio. 

The CFPS has made an effort to limit the negative statutory effects on balloons held in 

portfolio by extending the time frame before the balloon loan restrictions take place, potentially 

offering Congress an opportunity to act on this issue. This ensures portfolio lenders have time to 

work through issues with existing balloons, but also allows polieymakers the opportunity to 

ensure a useful tool is not permanently removed from a bank's toolbox. Community banks offer 

balloons to satisfy consumer needs and accommodate their customers on an ongoing basis, which 

should be recognized under law. Accordingly, CSBS supports creating a statutory Small 

Creditor QM and applying it to all loans held in portfolio, including balloon loans. 

4 
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Absent a legislative change conferring QM status on balloon loans held in portfolio, the 

CF'PB should establish a petition process to fix inconsistencies in the rural designation 

process. 

Balloon loans are currently eligible for QM status if they meet the basic QM 

rcquirements and are originated in a "rural or underserved" area. 7 The CFPB has the 

responsibility for defining "rural" and "underserved." Originally proposed by the Federal 

Reserve, the CFPB adopted certain county characteristics under the USDA's Urban Influence 

Code to determine the definition of "rural."g Though the CFPB clearly put considerable thought 

and effort into this definition, including expanding the narrow Urban Influence Codes proposed 

by the Federal Reserve, it has produced some illogical results. This is hard to avoid when trying 

to establish one standard for categorizing every rural area in a country with 3,794,000 square 

miles and more than 300 million people. Indeed. there are several federal rural definitions. 

including those based on Census Places, Census Urban Areas, Metro Counties, Rural-Urban 

Commuting Areas, contiguous Urbanizcd Areas, and others. 

No single definition gets it right because land and population characteristics are 

inherently local and cannot be dictated by formula. Accordingly, CSBS has proposed that the 

CFPB establish a process whereby an interested party can petition the Bureau to designate a 

certain county as "rural" for the purposes of the balloon QM requirements under current law. 

State geography makes it difficult to issue a uniformly applicable definition of "rural" 

based on county characteristics. A comparatively small state in land area, Kentucky has the third 

most counties with 120, behind only Texas (254) and Georgia (159). This makes Kentucky 

difficult to quantify for purposes of defining "rural" via Urban Influence Codes, which 

essentially consider a county part of a metropolitan or micropolitan statistical area if it borders a 

county that has a city of 10,000 or more. Since there are comparatively more counties in 

Kentucky than other states, a single county can have up to seven neighboring counties, thereby 

increasing the likelihood the Urban Influence Code will not necessarily reflect the underlying 

characteristics of the county. 

As currently defined by the CFPB rule, the average rural county in Kentucky contains 57 

people per square mile, However, there are 12 counties considered non-rural that have 57 people 

per square mile or less, including Bracken, Hancock, McLean, and Trimble counties, all with 

fewer than 10,000 people9 Conversely. there are 32 rural counties with more than 57 people per 

squarc mile, including one with 215 people per square mile and a total population of 65,565. It 

is illogical that a "rural" county can have six times the number of people on aggregate and five 

times the number of people per square mile than a non-rural county with a smaller population. 

These are the types of results that occur when an inherently local issue like determining the 

characteristics ofland areas is done by formula in Washington, D.C. and not by local officials. 

7 15 U.S.c. § 1639c(b){2)(E)(iv)(I). 

8 The applicable Urban Influence Codes for the rural definition are all noncore counties and micropolitan counties 

not adjacent to a metropolitan area. 12 C.F.R. 1026.25(b)(2){iv)(A). For more information on Urban Influence 

Codes, see hltP:!lwww.ers.usda.gov/data-products/urban-influence-codes.aspx. 

9 All census numbers are based on the 2010 census, which is the source of the currently applicable Urban Influence 

Codes. 

5 
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This is the case in many other states. For example, Wirt County, West Virginia is not 

considered rural because of its proximity to Parkersburg. Wirt County has one town, Elizabeth, 

24 unincorporated communities, and only 5,717 people. In Massachusetts, the island counties of 

Nantucket and Dukes (home of Martha's Vineyard) are considered rural, but the considerably 

less commercial Franklin County is not. There are five more people per square mile in Franklin 

County than Nantucket, but the counties are on opposite ends ofthe Urban Influence Code scale. 

The CFPB's approach also creates illogical results in states with fewer, larger counties. 

For instance, Nye County, Nevada is the third-largest county in the United States. Despite 

containing only 2.42 persons per square mile and being home to Yucca Mountain, once 

considered for a nuclear waste repository because of its remoteness, Nye is not considered rural 

because it neighbors Clark County, home of Las Vegas. 

To remedy the inconsistencies of a blanket approach to the rural definition and in the 

absence of a statutory change, CSBS has suggested the CFPB adopt a petition process for 

interested parties to seek rural designation for counties that do not fit the Urban Influence Code 

definition - a step that is within the CFPB's current authorities. CSBS recommended this 

approach to the CFPB in a letter dated March 26, 2013. 10 We stand ready to work with the 

CFPB to implement a regulatory process to enhance their challenging task of characterizing over 

3,000 unique counties. 

MOVING FORWARD 

Tfthe regulatory framework for the ability-to-repay requirement is going to encompass 

all mortgage lending, it needs to have the flexibility to adapt to varying business models - from 

originate-to-distribute lenders, to large banks that originate mortgages in a more production-line 

fashion, to community banks that hold loans in their portfolios. The originate-to-distribute 

market and the standardized lending models of large banks provide an excellent source of 

mortgage credit. However, the scale of these operations requires that underwriting be 

standardized to support a volume-focused business. This approach precludes the individualized 

lending determinations performed by community banks, which make a case-by-case 

determination of repayment ability for loans held in portfolio. 

It is our responsibility as state regulators to ensure community banks can offer flexible 

products to meet the needs of their local communities, and it is the responsibility of policymakers 

to create a legal and regulatory framework that permits flexibility where borrower and lender 

interests are aligned. The CFPB has created a framework to accommodate this lending model 

through their Small Creditor QM, and policymakers should look to this framework in any reform 

initiatives. 

At its core, community banking is about aligning economic incentives between borrower 

and lender. Community bank portfolio lenders are incentivized to ensure payments can be made 

over the life of the loan because they retain the full risk of default. Because of this risk, I expect 

the institutions I supervise to determine repayment ability based on the borrower's income, 

10 The (SBS letter to the (FPB is included as Exhibit B at the end of this testimony. 

6 
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assets, employment, credit history, and ability to pay other debts. These are time-tested practices 

that ensure banks are lending in a safe and sound manner that regulators review through the 

supervisory process. This process works and should be encouraged for all loans held in portfolio 

by community banks to ensure they can continue to meet the credit needs oftheir communities. 

Although this testimony focuses on mortgages and the Ability-to-Repay and QM 

Standard, we see the potentially harmful consequences of a one-size-fits-all approach to 

regulation across many areas of basic community banking and rules and regulations. For 

instance, banks need increased levels of and enhanced quality capital, but the Basel III standards 

designed for globally systemic financial institutions should not also apply to a $200 million 

bank. By way of comparison, Citibank in New York and Deutsche Bank in Frankfurt are 

respectively 5,000 and 10,000 times larger than the loeal community bank in Flemingsburg, 

Kentucky, creating a drastically different scope and scale of risks. Similarly, proprietary trades 

should not have the benefit of the federal safety net, but small banks should not have to prove 

they comply with the Volcker Rule when they only engage in basic commercial bank activities. 

As public officials charged with ensuring these institutions are well run and serve the local 

communities in which they operate, it is important federal policy appropriately recognizes the 

community bank business model for these institutions to continue serving their markets. 

Thank you for the opportunity to testify today. State regulators stand ready to work with 

Members of Congress and our federal counterparts to develop and implement a supervisory 

framework that continues to recognize the importance of our unique dual-banking system. 

7 
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[3~[3~ Sl~CE 1902 

CONFERENCE OF ST,L,\TE BANK SUPERVISORS 

Proposals for Community Bank Regulatory Relief 

June 2013 

EKhibit A 

As locally based and locally accountable regulators, State Banking Commissioners are 

committed to ensuring a diverse financial services and banking industry. CSBS and its members 

believe that community banks are a necessary part of this diverse system and key to ensuring 

locally accessible credit and financial services. CSBS and its members also are concerned about 

the challenges facing the community bank business model, particularly those challenges arising 

from regulation and supervision. As a result of the work of the CSBS Community Bank Steering 

Group, the CSBS Board of Directors, and the entire membership CSBS has developed this list of 

regulatory relief proposals focused on ensuring that regulation and supervision reflect the 

community bank business model. 

1. The Law Should Ensure Regulations are Tailored for Portfolio Lending 

Banks that originate and hold consumer loans have an aligned economic interest with 

the borrower. These banks provide the capital to support the credit and live with the 

risk of non-performance. In some cases, the credit is tailored to the needs and 

circumstances of the borrower which may prohibit the loan from being sold on the 

secondary market. This is an important source of credit for consumers and small 

businesses. Therefore, regulations should be tailored in such a way that they support 

and do not impede portfolio lending. 

2. Fair Lending Examination Procedures Must be Tailored to Recognize the Relationship 

Lending Model of Most Community Banks 

Many times it is not the statute that creates the problem but the interpretation, 

guidance, and the examination techniques utilized. Despite interagency examination 

guidelines and assurances of continued fair lending collaboration, the states have 

observed a drastic difference in how the three federal banking agencies treat 

community banks on these issues. Our Community Bank Steering Group has listed 

overzealous compliance/fair lending examinations as a major issue facing community 

banks. 

Application of one size fits all examination techniques and tools to community banks 

without regard for the use of judgment based on deep knowledge of local credit 

markets is not appropriate. For example, loans held in portfolio often are tailored to the 

needs and circumstances of the borrower. A fair lending analysis of community bank 

loans should capture the differences and nuances of how and why certain loans were 

made or why there may be a difference in terms. 

1129 20'" Street. N W .• ninth Floor. Washington, DC • 20036 

www.csbs.org .202-296-2840. FAX 202-296-1928 
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Despite assurances to the contrary, we are seeing an examination approach that lacks 

recognition of the community bank business model. Institutions are abandoning certain 

products due to these examination practices. The result is that the consumer and small 

business person are forced to leave the banking system for alternative delivery of 

products at a higher cost. 

In addition to requiring accountability through its oversight capacity, Congress should 

explore ways to recalibrate fair lending requirements to recognize the community bank 

approach to relationship-based lending. Supervisors must utilize their flexibility to look 

beyond statistical models to determine fair lending violations at community banks. 

3. Remove the Rural or Underserved Definition for Balloon Loans 

Limitation of the rural or underserved standard to balloon loan qualified mortgages 

should be eliminated. Balloon loans should be treated under the basic small creditor 

Qualified Mortgage standard proposed by the CFPB. 

4. Appraiser Qualifications for Certain 1-4 Family Loans 

Regulations regarding appraisals can curtail credit in smaller communities where there 

can be a lack of qualified appraisers or a lack of comparable sales. Congress should 

require regulations to accommodate portfolio loans for owner-occupied 1-4 family 

loans, recognizing the unique challenges to securing a qualified appraisal and the 

lender's proximity to the market. 

5. Ensure State Supervisory Representation on Federal Regulatory Bodies 

The current FDIC Board does not include an individual with state regulatory experience 

as required by law. The FDI Act and Congressional intent clearly require that the FDIC 

Board must include an individual who has worked as a state official responsible for bank 

supervision. As the chartering authority for 74% of all banks in the U.S., state regulators 

bring an important regulatory perspective that reflects the realities of local economies 

and credit markets. Congress should refine the language of the FDI Act to ensure that 

Congress's intent is met and that the FDIC Board includes an individual who has worked 

in state government as a banking regulator. 

In creating the CFPB, Congress dearly recognized that the CFPB would touch a variety of 

state-regulated financial services providers, and Congress directed the CFPB to 

collaborate closely with state regulators across both bank and non-bank supervision. 

Should Congress choose to establish a CFPB governing board, it must include a member 

with state supervisory experience. 
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6. Revise the Dodd-Frank Act Creditworthiness Provisions 

Certain aspects of Dodd-Frank that require the federal regulators to remove references 

to credit rating agencies in their regulations have negative implications for permissible 

investments standards. Community banks will be required to perform more in depth 

analysis of investment options to demonstrate their investment grade status. Many 

community banks do not have to capacity to perform such analysis and may be forced 

to turn to expensive third party analysis or abandon certain investment options 

altogether. Many of these investments are local bond issues that provide critical 

support to schools and city and county governments. Congress should revisit the DoddFrank creditworthiness provisions to ensure this unintended consequence for 

community banks is resolved. 

7. Application Decisions Related to Community Banks Should Not Set Precedent for SIFls 

Community bank applications submitted to federal banking agencies for transactions 

such as mergers and capital investments can take an extended time to process because 

the agencies have to ensure the decision will not establish a precedent that could be 

exploited by larger institutions. Federal law could provide the necessary protection by 

stating that application decisions for banks below a specified size (perhaps $2 billion) do 

not establish a precedent for any institution designated as a SIFI (Le., a bank holding 

company over $50 billion or a designated non-bank SIFI). 

To further address the length of time the agencies are taking to review these 

applications, the review and approval process for applications submitted by institutions 

below a certain size should be de-centralized with rnore final decision-making authority 

given to FDIC Regional Offices and the regional Federal Reserve Banks. 

8. Deposit Insurance for Defined Transaction Accounts 

The expiration of the Transaction Account Guarantee program eliminated an option for 

community banks to serve local businesses during a time of continued economic 

uncertainty. To encourage businesses to bank with community banks, the FDIC should 

treat deposits in defined transaction accounts, such as payroll, as the deposits of the 

designated beneficiaries of the funds. As evidenced by deposit insurance for revocable 

trust accounts, the FDIC has the authority to apply pass-through insurance to defined 

transactions where relationships are fiduciary in nature, such as when payroll funds are 

placed in a transaction account for the benefit of explicit employees. This would ease 

business concerns and protect consumers by spreading deposit insurance to each 

employee's share of the sum set aside for payday. 

9. Risk·Based Capital 

Congress should mandate a study (by GAO or another applicable body) that investigates 

the value and utility of Risk-Based Capital for smaller institutions. The study should seek 
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to understand how risk weights drive behavior in the volume and type of credit a bank 

originates, as well as the burden of providing the necessary data for calculation of the 

ratios. 

10. Concern about Delayed Recognition of Losses 

Certain proposals addressing banking relief over the last few years have included 

provisions, such as delayed recognition of commercial real estate losses, that 

manipulate accounting standards in a fashion which overstates the financial condition of 

banking institution. We have longstanding safety and soundness concerns about 

measures that delay recognition of losses and believe they should not be included 

regulatory relief bills in the future. 

Questions? Please contact: 

Matt Lambert (mlambert@csbs.org I 202.407.7130) 

Margaret Liu (mliu@csbs.org I 202.728.5749) 

Sandy Sussman (ssussman@csbs.org I 202.407.7160) 
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81767.078

CONFERENCE OF STATE B/".NK SUPERVISORS 

March 26, 2013 

The Honorable Richard Cordray 

Director 

Consumer Financial Protection Bureau 

1700 G Street, NW 

Washington, D.C. 20552 

Dear Director Cordray, 

Exhibit B 

As the Consumer Financial Protection Bureau ("CFPB") prepares to implement balloon qualified 

mortgage and escrow requirements for rural creditors, the Conference of State Bank 

Supervisors ("CSBS") would like to take the opportunity to suggest an additional procedural 

mechanism for the CFPB to utilize when determining whether an area should be defined as 

"rural." To mediate the inconsistencies inherent in a nationwide rural classification system, 

CSBS recommends adopting a petition process whereby interested parties can petition the 

CFPB to make a determination that a specified and bounded area be considered rural for the 

purposes of Truth in lending rural requirements. 

COUNTY DESIGNATIONS REQUIRE A FLEXIBLE RURAL DESIGNATION ALTERNATIVE 

Practically speaking, there is no single good manner to define "rural" in a country with 

3,794,000 square miles and more than 300 million people. As a result, the rural designation will 

not be applied to areas inherently rural because states and county sizes vary significantly. For 

example, the third largest county in the United States, Nye County Nevada, has only 43,946 

people over 18,159 square miles, or 2.42 persons per square mile. Due to its proximity to las 

Vegas, Nye County is still considered a core county under the Urban Influence Code, thereby 

preventing it from being defined as rural for Truth in lending purposes. This is evidenced by the 

fact that Nye is the site of Yucca Mountain, the Department of Energy's original proposed site 

for storing spent nuclear fuel because of its remoteness among other characteristics. 

The variance in rural definitions stems beyond the Urban Influence Code. The United States 

Department of Agriculture Economic Research Service can generate nine different definitions of 

"rural" depending on land boundaries and population thresholds. This creates a myriad of 

"rural" possibilities, from Census Places with a population less than 2,500 people, to a definition 

based on Rural-Urban Commuting Areas. While these options do not use counties as 

boundaries, it is easy to see why the CFPB would use a metric that relies on counties - the 

Urban Influence Code - as the applicable land boundary. Every house must be in a county, 

which is an easily quantifiable area. However, the population of that county may vary 

significantly, as might the Urban Influence Code classification because ofthe surrounding 

populations. 

1129 20'h Street, NW. Ninth Floor Washington, DC 20036 www.csbs.org 

202-296-2840 FAX 202-296-1928 
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81767.079

To mediate these inconsistencies, a process should exist whereby an interested party could 

petition the CFPB for a county to be considered rural. Specified criteria could be required, such 

as: 

Census Places data 

Census Urban Area data 

• OMB Nonmetro County designation 

• Rural-Urban Commuting Area data 

• USDA Business and Industry ineligible location data 

USDA Rural Housing program criteria 

• Population Density 

• Population per square mile 

Considering the changing dynamics of population, it might be logical to have open submission 

periods for such a process, whereby submitted data can be compared so the results can be 

consistent for all lenders. This would also be logical given Urban Influence Codes are subject to 

change. 

When definitions affect credit availability, there should be some opportunity to submit a case 

to the defining body arguing why an area should be considered the type of area excepted for 

responsible balloon loan origination. CSBS would be happy to assist in the streamlining of such 

a process and commits to supporting any effort by the CFPB to mitigate the rural definition 

issue. 

BALLOON LOANS ARE A CRUCIAL CREDIT PRODUCT FOR COMMUNITY BANKS 

As a policy matter, CSBS believes portfolio lending aligns the interests of consumers and 

lenders, warranting a regulatory framework that encourages more originate-to-hold lending. 

CSBS believes the rural requirement for balloon qualified mortgages and escrow will often limit 

this type of responsible credit origination. However, CSBS recognizes the CFPB has limited 

options under the statute, further supporting the petition process outlined above. 

Balloon loans held in portfolio give consumers significant interest rate flexibility. Consumers 

will refinance balloon loans regularly when interest rates are attractive, and most community 

banks provide this service without fees. Banks are able to provide this service better with 

balloon loans than adjustable-rate mortgages because the terms are simpler. Indeed, system 

capabilities often prevent community banks from servicing ARMs. Further, current funding 

mechanisms make it easier for small creditors to match funding for balloon loans than 

adjustable rate mortgages, making this form of credit cheaper for the consumer. 

Community banks often originate balloon products and hold the mortgage on their books, 

refinancing and satisfying customer needs on an ongoing basis. Community banks also originate 

mortgages based on cost structures that do not include escrow services, working with the 
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borrower to make sure taxes, insurance, and other required payments are made in a timely 

manner. These considerations are size based, not population based, and rural requirements will 

have a significant effect on the responsible mortgage products offered in many states. While 

we appreciate the final rural definition is much broader than the definition proposed, there 

may be opportunity to accommodate certain areas where this credit should be available 

despite Urban Influence Code classifications. 

THE MARKET EFFECTS OF NEW RURAL DESIGNATIONS WILL BE NEGLIGIBLE 

By definition, the balloon qualified mortgage and escrow requirements are local in nature. The 

mortgages must be held on balance sheet by small creditors in specified areas. Accordingly, 

there can be no meaningful impact on the broader credit market by having a rural petition 

process for the balloon qualified mortgage and escrow requirements. 

As the CFPB continues to implement its mortgage rules, CSBS stands ready to help in the 

process as it relates to state and local areas. 

Thank you for your consideration, 

John W. Ryan 

President & CEO 

cc: 

Steven Antonakes, Acting Deputy Director 

David Silberman, Associate Director, Research, Markets & Regulations 

Meredith Fuchs, Associate Director, legal, General Counsel 
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81767.081

Statement of the Community Associations Institute 

House Financial Services Committee 

Subcommittee on Financial Institutions & Consumer Credit 

"Examining How the Dodd-Frank Act Hampers Home Ownership" 

June 18, 2013 

By 

Dawn Bauman 

Senior Vice President, Government & Public Affairs 

Community Associations Institute 
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81767.082

Chairwoman Capito and Ranking Member Meeks, thank you for the opportunity for 

Community Associations Institute (CA!)' to submit comments for the record for the 

Financial Institutions and Consumer Credit Subcommittee hearing entitled, "Examining 

How the Dodd-Frank Act Hampers Home Ownership." 

The Subcommittee's hearing focuses on the Consumer Financial Protection Bureau's 

(CFPB or the Bureau) Oualified Mortgage (OM) rule, which implements key mortgage 

lending reforms required by the Dodd Frank Act. The OM rule requires that mortgage 

originators reasonably verify borrowers have the ability to make payments under the 

terms of a mortgage loan before extending credit. The OM rule also mandates that 

terms and conditions of mortgage credit meet minimum consumer protection 

standards. 

CAl members support mortgage lending and securitization reforms that ensure access 

to credit on reasonable terms for Americans who choose to live in a community 

association (condominium, cooperative, or homeowner association).' Alternatively, CAl 

members strongly oppose any aspects of new mortgage lending and securitization 

policies that treat homeowners choosing to live in community associations differently. 

Support for Abilitv to Repay 

CAl members strongly support the basic premise that lenders be required to verify a 

borrower has the ability to repay a mortgage loan, including all mandatory monthly 

mortgage-related obligations, before extending credit. CAl members also strongly 

support the Bureau's determination that assessments paid by homeowners to their 

homeowner association are mortgage-related obligations. 

Homeowner assessments fund community governance, operations, and often essential 

municipal services. Examples of the activities and functions supported by community 

association assessments include maintenance of community infrastructure such as 

roads, bridges, and wastewater systems. Assessments also fund insurance and 

maintenance of common elements, community management and governance, utilities, 

and other critical community services. 

When homeowners fail to fund their fair share of community costs, the association must 

look to other owners to close budget shortfalls. Often, the only option is for the 

, Community Associations Institute is an international membership organization dedicated to building 

better communities. CAl and its more than 60 chapters provide education, tools and resources to the 

volunteers who govern communities and the professionals who support them. CAl's 32,000 members 

include community association volunteer leaders (homeowners), community managers, association 

management firms and other professionals who provide products and services to associations. CAl's 

vision is reflected in community associations that are preferred places to call home. 

1 All community associations have three defining characteristics: (1) membership is mandatory and 

automatic for all owners; (2) certain documents bind all owners to be governed by the community 

association; and (3) mandatory lien-based assessments are levied on each owner in order to operate and 

maintain the community association. There are three basic types of community associations: 

condominiums, cooperatives and planned communities. 

Community Associations Institute I Page 1 
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81767.083

community to increase assessment rates or to impose a one-time special assessment on 

owners. These options can jeopardize the financial viability of prudent borrowers by 

increasing mandatory housing costs. CAl members believe the ability to repay standard 

of the Dodd Frank Act will end this threat to both prudent borrowers and community 

associations. 

Including association assessments in the OM rule's ability to pay standard promotes the 

community association model of housing and is reasonable public policy. Unfortunately, 

not all aspects of the Dodd Frank Act or the OM rule meet this standard. 

Concern over Points & Fees Limitations 

Throughout consideration of the Dodd Frank Act, CAl members expressed concern that 

well-intentioned reforms may prevent creditworthy borrowers from qualifying for 

mortgage credit. The Dodd Frank Act's three (3) percent limitation on points and fees 

for OM loans offers a good example of this concern about unintended consequences. 

CAl members support the intent of Congress in limiting mortgage loan points and fees. 

Borrowers must be protected from hidden or excessive charges that are not related to 

the performance or purchase of a valid service or product or that do not otherwise 

directly benefit the borrower or the real estate being purchased. To protect borrowers, 

the Bureau must exercise restraint as a definition of the charges subject to the OM 

points and fees limitation that is too broad will prevent qualified borrowers from 

accessing credit on the best possible terms. 

CAl members are concerned the CFPB has failed to strike the right balance between 

consumer protection and access to credit in the final OM rule. The Bureau has included 

secondary market fees that are assessed on condominium unit mortgages in the OM 

rule's three percent points and fees limitation. 

Fannie Mae and Freddie Mac (the enterprises) assess Loan Level Price Adjustments 

(LLPAs) on each condominium unit mortgage the enterprises purchase or guarantee. By 

requiring these secondary market fees to be subject to the total points and fees cap for 

OM loans, the Bureau may force condominium unit borrowers into more expensive and 

restrictive mortgage loans. 

Based on fee schedules published by the enterprises, a 75 basis points LLPA is assessed 

on all condominium unit mortgages, irrespective of the stability of the condominium 

project or the credit qualification of the individual borrower. The enterprises also assess 

a wide number of other LLPAs and other fees sometimes known as Adverse Market 

Delivery Charges. The application of the fees is cumulative, and total secondary market 

charges vary by borrower and property type. 

By way of example, published LLPA schedules show that a well qualified condominium 

unit borrower approved for a mortgage with a loan to value ratio of 90 percent could 

face total secondary mortgage market fees equal to 2 percent of the loan balance. 

Community Associations Institute I Page 2 
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Other scenarios provided by the enterprises show that LLPA and other charges could 

range as high as 4.25 percent, depending on borrower, collateral, and mortgage 

product features. 

A borrower whose mortgage is subject to LLPAs must either pay higher points or a 

higher interest rate to offset secondary market costs incurred by the originator. 

Including these secondary market costs in the points and fees limitation increases the 

likelihood the mortgage will violate OM rule standards. In this instance, a borrower who 

meets the ability to pay test will be denied access to credit on the best possible terms 

not due to any defect of credit, but rather by arbitrary rule. Condominium unit owners 

and purchasers deserve access to credit on fair terms and the Bureau's final OM rule 

may prevent this outcome. 

LLPAs are already having a market impact on condominium unit owners. CAl notes that 

the Mortgage Bankers Association has cited LLPAs and other secondary market charges 

as a barrier to refinancing condominium unit mortgages through the Home Affordable 

Refinance Program (HARP). CAl members are very concerned that the inclusion of 

LLPAs and other secondary market fees in the total limitation on points and fees will 

mean condominium unit mortgages will not meet OM rule requirements. 

Further, as the OM rule is constraint on the ORM risk retention exemption, 

condominium loans may not be viewed in the secondary market as good candidates for 

securitization. This will dry up already tight sources of credit in the condominium 

mortgage market, devastate condominium unit owners who will face a lack of eligible 

buyers, and deny many would be first-time buyers homeownership opportunity. 

Support for Increasing Points & Fees Limitations 

CAl members strongly support efforts by this subcommittee and by the Congress to 

increase the three percent points and fees cap that governs both the OM and ORM 

standards. CAl members were disappointed the Bureau chose not to more fully revise 

the points and fees limitation in recent amendments to the OM standard and are 

concerned the Bureau may lack sufficient statutory authority to make necessary 

adjustments. 

At the very least, implementation of the three percent points and fees limitation should 

be delayed either by the Bureau or by the Congress. If the Congress should determine 

that legislative action is required to remedy this inequity in treatment of condominium 

owners, CAl members believe Congress could usefully consider retaining the points and 

fees limitation as a consumer protection, but at levels that reflect the reality of 

mortgage origination and secondary market fees. 

Again, thank you for the opportunity to provide comments to the Subcommittee as you 

examine this important housing policy. The Subcommittee's consideration of the 

community association housing perspective is critical to the 62 million homeowners 

living in America's 325,000 community association. 

Community Associations Institute I Page 3 
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Consumer hortgage Coalition 

Written testimony of 

The Consumer Mortgage Coalition 

Befarethe 

Subcommittee on Financial Institutions and Consumer Credit 

afthe 

Committee on Financial Services 

United States House of Representatives 

"Examining How the Dodd-Frank Act 

Hampers Home Ownership" 

June 18,2013 

600 Cameron Str~t. Alexandria, VA 22314 

Telephone: (202) 617~2101 hlx: (202) 318-8587 
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81767.086

The Consumer Mortgage Coalition (the "CMC,") a trade association of national mortgage 

lenders, servicers, and service providers, is pleased to submit written testimony for the 

record for the Subcommittee on Financial Institutions and Consumer Credit, ofthe 

Committee on Financial Services of the Housc Representatives. 

There are quite a few new consumer mortgage regulations being written and implemented 

today, covering both loan origination and loan servicing broadly. The Consumer 

Financial Protection Bureau ("CFPB") is trying to redesign mortgage regulations in a 

number of areas. 

Overall, we support the CFPB's thoughtful approach to this redesign. The agency is 

listening to many views, and is striving to create rcgulations that resolve problems and 

that serve consumers and markets. 

Title XIV of the Dodd-Frank Act required the CFPB to write several mortgage 

regulations, and set a schedule - these regulations were required to be final by January 

21,2013, and are required to become effective within a year after they become finalized. 

Regulations under Title XIV that are not required are not subject to this schedule. 

I. Recent and Pending Mortgage Rulemakings 

The CFPB is in the process of finalizing several mortgage rulemakings, some of them 

quite significant. 

A. Ability-to-Repay Regulation 

A significant rulemaking is the ability-to-repay regulation, also known as the qualified 

mortgage C"QM") rulemaking. This regulation requires creditors to verify and document 

a consumer's ability to repay a mortgage loan. Violations are subject to severe liability, 

known as "enhanced damages" under the Truth in Lending Act ("TILA"). 

1. There Are Three Basic Ways to Comply With This Regulation. 

1) One compliance method is to make a QM loan at an annual percentage rate ("APR") 

less than 150 basis points over the average prime offer rate ("APOR"), a market measure 

of the rate on prime loans. (Small lenders have a higher threshold.) These loans enjoy a 

safe harbor from liability. GSE and FHA loans can qualify for this safe harbor if their 

APR is less than the 150 basis point spread over the APOR. 

2) Another method is to make a "higher-priced" QM loan, which is a QM loan with an 

APR 150 basis points or more over the APOR. These loans do not have a safe harbor, 

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thcy have merely a rebuttable presumption of compliance with the ability-to-rcpay 

regulation. GSE and FHA loans can also qualify for this rebuttable presumption. 

All QM loans, regardless of their APR, cannot have certain risky features, including an 

interest-only period, negative amortization, or a term of longer than 30 years. Balloon 

payments are permitted only on loans by certain small lenders, and prepayment penalties 

are restricted. Significantly, points and fees on QM loans are limited to three percent of 

the loan amount. The definition of points and fees is therefore significant. 

3) A third method of complying with the regulation is to make a loan that is not a QM 

loan. The lender must still verify and document the consumer's ability to repay the loan, 

but the loan may have risky features and may have points and fees above three percent of 

the loan amount. Non-QM loans offer the lender neither a safe harbor from liability nor a 

rebuttable presumption of compliance. 

Some aspects of the final regulation are helpful, including the safe harbor and new clarity 

in the definition of points and fees. However, the regulation still will unnecessarily 

constrain mortgage credit, because of the definition of points and fees, and because the 

regulation includes an undefined residual income standard, as discussed below. 

2. The Safe Harbor Solves a Problem 

The CMC was very pleased that the final ability-to-repay regulation has a safe harbor 

from liability for some loans. Without a safe harbor, lenders nationwide would have 

pulled back from the marketplace unnecessarily drastically because of the potential for 

enhanced TILA damages. 

Enhanced TlLA damages are not new under the Dodd-Frank Act. They have applied to 

so-called HOEPA I loans, a type of high-cost loan, for years. Lenders make almost no 

HOEPA loans as a result. According to the Government Accountability Office, for 

example: 

"Because of the associated penalties and liabilities, lenders have generally 

avoided making high-cost loans, and the secondary market for these loans has 

been negligible. Data collected under the Home Mortgage Disclosure Act 

(HMDA) indicate that in 2004 (the first year for which marketwide data on highcost loans are available), lenders reported making 23,000 high-cost loans, which 

accounted for only 0.003 percent of all the originations of home-secured refinance 

or home improvement loans reported for that year. The number of reported highcost loans rose to about 36,000 in 2005 but fell every year thereafter. In 2009, the 

most current year for which HMDA data are available, these loans numbered only 

1 HOEPA is the Horne Ownership and Equity Protection Acl of 1994, Pub. L. No. 103-325, §§ 151-158, 

108 Stat. 2160, 2J90-2198 (1994) (codified as amended in scattered sections oflhe Truth in Lending Act, 

J5 U.S.C. §§ J601-16671). 

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6,500, which, in aggregate, made up less than 0.1 percent of all the originations of 

home-secured refinancing and home improvement loans reported for that year.,,2 

Lenders have historically been unwilling to make loans subject to enhanced damages in 

almost all cases. The Dodd-Frank Act applied enhanced TILA damages to loans that are 

not in compliance with the ability-to-repay regulation, so lenders need a safe harbor to be 

able to make any more than a handful of loans. 

3. The Final Definition of Points and Fees is Clearer Than the 

Proposed Definition 

The final regulation clarifies the definition of points and fees. While in the proposed 

regulation this definition was unclear in many areas, the CFPB has improved the clarity. 

One way the CFPB did so was to clarify that the amount of points and fees on a loan is 

known before the loan closes. This is critical because loans that have points and fees in 

excess of three percent of the loan amount are not QM loans, will not be qualified 

residential mortgage ("QRM") loans under the risk retention regulation, and because 

loans with points and fees above five percent are HOEPA loans. 

Another area where the CFPB greatly clarified the points and fees definition concerns 

employee compensation. Unlike the proposed regulation, the final regulation excludes 

from points and fees compensation that a lender pays to its employees. This is important 

because quantifying compensation that relates to a specific loan would have been 

operationally quite difficult. It would have required analyzing retirement plan 

contributions, contingent commissions, compensation plans that are amended as a loan 

progresses through underwriting, and somehow tying this compensation to specific loans. 

The calculation would have been so complex that lenders would have needed to estimate 

points and fees very conservatively. This means lenders would have treated many QM 

loans as potential non-QM loans, and would have refused to make them. 

4. The Definition of Points and Fees inappropriately Distinguishes 

Affiliates and Nonaffiliates Without Regard to Consumer 

Protection 

Although the definition of points and fees is improved, it will still prevent too many 

appropriate loans from being made. Points and fees include amounts paid to third parties, 

but only if the third party is affiliated with the lender. This is true even if the affiliate 

charges less than a nonaffiliate, thereby creating a perverse incentive to increase the cost 

to the consumer to stay below the three percent cap. This is unfortunate because 

affiliated business arrangements have been regulated for many years. Lenders must both: 

I) disclose the affiliation; and 2) permit the borrower to elect a nonaffiliate. Given this 

2 MORTGAGE REFORM Potential Impacts or Provisions in the Dodd-Frank Act on Homebuyers and the 

Mortgage Market, pp. 56-57, GAO 11-656 (July 2011). 

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infonned consumer choice, there is no consumer protection reason to alter the definition 

of points and fees based on affiliation. Rather, the Department of Housing and Urban 

Development ("HUD") has found that affiliated service providers can provide both lower 

costs3 and the convenience of one-stop shopping. 4 

For these reasons, the CMC supports the Consumer Mortgage Choice Act, S. 949 and 

H.R. 1077, which would remove the distinction between affiliated and unaffiliated 

service providers for purposes of the definition of points and fees. 

5. A Residual Income Standard is Needed 

For non-QM loans, the lender must consider the borrower's debt-to-income ("DTI") ratio 

or the consumer's "residual income." Neither standard is defined - there is no maximum 

pennissibIe DTI ratio, and there is no specified minimum acceptable level of residual 

income. 

For rebuttable presumption QM loans, the borrower can rebut the presumption of 

compliance by showing that the borrower did not have sufficient "residual income or 

assets" to meet "living expenses," and "material non-debt obligations" of which the 

lender knew. 

For both types ofloans, residual income is not defined. There is no definition of "living 

expenses," no definition of which debts, expenses, or "material non-debt obligations" are 

relevant, and there is no standard at all of how much residual income is sufficient. The 

CFPB explains: 

The Bureau expects to study residual income in preparation for the five-year 

review of this [QM] rule required by the Dodd-Frank Act.s 

We appreciate that the CFPB has not had time to conduct a study of the most appropriate 

residual income standard. However, the final ability-to-repay regulation applies a 

residual income standard for rebuttable presumption QM loans, and for loans that are not 

QM loans. For all these loans, lenders are held to a standard that they are unable to 

identify. 

In other words, the expectation that lenders will be willing to make loans outside the QM 

safe harbor depends on lenders' willingness to be held to a standard of residual income 

that is entirely undefined. Lenders are subject to enhanced damages for noncompliance. 

Without a residual income standard, there is not much reason to believe there will be 

3 HUD's proposed RESPA regulation, 59 Fed. Reg. 37360 (July 21,1994). 

4 HUD Economic Analysis accompanying HUD's June 7,1996 final RESPA regulation governing affiliated 

business arrangements. 

5 Section-by-section analysis to the final ability-to-repay / QM regulation, 78 Fed. Reg. 6408, 6528 

(January 30, 2013). 

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loans outside the narrow safe harbor. This is unfortunate because the safe harbor is 

narrow - it must compensate the lender for the risks of the loan while keeping the APR 

low, and with points and fees no more than three percent. In other words, this regulation 

will largely constrain credit to borrowers with a strong credit profile. 

We believe the CFPB should establish a residual income standard with which lenders can 

know how to comply. The Department of Veterans Affairs ("VA") has and uses a 

residual income test. We suggest that the CFPB should permit lenders use this test until 

the CFPB has time to study residual income standards and identify and implement a 

better standard, to the extent it finds a need to improve the V A standard. This approach 

would enable lending outside the limited QM safe harbor. 

6. Lending Will Be Unnecessarily Constrained 

Many believe lenders will be willing to make rebuttable presumption QM loans, or even 

non-QM loans. HOEPA loans have been extremely rare because they are subject to 

TILA enhanced damages. The Dodd-Frank Act increased the statute of limitations for 

enhanced damages from one year to three years, which increases the risk that lenders 

today are largely unwilling to incur. 

Moreover, the Federal Reserve created a new class of loans, higher-priced mortgage 

loans ("HPMLs") in a 2008 regulation. TILA enhanced damages apply to these loans. 

HPMLs are loans with an APR that exceeds the APOR by ISO basis points, much like 

rebuttable presumption QM loans. Lenders make very few HPMLs because of the 

enhanced damages that attach to them: 

The 20 II HMDA data also include information on loan pricing. The 2011 data 

reflect the second full year of data reported under revised loan pricing rules, 

which determine whether a loan is classified as "higher priced." Lenders now 

report on loans with annual percentage rates (APRs) that are I.S percentage points 

for first lien loans and 3.S percentage points for junior lien loans above the 

average prime offer rates (APORs), estimated using data reported by Freddie Mac 

in its Primary Mortgage Market Survey. 

The data on the incidence of higher-priced lending show that a small minority of 

first lien loans in 2011 have APRs that exceeded the loan price reporting 

thresholds. The principal exception was for conventional first lien loans used to 

purchase manufactured homes; for such loans 82 percent exceeded the reporting 

threshold in 2011. For conventional first lien loans used to purchase site-built 

properties, about 3.9 percent of the reported loans exceeded the reporting 

threshold (up from 3.3 percent in 20 I 0). The incidence of higher-priced lending 

for FHA-insured loans on site-built properties (3.8 percent in 2011) is virtually 

the same as for conventional loans. The incidence of higher-priced lending for 

loans backed by VA guarantees is notably smaller than for either conventional or 

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FHA-insured loans; only about 0.4 percent of VA-guaranteed loans were higher 

priced in 2011. 6 

We believe the final QM regulation will constrain credit more than was intended and 

more than is appropriate. We therefore support, at a minimum, a clear and specific 

residual income standard that specifies what income, debt, and expense items are 

relevant, how lenders must quantify them, and the appropriate amount of residual 

income. 

B. Risk Retention, HPML Loans, and FHA Premiums 

The ability-to-repay regulation is best viewed in light of two separate regulations. One is 

the Dodd-Frank's risk-retention regulation, which is not yet final. It will require lenders 

or securitizers to retain five percent ofthe risk of securitized loan, unless the loan is a 

QRM loan. The definition of QRM loan may be "no broader" than the definition of QM 

loan. The cost ofnon-QRM loans will need to be high enough to compensate the lender 

for the cost of risk retention. Non-QRM loans will also be non-QM loans, and would 

subject the lender to enhanced TlLA damages, if the lender is willing to make such a loan 

in the first place 

For purposes of maintaining the solvency ofthe FHA insurance fund, FHA recently 

increased the mortgage insurance premiums on certain FHA loans, and now requires 

payment of the premium for a longer period of time. FHA insurance premiums are 

included in the APR. The FHA's recent increased and extended premiums will increase 

the APR, often above the HPML threshold, where lenders are rarely willing to go. This 

will drastically curtail FHA lending, especially on smaller loans. We do not believe this 

was the intent of either the HPML threshold or of the premium increase. Nevertheless, it 

will be the actual effect. 

It may be advisable to revisit the overlap of the several rules that are designed to limit 

subprime lending. Taken together, the several regulations may unnecessarily constrain 

credit more than intended. 

C. Servicing Regulations 

The CFPB released two final servicing regulations in January 2013, which far exceed 

what the Dodd-Frank Act requires. 

Generally, the CFPB regulations would institute a loss mitigation requirement based on 

existing Making Home Affordable programs HAMP and HARP. The regulations would 

6 Federal Financial Institutions Examination Council Announces Availabilitv 0(2011 Data on Mortgage 

Lending. Press Release (September 18,2012) (footnote omitted). 

7 
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require servicers to provide broad infonnation upon request, and would redesign monthly 

statements. 

While we support the overall goals behind the regulations, as originally released, the 

regulations need several issues resolved before servicers can implement the regulations. 

For example, one of the servicing regulations finalized in January 2103 requires a notice 

to a borrower who becomes 45 days delinquent. At the same time, it prohibits servicers 

from taking certain action until the loan is 121 days delinquent. The CFPB tried to write 

the 121-day prohibition broadly to avoid loopholes. However, it prohibits is sending a 

"first notice or filing" until day 121, and this term is defined broadly enough to include 

the 45-day notice. The regulation appears to simultaneously require and prohibit the 

same notice. 

Another example is that one of the final servicing regulations requires servicers to send 

notices to borrowers of the due date for a loss mitigation application, including four 

dates. Two of the dates are based on the number of days until a foreclosure sale, which 

dates the servicer may not be able to predict, and the dates may have already lapsed 

before the servicer sends the notice, without the servicer knowing so. This would require 

a notice to a borrower that is not helpful. 

The infonnation request provision in the final regulation is too broad, and would be a 

method of "back door" discovery without the benefit of a court's weighing the actual 

need for the infonnation requested against the burden of producing it. The Dodd-Frank 

Act required the CFPB to define a valid qualified written request ("QWR") with which 

servicers must comply. Specifically, the Dodd-Frank Act intended to free servicers from 

the requirement to comply with abusive QWR "back door" discovery requests. The final 

regulation would revise and rename these abusive discovery requests, but would not 

remove them as Congress required. While we support the requirement that servicers 

supply relevant information to borrowers, the provisions as drafted would penn it a 

continuing abuse without questioning the relevance of the infonnation servicers would be 

required to produce. 

The Dodd-Frank Act requires servicers to send monthly statements in most cases. 

However, the CFPB's regulation redesigned even the layout ofthe statements without 

first identifying a problem it wants to cure. Rearranging statement layouts is not a DoddFrank requirement, and we do not believe it should be required to be complete by the 

Dodd-Frank compliance date. It is burdensome, and any benefits have not been 

identified. 

There are some areas where the periodic statement needs additional thinking. One 

concerns a requirement in a final regulation that servicers send monthly statements to 

borrowers in bankruptcy. We certainly support the policy of notifying borrowers of 

relevant infonnation. However, the regulation does not have a separate statement for 

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borrowers in bankruptcy. The same statement for a current borrower is in some ways 

irrelevant or misleading to a borrower in bankruptcy. Some bankruptcy courts will 

sanction servicers who even send a statement at all. While the policy of statements to 

bankrupt borrowers has merit, the statement would need to be specifically designed for 

the unique circumstances of bankruptcy. The CFPB needs to take timc to design and test 

bankruptcy statements before requiring them. 

The CFPB has said it will repurpose its servicing regulations this month. 

D. HOEPA Rulemaking 

In January 2013, the CFPB also finalized a HOEPA regulation. HOEPA prohibits certain 

lending abuses. The Dodd-Frank Act expanded its reach and lowered the thresholds that 

define a HOEPA loan. Virtually no HOEPA loans are made because of the liability they 

entail, so this rulemaking will be of limited effect. It is important to note, though that a 

HOEPA loans includes a loan on which points and fees exceed five percent of the loan 

amount. The definition of points and fees under the HOEPA regulation is largely the 

same as under the ability-to-repay regulation. (One difference is that the HOEPA 

regulation applies to open-end credit while the ability-to-repay regulation does not, so the 

HOEPA regulation defines the term for open-end credit.) If lenders become willing to 

make non-QM loans with points and fees above three percent, the HOEPA five percent 

cap would limit lending. 

E. Loan Originator Compensation Regulation 

The CFPB finalized a loan originator compensation regulation in January 2013. It will 

prohibit dual compensation to a mortgage broker, from both a lender and from a 

consumer. It will prohibit compensation to vary based on the terms of a loan"( other than 

the amount of principal). This regulation is designed to prohibit yield sprcad premiums, 

much as a 2008 Federal Reserve regulation did. 

F. Appraisal and Escrow Regulations 

There are some additional new rulemakings that will have less impact than the 

regulations described above. 

There are two new appraisal regulations. One requires lenders to provide a copy of each 

appraisal to borrowers, even if the loan never closes. Another requires appraisals, with 

an interior inspection, on certain loans, and a second appraisal if there is a risk that the 

property is being"flipped" - bought and quickly resold to an unsuspecting buyer at an 

inflated price. 

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There is also a new escrow regulation that exempts certain small creditors from the 

general requirement to establish escrow accounts on HPMLs. The impact of this 

rulemaking will be limited because of the scarcity ofHPMLs. 

These regulations are not as significant as other Dodd-Frank mortgage rulemakings, but 

they do require implementation resources. 

II. Implementing the Many Regulations 

The number of new mortgage regulations, coupled with the breadth of their impacts, will 

redesign the consumer mortgage industry in many or most areas. A look at the 

implementation process is therefore in order. 

Normally, it is less burdensome to implement revised regulations all at one time rather 

than piecemeal. However, the CFPB is still revising some if the regulations it released 

only last January. The ability-to-repay regulation was revised on May 29, 2013. The 

servicing regulations are undergoing the broadest changes, which have yet to be 

proposed. Once the credit constraints implicit in the ability-to-repay regulation, and in 

the HPML restrictions as applied to the FHA premium increase, become apparent, 

regulations are likely to be revisited. For this reason, the luxury of implementing all the 

revisions at the same time is unavailable. 

Some of the regulatory revisions are required by the Dodd-Frank Act. Others, including 

much of the servicing regulations, exceed the Dodd-Frank Act's requirements. We 

therefore believe it makes the most sense to implement those regulations that the DoddFrank Act requires by the statutory deadline of one year after the regulation becomes 

final. Regulations that the Dodd-Frank Act does not require should be implemented 

thereafter. The servicing regulations are not final - they will be reproposed shortly - and 

compliance with them by January 2014 should not be required. 

Ill. Disparate Impact or Dodd-Frank Act? 

The ability-to-repay and the upcoming risk retention regulations are designed to restrict 

mortgage lending to borrowers whose credit profile is very strong. If others are able to 

obtain loans at all, the price will be notably higher because of the cost of enhanced T1LA 

damages under the ability-to-repay regulation, and because of the cost of risk retention 

for non-QRM loans. 

At the same time, both HUD and the CFPB have made clear that they will view lending 

and servicing practices that have a disparate impact on classes of borrowers as illegal, 

even if the lender or servicer uses only neutral standards, such as the definition of a QM 

loan. The CFPB administers the Equal Credit Opportunity Act while HUD administers 

the Fair Housing Act, both of which apply to consumer mortgage lending. 

10 
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The policy goals of applying a disparate impact theory of liability to mortgage lending 

and servicing is at cross purposes to the policy goals behind the ability-to-repay 

regulation, the risk-retention regulation, and the definitions of QM and QRM loans. 

The industry needs substantial guidance on how to comply with two opposing policies. 

We recommend that a lender that elects to restrict its lending to only QM loans, or 

substantially only to QM loans, should not be subject to disparate impact liability. The 

lender in this case is complying with a federal policy that was a major hallmark of the 

Dodd-Frank Act mortgage reforms - the ability-to-repay and QM standard. Compliance 

with the a federal standard under one set of laws should not create liability under a 

separate body oflaw. 

IV. Conclusion 

The CMC appreciates the attention of this Subcommittee to the redesign of consumer 

mortgage lending under the Dodd-Frank Act. 

Attached are two lists of guidance the CMC and other trade associations have submitted 

to the CFPB in connection with the origination and servicing rulemakings. These provide 

a more detailed picture of the types of issues the industry is handling in implementing the 

new regulations. 

For further information, please contact: 

Anne C. Canfield 

Executive Director 

Consumer Mortgage Coalition 

600 Cameron Street 

Alexandria, VA 22314 

(202) 617-210 I 

Fax: (202) 318-8587 

E-mail: Anne@Canfieldassoc.com 

11 

81767.096

AMERICAN FINANCIAL SERVICES ASSOCIATION 

CONSUMER MORTGAGE COALITION 

MORTGAGE BANKERS ASSOCIATION 

GUIDANCE REQUESTS for SERVICING REGULATIONS 

to the BUREAU OF CONSliMER FINANCIAL PROTECTlON 

Working- f)ocllmcllt 

.June 3, 2013 

81767.097

Table of Contents 

GENERAL MA TIERS ..............................................................................................................................................................................................................................................................

1. Effective Dates ..........................................................................................................................................................................................................................................................................................

2. Small Servicer Definition, § 1026.41(eJ(4)(ii) ..............................................................................................................................................................................................................................

3. Definition of Business Day ..................................................................................................................................................................................................................................................................

4. Mailing as Delivery, § 1024.11 ...........................................................................................................................................................................................................................................................

5. UDAAPs ......................................................................................................................................................................................................................................................................................................

6. Presumed Consent to Electronic Statements, Regulation Z Comment 41( cJ-4 ................................................................................................................................................................

SERVICING - REGULATION X .............................................................................................................................................................................................................................................

Escrow Accounts, § 17 ................................................................................................................................................................................................................................................................................

7. Advancing premiums. § 17(k)(5) ...........................................................................................................................................................................................................................................................................

Scope, § 30 ......................................................................................................................................................................................................................................................................................................

8. Qualified lender. § 30(b)(3) .....................................................................................................................................................................................................................................................................................

Definitions, § 31 ...........................................................................................................................................................................................................................................................................................

9. Exceptions to the definition of loss mitigation option. § 31 .......................................................................................................................................................................................................................

10. Definition of loss mitigation application, and time for verifying whether an agent is authorized to act for borrower, comment 31·1 ...............................................................

Servicing Transfers, § 33 ...........................................................................................................................................................................................................................................................................

11. Appropriate mailing address. comment 33(b) (3)-1 .................................................................................................................................................................................................................................

12. Payments incorrectly sent to transferor. § 33 (c)(l) ................................................................................................................................................................................................................................

13. Preemption. § 33(d) ...............................................................................................................................................................................................................................................................................................

Escrow Refunds. § 34 ..................................................................................................................................................................................................................................................................................

14. Payment of a loan in full. § 34(b) ......................................................................................................................................................................................................................................................................

Error Assertions, § 35 ................................................................................................................................................................................................................................................................................

15. Annual escrow statements available on demand at any time, comment 35(a)-2 ........................................................................................................................................................................

16. Reasonable fees for nonpayment default. comment 35 (b )(2)·2.iii ....................................................................................................................................................................................................

17. Error under § 35(b )(7) should not include failure to provide complete loss mitigation information under § 39[b) (2) ............................................................................................

18. An error under § 35(b)(7) should include only duties that require information disclosure ..................................................................................................................................................

19. An error under § 35(b )(8) should not include failure to transfer useless information .............................................................................................................................................................

20. Definition ofHany other error," § 35(b)(11) ................................................................................................................................................................................................................................................21. Single intake address. § 35(c) ............................................................................................................................................................................................................................................................................22. Change of intake address. 35(c) ........................................................................................................................................................................................................................................................................23. Providing the designated address, comment 35(c)-2 ..............................................................................................................................................................................................................................24. Notice of right to request documents, § 35(e)(1)(i)(8) ..........................................................................................................................................................................................................................

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25. Borrowers mayor may not provide relevant information, § 35[e)[2J ............................................................................................................................................................................................

26. Time limits, § 35[e)[3) .........................................................................................................................................................................................................................................................................................

27. IS-day extension should be available long before a foreclosure sale, § 35 [e) [3) .......................................................................................................................................................................

28. Borrower requests for information on which servicer relied - mUltiple requests, § 35[e)[ 4) .............................................................................................................................................29. Borrower requests for information on which servicer relied - form should not matter, § 35[e)[4) .................................................................................................................................

30. Attorney work product should not be subject to mandatory disclosure, § 35[e) [4) .................................................................................................................................................................31. General descriptions of materials withheld should be sufficient, § 35 [ell 4) ...............................................................................................................................................................................32. Frivolous or abusive error assertions should not require a response, § 35 [g) ............................................................................................................................................................................

33. Error assertions that are the subject of pending litigation should not require a response, § 35 [g) ...................................................................................................................................

34. Error assertions buried in abusive error assertions, § 35[g)[I)[ii) .................................................................................................................................................................................................

35. Untimely error assertions, § 35[g)[I)[iii)[8) .............................................................................................................................................................................................................................................

36. Notice to borrower that servicer is not required to respond to error assertion, §35 [g) [2) ...................................................................................................................................................

37. Limits on adverse credit reporting, § 35[i) .................................................................................................................................................................................................................................................

Information Requests, § 36 ..................................................................................................................................................................................................................... , ...............................................

38. Scope of requests that require responses, § 36[a) and 36[1)[1)[iii) .................................................................................................................................................................................................

39. Single intake address, § 36[b) ...........................................................................................................................................................................................................................................................................

40. Change of intake address, 36[b) ......................................................................................................................................................................................................................................................................

41, Providing the designated address, comment 36[b )-2 ............................................................................................................................................................................................................................

42. Format of information provided should be irrelevant, § 36[d)[1) ....................................................................................................................................................................................................

43. Reasonableness standard of information availability does not consider all relevant information; additional examples needed, comment 36[d)[I)[ii) ..........................

44. Format of information provided, comments 36[d)[I)[ii]-2.i and 36[1)[1)[iv)-1.iii. ..................................................................................................................................................................

45. Frivolous or abusive information requests should not require a response, § 36[1)[1) ............................................................................................................................................................46. Requests for information that are the subject of pending litigation should not require a response, § 36[1) ..................................................................................................................

47. Attorney work product should not be subject to mandatory disclosure. § 36[1)[1)[ii) ....................................................................................................................................... " ..................

48. Information requests buried in abusive information requests, § 36[1) [1) [iv) .............................................................................................................................................................................

49. Untimely requests, § 36[1)[1)[v) ....................................................................................................................................................................................................................................................................

50. Notice to borrower that servicer is not required to respond to information request, § 36[1)[2) ........................................................................................................................................

51. General descriptions of materials withheld should be sufficient, § 36[1) [2) ................................................................................................................................................................................

Force-Placed Insurance, § 3 7 .............................. " .... "."" ................. "" ......... " .. "" .... " ................................... " .................................................................... "" .. "."" .. " .. " ... " .. " .. ""." .......... "" .............

52. Scrvicers need to be able to reqUire sufficient insurance coverage, § 37 .......................................................................... , ..................................... " ............ " .......................................................53. Servicers need to require flood insurance when not required by the FDPA, § 37[a) ................................................................................................................................................................

54. Definition of force-placed insurance and properties remapped out of a SFHA, § 37[a)[2) ....................................................................................................................................................

55. Insurance as a condition of a loan when voluntary coverage is unavailable, § 37[a)[2) .........................................................................................................................................................

56. Reasonable response time, § 37[c) and [g) ................................................................. , ...................... , ........................................................................................................................................................

81767.099

57. Evidence demonstrating insurance, comment 37(c)(l)(iii)-2 ..............................................................................................................................................................................................................

58. Additional information in a disclosure, § 3 7(c)( 4), (d) (4), (e)( 4) .......................................................................................................................................................................................................59. Additional pages, § 37(c)(4), (d)(4), (e) (4) ...................................................................................................................................................................................................................................................

60. Estimated premiums, § 37(d)(2)(i)(D), (e)(2)(viii)(C) ............................................................................................................................................................................................................................61. Renewal of policies that predate January 10, 2014, § 37(e) ..................................................................................................................................................................................................................

62. Annual renewal notices, § 37 (e) (5) ..................................................................................................................................................................................................................................................................

63. Refunds, § 37(g)(2) .................................................................................................................................................................................................................................................................................................

64. Bonafide and reasonable charge, § 37(h)(2) ................................................................................................................................................................................................................................................

Servicing Policies and Procedures, § 38 ........ , ......................................... , ............................................................................................................................................................................................

65. Compliance standard under § 38(a) .................................................................................................................................................................................................................................................................

66. Consumer complaints, comment 38(a)-1 .......................................................................................................................................................................................................................................................67. Delegating corrections to service providers, comment 38(b)(1) (ii)-1 ..............................................................................................................................................................................................68. Providing information "with respect to" the mortgage loan, § 38(b) (1) (iii) ..................................................................................................................................................................................69. Information to investors about "all mortgage loans they own," § 38(b) (1) (iv) ............................................................................................................................................................................

70. Identifying the successor in interest, § 38(b)(l) (vi) ................................................................................................................................................................................................................................

71. Transferring information in a servicing transfer, § 38(b)(4) ...............................................................................................................................................................................................................

72. Privileged or protected information in a servicing transfer, comment 38(b)(4)(i)-2 ...............................................................................................................................................................73. Informing borrowers of how to submit error assertions and information requests, § 38(b)(S) ..........................................................................................................................................74. Compiling servicing file in five days, § 38(c)(2) .........................................................................................................................................................................................................................................75. Servicer's notes as part of the servicing file, § 38(c)(2)(iii) ..................................................................................................................................................................................................................76. Report of data fields, § 38(c)(2)(iv) ................................................................................................................................................................................................................................................................

77. Data fields .. timing § 38(c)(2)(iv) ...................................................................................................................................................................................................................................................................78. January 10, 2014 compliance date, comment 38(c)(2)-1 ......................................................................................................................................................................................................................

Early Intervention, § 39 .............................................................................................................................................................................................................................................................................

79. Live contact within day 36 of delinquency, § 39 (a) ..................................................................................................................................................................................................................................

80. Date of delinquency after servicing transfer, comment § 39(a)-1.1ii .................................................................................................................................................................................................81. Good faith efforts to establish live contact, comment 39(a)-2 .............................................................................................................................................................................................................82. Promptly informing borrowers of loss mitigation options, comment 39(a)-3.ii ..........................................................................................................................................................................

83. Authenticating an agent before providing information on loss mitigation options, comment 39(a)-4 ..............................................................................................................................84. One notice during 180 days, § 39(b) (1) .........................................................................................................................................................................................................................................................85. Incorrect cross-reference, § 39(b)(l) .............................................................................................................................................................................................................................................................

Continuity of Contact, § 40 ........................................................................................................................................................................................................................................................................

86. Authenticating an agent before assigning personnel and assisting borrower through agent, comment 40(a)-1.. ........................................................................................................

87. Two consecutive payments without a late charge, § 40(a)(2) .............................................................................................................................................................................................................

4 

81767.100

88. Complete payment history. § 40(b)(2)(i) .....................................................................................................................................................................................................................................................

89. Providing error assertion information, § 40(b)(4) ...................................................................................................................................................................................................................................

Loss Mitigation Procedures, § 41 ...........................................................................................................................................................................................................................................................

90. Number of days before foreclosure, § 41 generally ..................................................................................................................................................................................................................................

91. Submitting or receiving applications, § 41 generally ...............................................................................................................................................................................................................................

92. Evaluations in the servicer's discretion, § 41(a) and comment 41 (c)(1)-1 ....................................................................................................................................................................................93. Definition of loss mitigation application, § 41(b)(1) ................................................................................................................................................................................................................................94. Reasonable due diligence, § 41(b)(1) .............................................................................................................................................................................................................................................................95. Notice of missing application information and application deadlines, §§ 41 (b) (2)(i) (8) and 41(b )(2) (ii) ......................................................................................................................96. Must or should submit documents, § 41(b)(2)(i)(B) and (b)(2)(ii) ..................................................................................................................................................................................................

97. Evaluation for all loss mitigation options available, § 41(c) (1) (i) ......................................................................................................................................................................................................98. Third party fails to submit required application information. § 41 (c)(2)(ii), § 41(h) and § 38(b)(2) (v) ..........................................................................................................................99. Denial notices, § 41(d)(1) ....................................................................................................................................................................................................................................................................................

100. First foreclosure notice or filing, § 41(1)(1), (I) (2), (g) (j), and § 3S(b)(9) .....................................................................................................................................................................................

101. Preforeclosure referral or filing, § 41 .............................................................................................................................................................................................................................................................

102. No foreclosure filing for 120 days needs exceptions, § 41(1)(1), (1)(2), (g) (j), and § 35(b )(9) .............................................................................................................................................

103. Appeals of offer or denial, § 41(h) ....................................................................................................................................................................................................................................................................104. Appeals, § 41(h) and comment 41(b)(1J-2 ..................................................................................................................................................................................................................................................

105. Duplicative loss mitigation requests and the regUlation's effective date, § 41(i) and comment 41(i)-1 ...........................................................................................................................

SERVICING - REGULATION Z ... , ..........................................................................................................................................................................................................................................

Disclosures of Post Consummation Events, § 20 ..............................................................................................................................................................................................................................

106. Implementation date for rate reset notices, § 20(c) and (d) .................................................................................................................................................................................................................

107. Coverage. § 20(c) and (d) .....................................................................................................................................................................................................................................................................................

108. Annual statement removed, § 20 (c) ................................................................................................................................................................................................................................................................109. Definition of adjustment, § 20(c)(2) ...............................................................................................................................................................................................................................................................110. Definition of last payment, § 20(c)(2)(ii) and 20 (d) (2) (iii)(C) ............................................................................................................................................................................................................

111. Step increases and trial or permanent modifications, § 20(c)(2)(iii) and (v) ...............................................................................................................................................................................

112. Transactions permitting interest rate carryover, §§ 20 (c) (2) (iv) and 20( d)(2) (v) ....................................................................................................................................................................

113. Payment-option ARM loans, § 20(c) (2) (vi) ..................................................................................................................................................................................................................................................

114. Format. § 20(c)(3) ..................................................................................................................................................................................................................................................................................................

115. Timing of initial adjustment notice in a modification, § 20(d) .............................................................................................................................................................................................................

116. Assumptions, § 20(d) .............................................................................................................................................................................................................................................................................................117. Estimated initial rate adjustments, § 20( d)(2) ...........................................................................................................................................................................................................................................118. lnitial adjustment in a modification, § 20(d) and comment 20(d)-2 .................................................................................................................................................................................................

81767.101

119. Initial adjustment notice in a fixed-rate step-rate loan. comment 20(d) (1) (ii)-2.iii ...................................................................................................................................................................

120. Disclosures of initial rate adjustments in modified loans. § 20 (d) (2) (iv) and (vi) ......................................................................................................................................................................121. Modification as an alternative to a rate adjustment. § 20(d)(2)(x) ...................................................................................................................................................................................................

Prohibited Acts. §36 ....................................................................................................................................................................................................................................................................................

122. Applicability to HELOCs. § 36(b) ......................................................................................................................................................................................................................................................................123. Partial payments. § 36(c)(1)(ii) ........................................................................................................................................................................................................................................................................

Periodic Statements. § 41 .........................................................................................................................................................................................................................................................................

124. Inapplicable to HELOCs, § 41(a)(1) ....................................................................................................................................................... , .........................................................................................................

125. Definition of billing cycle. § 41(a)(1) and § 2(a)( 4) ..................................................................................................................................................................................................................................126. Timing of statement. comment 41(b)-1 .... , ....................... , ............................................................................................................................................................................................................................127. Form of statements. § 41 (c) ............................................................................................................................................................................................................ , ...................................................................

128. Layout of statement. § 41(d) ..............................................................................................................................................................................................................................................................................

129. Borrowers in bankruptcy. § 41 (d) (2) .............................................................................................................................................................................................................................................................130. Explanation of amount due for delinquent borrowers, § 41( d)(2) ....................................................................................................................................................................................................

131. Explanation of amount due for borrowers in bankruptcy or foreclosure or after maturity. § 41( d) (2) ............................................................................................................................

132. Disclosure of fees. § 41(d)(2)(ii) and (d)(4) ................................................................................................................................................................................................................................................

133. What must be done to apply suspended funds, § 41(d)(5) ...................................................................................................................................................................................................................

134. Definition of page. § 41(d)(S), (d)(8) ..............................................................................................................................................................................................................................................................135. Delinquency information on a separate page. § 41(d)(8) ......................................................................................................................................................................................................................136. Definition of delinquency, § 41(d)(8) .............................................................................................................................................................................................................................................................137. Date of delinquency, § 41(d)(8)(i) ............................... , ...................................................................................................................................................................................................................................

138. Notification of possible delinquency expenses, § 41 (d) (8)(ii) .............................................................................................................................................................................................................

139. Amount needed to bring the loan current. §41(d)(8)(vi) .....................................................................................................................................................................................................................

140. Periodic statement exemptions. § 41(e) .......................................................................................................................................................................................................................................... , .............141. Coupon books for daily simple interest loans with a fixed rate. § 41(e](3) ...................................................................................................................................................................................

142. Updated coupon books for ARM loans§ 41(e)(3) ......................................................................................................................................................................................................................................

143. Fixed-rate. non-escrowed loans paid by ACH. § 41(e)(3) ......................................................................................................................................................................................................................

144. Small servicer exemption for seller-financed loans. § 41(e)(4) ..........................................................................................................................................................................................................145. Temporarily servicing loans subject to a forward commitment at origination. § 41(e)(4)(ii](A) ........................................................................................................................................146. Definition of small servicer's affiliate. § 41(e) (4) (iii) ..............................................................................................................................................................................................................................

6 

81767.102

GENERAL MATTERS 

c-- -"------- -- 

TOPIC ISSUE RECOMMENOA nON 

I. Effective Dates The Dodd-Frank Act requires a January 2014 effective date for required We recommend that the CFPB discuss with industry member an

rules, but some aspects ofthe final servicing rules exceed the required representatives how to manage the implementation dates. 

rules. M0l1gage servieers and lenders are currently implementing an 

enormous volume of new. and very comprehensive. set ofregulatory i 

amendments. More arc yet to come. Thc industry must acknowledge I 

I the possibility that compliance by the January 2014 dates may not be i 

possible. 

2. Small Servicer The Regulation Z small servicer definition, at § 1026.4I(e)(4)(ii), is We request clarification of the twn assignee in § I026.4I(e)(4)

Definition, incorporated into Regulation X by §§ 1024. I 7(k)(5)(iii) and 

§ 1026.41(e)(4)(ii) I 024.30(b)( I). The delinition provides: We also request claritication orthe dclinition in the case of a sm

servicer that acquires servicing in a merger or acquisition of the 

"(ii) Smali servicer A small servicer is a servicer that either: I or assignee, 

(Al Services 5,000 or mortgage loans, for all of which the 

servic<":f (or an affiliate) is the creditor or assignee; or 

! 

(B) Is a Housing Finance Agency, as defined in 24 CFR 266,5." 

For this purpose, docs the word "assignee" refer to an assignee of the 

loan. the servicing, or either? If it refers only to the loan, the definition 

would be extremely narrow, 

3. Definition of Business The definition of business day is not the same in Regulation X and Z. We request clarification that. under Regulation X, servicers can 

Day treat Patriots' Day as a legal public holiday. 

The revised Regulation X frequently uses the term "days (excluding 

legal public holidays, Saturdays, and Sundays)." Regulation Z defines 

two types of business general and specific: 

81767.103

TOPIC 

4. Mailing as Delivery, 

§ 1024.11 

GENERAL MATTERS 

ISSUE 

"Business means a day on which the creditor's offices are opcn 

to the public carrying on substantially all ofils business 

functions. However, for purposes of rescission under §§ 1026.15 

and 1026.23, and for purposes of §§ 1 026.19(a)(I )Oi), 

1026.19(a)(2), 1026.31, and I026.46(d)(4), the term means all 

calendar days except Sundays and the legal public holidays specif.ed 

in 5 U.S.C. 6103(a), such as New Year's Day, the Birthday of 

Martin Luther King, Jr" Washington's Birthday, Memorial Day, 

Independence Day, Labor Day, Columbus Day, Veterans Day, 

Thanksgiving Day, and Christmas Day." 

Section 1 026.2, Maine and Massachusetts, but not other states, observe 

Patriots' Day on the third Monday in April. when federal and state 

offices as well as lllany businesses are closed, 

RECOMMENDATION 

The new rule did not amend § 1024.11, which provides: I We suggest that § II be revisoJ to read: 

"The provisions of this part requiring or pelmitting mailing of 

documents shall be deemed to be satisfied by placing the document 

in the mail (whether or not recei vod by the addressee) addressed to 

the addresses stated in the loan application or in other information 

submitted to or obtained by the lender at the time of loan application 

or submitted or obtained by the lender or settlement agent, except 

that a revised address shall be used where the lender or settlement 

agent has been expressly infonncd in writing of a change in 

address," 

This does not mention servieers, yet servicers need to deliver 

disclosures to borrowers, The lack of mention ofservicers, hy negative 

8 

"The provisions of this part requiring or permitting mailing 

documents shall be deemed to be satisfied a; I'laeiRg the wdocument is placed in the mail or with a private delivery 

(whether or not received by the addressee) addressed to the 

addresses obtained by the lender, settlement agent, servi

ather party making the disclosure, as the appropriate d

address. If the lender, settlement agent, servicer, or oth

making the disdosure, receives notice of a change in tha

address, it must begin using the new address within a re

amount of time, which shall not be less than five specific 

business days. " ' . , 

SHBIRitlee te or oetained By the I cnder at tee tillle 0 f leaR ap

81767.104

5. UDAAPs 

6, Presumed Consent to 

Electronic Statements, Regulation Z Comment 

41«)-4 

GENERAL MATTERS 

ISSUE 

implication, could be read to mean that servicers who mail disclosures 

have not delivered them until they are received, which is not the intent 

and would be unworkable because it is difticult to track when mail 

arrives or is received. 

'[be appropriate delivery address may not be the address "submitted to 

or obtained by the lender" and may not be a revised address of which 

"the lender or settlement agent has been expressly informed[,j" A 

servicer may be notified of a change of address, then later transfer the 

servicing to a new servicer. The new serviceI' will have the correct 

address but may not have received notice ofa change of address, 

The regulation in some places provides that a servicer delivers a 

disclosure by putting it in the mail. See §§ 7(a)(2) and (b)(2); 

§ 37(c)(I)(i); 37(d)(l); 37(e)(I)(i); 37(e)(5), However, in some places 

the rule is silent about whether a servicer has delivered a disclosure by 

mailing it See § 34(b); 37(gJ(2); and §§ 35 and 36, 

O£ sHfm,ilted of oatai!!e" 13; the I.",!.£ or settlement age"l, 

that a fe'. ised "ddress sflall 13e used v, here the leAder or sett

Compliance with Regulation X, Regulation 2, and their comme

should in no circumstances be an unfair and deceptive act or pr

CUDAP") under state or federal law or a UDAAP under Dodd

§§ 1031(a) or I036(a)(1)(B), 

Regulation 2'5 comment 41 (c)-4 provides: I This is helpful. We recommend applying this deemed consent 

"Any consumer who is currently receiving disclosures for any 

account (I()[ example, a mortgage or checking account) 

from their servicer shall be deemed (0 have consented 

statements, " 

9 

disclosures under Regulations X and 2, 

81767.105

SERVICING - REGULATION X 

TOPIC ISSUE I lUI'! 

Escrow Accounts, § 17 

7, Advancing premiums, Section 17(k)(5) provides: We request clari t1cation that because the servicer is not authoriz

§ 17(k)(5) pay the non-nood bills and the non-nood hazard insurance is no

"(iJ [n general. Except as provided in paragraph (k)(5)(iiiJ of this escrowed, the servicer should not lIse the flood insurance escro

section, with respect to a borrower whose mortgage payment is more non-flood/noll-escrowed items, 

than 30 days overdue, but who has established an escrow account for 

the payment for hazard insurance, as defined in § 1024,31, a servicer We request clarification that if a servicer escrows for insurance 

may not purchase i(Jrce-placed insurance, as that term is deilned in servicer does not require, 110 advances are required for that non

§ 1024.37(a), unless a servicer is unable to disburse funds from the insurance, If there is ultimately a foreclosure and there are insu

borrower's escrow account to ensure that the borrower's hazard funds to reimburse the servicing advances as well as pay the ac

insurance premium charges are paid in a timdy manner, interest and principal balance, the investor will likely disallow 

(ii) Inability to disbursefund1, (A) When inahili(y exists, A servicer advanced premiums, It seems reasonable that when the borrow

is considered unable to disburse funds from a borrower's escrow becomes delinquent, jf any of the escrowed coverage is extra or 

account to ensure that the borrower's hazard insurance premiums are servicer can force place coverage for an amount less than the e

paid in a timely manner only if the servicer has a reasonable basis to amount but still provide the minimum investor-required covera

believe either that the borrower's hazard insurance has been servicer should not be obligated to continue to advance for the 

canceled (or was not renewed) lor reasons other than nonpayment of borrower's optional excess coverage, 

premium charges or that the borrower's property is vacant," 

The definition of hazard insurance includes both flood and non-flood 

hazard insurance, Section 31, 

Suppose a serviccr escrows lor Hood, but not any other hazard 

insurance, the loan is more than 30 days overdue, and the non-flood 

insurance premium is due, Must the scrvicer usc the funds escrowed for 

81767.106

TOPIC ISSUE RECOMMENDA nON 

flood insurance premiums to pay tor a dillerent insurance policy? i 

I 

A borrower may request an escrow tor insurance on the property that 

the servicer does not require. 

Scope, § 30 

8. Qualified lender, Section 30(b)(3) excludes trom the scope of Subpart C: We request clarification that this refers to servicers that are qua

§ 30(b)(3) lenders subject to Farm Credit Administration regulations. We 

"A servicer with respect to any mortgage loan for which the servicer clariilcation whether the exclusion, for other ilnancing instituti

is a qualified lender as that tenn is deflned in 12 CFR 617.7000." applies only (0 loans that are loans "discounted OJ' pledged" und

§ l.7(b)(l). 

12 C.F.R. § 617.7000 provides: 

"Qualified lender means: 

(I) A System institution, except a bank tor cooperatives, that makes 

loans as defined in this section; and 

(2) Each bank, institution, corporation, company, credit union. and 

association described in section 1.7(b)(1)(B) orthe Act (commonly 

referred to as an other financing institution), but only with respect to 

loans discounted or pledged under section 1.7(b)(l)." 

Definitions, § 31 

9. Exceptions to the Section 31 defines loss mitigation option as: These types of workouts do not require a full review of the bor

definition of loss financial condition. so the § 41 protections, with a 3 O-day revie

mitigation option, § 31 "[A]n alternative to foreclosure offered by the owner or assignee of period, are not necessary. These workouts may begin or be com

a mortgage loan that is made available through the servicer to the before day 36 of a delinquency. so the 39 early intervention 

requirements should not apply. They also may be complete be

The second comment numbered 31-1 explains: 

45 of a delinquency so that the § 40 continuity of contact proce

should not apply. Servicers should have full flexibility to arran

payment plans with borrowers. rapidly when a full financial rev

11 

81767.107

SERVICING - REGULATION X 

"Loss mitigation options include temporary and long-term relie!; 

including options that allow borrowers who are behind on their 

mortgage payments to remain in their homes or to leave their homes 

without a foreclosure, such as, without limitation, refinancing, trial 

or permanent modification, repayment of the amount owed over an 

extended period of time, forbearance of future payments, short-sale, 

deed-in-lieu of foreclosure, and loss mitigation programs sponsored 

by a locality, a State, or the Federal government," 

This definition appears all-inclusive, Section 41 applies a number of 

procedural requirements lc" loss mitigation actions, and subjects 

servieers to private rights of action for alleged noncompliance. It is 

important that the definition of loss mitigation not be overbroad so that 

servicers will have flexibility to work with borrowers without having to 

take into account the cost of litigation risk [or offering loss mitigation 

options. 

There arc a number oCworkouts servicers routinely alTer that do not rise 

to the level of needing formal § 41 procedures. Examples include: 

1. A borrower refinances, such as at a lower rate, lower UPB, or for a 

longer term, with the current servicer or its affiliate. 

2. On a current loan, a serviceI' unilaterally lowers the interest rate or 

converts an ARM loan to a I1xed rate loan to prevent a potential 

default. The servicer has no need to review the borrower's I1nancial 

condition. 

3. A borrower without an escrow fails to pay property taxes, so the 

serYicer pays the taxes and permits the borrower to repay the taxes 

over time because the borrower claims inability to pay the taws in a 

scrvicer does not necessarily review the borrmver's 

12 

unnecessary. These loan workouts do not need to go through t

waterfall process because they are simple agreements, although 

§ 41(e)( l)(i) would require considering the borrower for "all lo

mitigation options avaHable[.]" 

We recommend that the definition of loss mitigation option be 

to exempt the following: 

Loan originations. whether or not related to resolving or pr

a default. 

An adjustment that fixes or lowers the interest rate, or both

life of the loan, without extending the loan term or capitaliz

arrearages, at no charge to the borrower. 

An agreement by which the borrower may pay the servieer 

mortgage-related obligations, as defined in § I 026.43(b)(8) 

ATR rule, including taxes, insurance, condo and similar fe

ground rents; and leasehold payments] after they are or we

An agreement that permits the borrower to pay any portion 

loan payments at a date later than originally scheduled. 

o See, for example, the Fannie Mac Guide, § 403, coverin

number of borrower-specific situations in which "the se

can agree to reduce or suspend the borrower's monthly 

for a specified period. Forbearance may be offered by i

combination with other foreclosure prevention alternati

as a combination of forbearance and a repayment plan.

Forbearance plans are typically fbr six months, with lon

requiring Fannie Mae approval. Servicers may be requ

consider forbearance options, § 403.02.02. 

o See also the Fannie Mae Guide § 404, covering repaym

81767.108

SERV[CING - REGULATION X 

TOPIC ISSUE RECOMMENDATION 

financial condition because the increase in periodic payments is plans, which arc typically 12 to 18 months. Servicers m

relatively small and the borrower wants to remain in the home. required to consider repayment plans for temporary har

4. A borrower who has missed, or is about to miss, one payment or a § 404. 

few payments because of a unique event works out an arrangement 0 Forbearance and repayment plans are less formal than 

with the servicer. The agreement may involve repayment over time, modifications, typically require less documentation, and 

either currently or in the future, depending on the borrower's oral. The flexibility they offer can prevent unnecessary 

specifie situation. The servicer does not review the borrower's foreclosures. 

financial condition as it would with a furmal modification. Such 

agreements are often reached over the phone. Flexibility is critical We also recommend that the definition of delinquency, for per

I to the success orlhese workouts because every situation is dilTerent. statement purposes. in § 1026.41 (d)(8), be limited to delinquen

are not subject to an agreement with the servicer to resolve, rep

otherwise work out the delinquency. 

In examples 3 and 4, the loan is technically delinquent althoug

servicer does not follow normal collection procedures. As lon

borrower continues to make payments as agreed with the servi

should be no need include delinquency information related to t

workout in the periodic statement under § 1026.41(d)(8) becau

be covered by the agreement with the borrower. In addition, th

§ 1 026.41(d)(8) information is not designed for examples 3 an

requires disclosure of: 

. The date the consumer became delinquent. In examples 3 

this will not matter to the borrower because the servicer ba

not to pursue the delinquency. 

Risks if the delinquency is not cured. In examples 3 and 4

not relevant becallse the servicer has agreed not to pursue t

delinquency. 

An account history showing the amount due from each bill

Again, this is not relevant. The conSllmer needs to know h

13 

81767.109

TOPIC. ISSPE I.TION. 

to pay in the fClture, not which billing cycle it was "due:' T

amount to pay is set out in the agreement with the servicer. 

the payment is "due" has changed, so the periodic statemen

be misleading. 

10. Definition of loss Comment 31-1 provides that a loss mitigation application may be Servicers have duties based on the date they receive a loss miti

mitigation application, and submitted by a borrower's agent, and that the servicer may undertake application. When an agent is involved, servicers should not b

time for verifying whether reasonable procedures to detennine if a person that claims to be an to have received an application until they have had a reasonabl

an agent is authorized to agent of a borrower has authority trom the borrower to act on the of time to verify any agent's authority. The permitted time sho

act for borrower, comment borrower's behalf. run while the servicer is waiting for a response to questions rel

31-1 or for documentation about, the agent's authority. 

This recommendation is the same treatment in comments 35(a)

36(a)-I, relating to the time to respond to error assertions and 

inill1'lnation requests. Those comments permit servicers to trea

error assertion or information request as received H[u]pon recei

such documentation" from the borrower that the agent has auth

act on the horrower"s behalt: It is also similar to Regulation Z 

36(c)(3)-I, which permits creditors to verify the authority of an 

who requests a payoff statement before the time for delivering 

statement begins to run. 

Servicing Transfers, § 33 

See also § 38(b)(4), which covers servicing transfers. 

II. Appropriate mailing Comment 33(b)(3)-1 provides: We recommend revising the language as follows: 

address, comment 

33(b)(3)-1 "A servicer mailing the notice of transfer must deliver it to the "A servicer mailing the notice of transfer must deliver it to 

mailing address (or addresses) listed by the borrower in the loan mailing address (or addresses) listed by the borrower in the 

documents, unless the borrower has notified the servicer of a new documents, unless the borrower has notified the servicer, le

address (or addresses) to the servicer's requirements for a prior servicer of a new address (or addresses) pursuant to 

14 

81767.110

TOPIC 

12. Payments incorrectly 

sent to transferor. 

§ 33(c)(l) 

SERVICING - REGULATION X 

ISSUE 

receiving a notice ofa change of address." 

It is possible that a prior servicer, rather than a borrower. provided the 

notice to the servicer who is mailing a notice, or that 

the borrower provided the change-ot:addrcss to a lender. 

for 60 days atier the transier effective date. timely payments sent to the 

transferor "may not be treated as late for any purpose." § 33(c)(l). The 

transferor must either send the payment to the transferee or return it to 

the borrower with notice of the proper recipient. § 33(c)(2). 

The requirement that the transferee treat the payment as timely assumes 

that the transferee is aware of the payment, but this will ol\en not be the 

case, at least for a few days al\er the transferor mails the payment. 

Comments 33(c)(I)-2 and 39(a)-l.iii both seem (0 acknowledge this. 

Borrowers who receive the returned paymcnt, even with clear 

instructions on where to send it, may not forward the payment 

immediately, especially if they arc under Hnancial strain. Or, the 

borrower may be away tram home and not realize the payment was 

misdirected. and would not know at least to call the servicer. 

Comment 33(c)( 1)-2 provides that a transferee's "compliance" with 

§ 39 (early intervcntion) during the 60-day period does not constitute 

treating a payment as late for purposes of § 33(c)( I). 

15 

RECOMMENDATION 

servicer!s, lender's, or prior servicer's requirements for r

a notice of a change of address" 

To the extent the transieree has no reason to know a payment w

timely sent to the transferor, has not received it, and acts as if t

payment was not received. the transferee should not be held in 

of any law, policies or procedure under § 38, or any UDAP or 

law. 

A transferee should be required to treat only one misdirected p

from the same borrower as timely. There is no need to notify b

repeatedly of the same information. One misdirected payment 

all error. but the second one likely is not. The borrO\rer may a

that the transferor will not cash the check, meaning mailing a c

would bounce is a method to avoid payment. 

The requirement that the transferee treat a payment as timely e

the servicer has not received it should never apply to any oCthe 

servicer's duties to investors, it should only apply to the servic

duties with regard to thc borrower. We recommend a commen

this clear. 

Comment 33(c)(1 )-2 talks of compliance with § 39 with respec

timely payments. Section 39 does not apply in the absence of 

delinqucncy, and the concept of compliance with the inapplica

confusing. It would be clearer to replace "compliance" with "a

based on § 1024.39[.]" 

81767.111

SERVlCING-REGULATlON X 

TOPIC ISSUE IDATION 

13. Preemption, § 33(d) Section 33(d) preempts state laws that require servicing transfer notices. It should also expressly preempt any federal or state HDAP law

UDAAP laws under Dodd-Frank §§ 1031(a) or 1036(a)(1 )(B). 

Escrow Refunds, § 34 

14. Payment of a loan in Section 34(b) requires escrow refunds after "payment ora mortgage When a serviceI', assignee, or both agree with a borrower or bo

[ui!, § 34(b) loan in Icti![T' After a short sale, deed-in-lieu, or sale-leaseback. on a short sale, deed-in-Iieu of foreclosure, sale-leaseback, or s

whether the loan is paid "in fui!" may not be clear, especially in states nonretention foreclosure altcrnative, whether any escrow refun

that do not permit deficiency judgments. required should be determined by that "",,,.cment 

Error Assertions, § 35 

15. Annual escrow Comment 35(a)-2 provides: We request clarification that an inf(lfmation request that docs n

statements available on an erroneous annual escrow statement not trigger a requir

demand at any time, "1\ serviceI' should not rely solely on the borrower's description of a send a new annual escrow statement. 

comment 35(a)-2 submission to determine whether the submission constitutes a notice 

of error under § 1024.35(a), an information request under 

§ 1024.36(a), or both. For example, a borrower may submit a letter 

that claims to be a 'Notice of Error' that indicates that the borrower 

wants to receive the information set torth in an annual escrow 

account statement and asserts an error for the scrvicer's failure to 

provide the borrower an annual cscro\v statement. Such a letter may 

constitute an information request under § 1024.36(a) that triggers an 

obligation by the servicer to provide an annual escrow statement." 

The obligation to provide annual escrow statements is triggered by 

RESPA § 10(c)(2)(8) and by § 1024.17(i). The comment quoted seems 

to imply that a bonower can send in a request for an annual escrow 

statement. that is not an error assertion, and that the information request 

"triggers" an obligation to send an annual escrow statement. This 

seems to imply that borrowers have the right to receive annual escrow 

statements monthly. 

16 

81767.112

SERVICING - REGULATION X 

r 

TOPIC ISSUE RECOMMENDATION 

16. Reasonable fees for Comment 35(b)(2)-2.iii gives examples of fees for which a servicer Servicers may charge borrowers appropriate fees to protect the 

nonpayment delilUlt, lacks a reasonable basis to charge, including: and investor from nonpayment delillllts, even if the loan is curr

comment 35(b)(2)-2.iii quoted comment should be amended to read: 

"A default property management fee for borrowers that are not in a 

delinquency status that would justify the charge[.]" "A default property management fee lor borrowers that are 

ElelinqueA€;' default status that would justify the charger.]" 

Some mortgage defaults are unrelated to late payments. BOffowers are 

required, [or example, to maintain the property and arc often required to 

repair it if it is damaged. Failure to do so as required is a default even if 

all payments arc timely. For example, the GSE Uniform Security 

Instrument provides: 

"Lender may charge Borrower fees for services performed in 

connection with Borrower's default, for the purpose of protecting 

Lender's interest in the Property and rights under this Security 

Instrument, including, but not limited to, attorneys' lees, property 

inspection and valuation lees." 

17. Error under § 35(b)(7) Section 35(b)(7) delines error to include: We request claritication that if a servicer has provided the info

should not include failure required by § 39(b)(2), per se there can be no error under § 35(

to provide complete loss "Failure to provide accurate information to a borrower regarding Specifically, the deflllition of error should not apply when a se

1 mitigation information I loss mJtlgatlon options and foreclosure, as reqUIred by § 102439:' provides all the information required by 39(b)(2) even ifit is 

under § 39(b)(2), complete and exhaustive because § 39(b)(2)(iii) requires only a 

SeetlOn 39(b)(2) requires serVlcers to supply on I, "blld" loss mltlgation description of examples of loss mitigation options that may be 

i mlO1l11atJon from the servicer." 

18, An error under I Section 35(b)(7) delines error to include: We request clarification that the § 35(b)(7) definition of error i

§ 35(b)(7) should include only duties under § 39 that require disclosure ofinlonnation. 

I only dutles that require "Failure to provide accurate information to a bOffo""r regarding 

! information disclosure loss mitigation options and foreclosure, as required by § 1024,39." 

17 

81767.113

SERVICING - REGULATION X 

TOPIC ISSUE RlCf''''''''' ({lUN 

i 

The referenced § 39 requires actions other than providing infonnation: 

it requires attempting to contact a borrower, I 

19, An error under Section 35(b)(8) defines error to include: If the transferee and transieror servicers agree that particular 

§ 35(b)(8) should not information does or docs not need to be transferred, failure to d

include failure to transfer "Failure to transfer accurately and timely information relating to the the unnecessary should never be a violation. This way. the app

useless information servicing ofa borrower's mortgage loan account to a tmnsferee information will be transferred, but the regulation would not ne

scrvicer:' specify every conceivable piece of information that must be tra

in every scenario, 

Some information reiates to "the servicing of a borrower's mortgage 

loan" that the transferee does not need, For example, the transferee We recommend revising § 35(b)(8) as follows: 

normally cloes not need all communications between the transferor 

serviceI' and the investor for the period belorc the transferee is the "Failure to transfer accurately and timely information relati

servicer. Likewise, identilieation ofwhieh employee within the servicing ofa borrower's mortgage loan account that the t

transferor serviceI' prcpared a response to a QWR, or responded to a and transferee agree should he transferred to a transfere

phone inquiry, likewise is not useful to the transferee servicer. There serviccr:' 

should be no requirement to transfer useless information. 

If there is a transfer of servicing but no change in the document 

custodian, not all the information will need to be transferred, In this case, there should be no requirement that the transferor or custodian 

transfer the custodian's flIes at all. 

20, Definition of "any Section 35(b) defines error to include, in addition a list of errors: We request clarification that ifthe borrower does not specify a

other error," § 35(b)(1 I) and the servicer cannot reasonably understand what error the b

"Any other error relating to the servicing of a borrower's mortgage asserts, there is no error assertion. 

loan." 

2 L Single intake address. Section 35(c) permits servicers to designate an address for submissions We request clarification that it is pennissible to designate a sin

§ 35(c) L?f error assertions. ...... address for submissions of error assertions, information reques

18 

81767.114

SERVICING - REGULATION X 

TOPIC ISSUE ... ",n. UN> m"iDATION .' 

QWRs. 

22. Change of intake Section J5(c) requires notice ofa change in a designated intake address. We suggest that if the new address is included on or with the la

address. J5(c) but does nnt specify by when. Comment J8(b)(5)-1 provides that periodic statement delivered before the change becomes eflecti

servicers may notify borrowers of the error assertion process by a notice should be sumeicn!. 

, (mailed or delivered electronically) or a website. 

If a servicer will designate the existing QWR address as the int

address lor error assertions, no separate notice should be requir

the regulation becomes effective. 

23. Providing the Comment 35(c)-2 provides: We recommend that the address need be provided only: 

designated address, . Upon request; and 

comment 35(c)-2 "If a serviceI' establishes an address that a borrower must use to . In periodic statements or coupon books . 

assert an enor, a servicer must provide tbat address to the borrower 

in any communication in which the scrvicer provides the borrower 

with contact information for assistance li'OlD the servicer." 

This would be very broad, including even oral communications, and 

even if the borrower expressed an unwillingness to hcar the information. 

It could be required on escrow statements, rate-reset notices, and IRS 

Forms 1098. It could also be required on initial and annual privacy 

notices even if the opt-out address is different that the error assertion 

address, possibly confusing borrowers, 

It would also require the intake address on j(Jrce-placed insurance 

notices, which do not include this information and which prohibit 

additional information on the form. Sections 37(c)(4); (d)(4); and (e)(4). 

I 

These provisions permit additional information on a separate piece of 

paper. However, including an intake address on a separate piece of 

paper would be wasteful, and would appear to indicate that the intake 

19 

81767.115

SERVICING - REGULATION X 

TOPIC ISsUE ; IATJON 

address is more important then the insurance in!'ormation. I 

Clearly the eFPB. therefore, did not intend that aU communications 

include this intake address. 

24. Notice of right to Section 35(e)(1)(i)(B) requires responses to error assertions to state, The servicer should be able to require such requests to be writt

request documents, among other things, how the borrower can request a copy of documents servicer can be able to accurately determine whether a borrowe

§ 35(c)(I)(i)(B) on which the servicer relied. such a request. 

25. Borrowers mayor may An error resolution may require information that a borrower has and the We request clarification that when a borrower does not provide 

not provide relevant servicer does not. The regulation does not permit the servicer to require requested, relevant information. and the serviceI' reasonably in

information, § 35(e)(2) the borrower to produce that information before investigating the the error assertion, the servicer's lack of that information shou

asserted error, and does not permit the servicer to determine that no permissible basis to determine that no error occurred. 

error occurred because the borrower failed to provide any requested 

information without conducting a reasonable investigation. If the servicer conducts a reasonable investigation and determi

the servicer needs information it does not possess, and determi

no error has occurred because the servicer lacks necessary info

that error notice should be deemed resolved. If the borrower th

supplies the missing infonnation. that should be a new error no

subject to the full 5-day, 30-day, and 45-day response times. O

a borrower could wait until day 30 or day 45 to deliver the nec

information and the servicer would not have time for a reasona

investigation. 

26. Time limits, § 35(e)(3) Section 35(e)(3)(i)(B) requires servicers to respond to assertions of The serviceI' should be held to a reasonableness standard. If th

(b)(9) and (b)(lO) errors by the earlier of30 days li'om receipt or the cannot reasonably cancel or postpone a foreclosure sale, it sho

date of the !flJ'eclosure salc. Comment 35(e)(3)(i)(B)-1 provides: required to respond to the error assertion before the sale. It sho

permissible to respond within 30 days and to take any appropri

"If a servicer cannot comply with its obligations pursuant to remedial steps. 

§ 1024.35(e) by the earlier ofa foreclosure sale or 30 days after 

receipt of the notice of error, a servicer may cancel or postpone a Otherwise, borrowers would use this as a means to delay an ap

20 

81767.116

SERVICING- REGULATION X 

TOPIC ISSUE '. RECOMMENDA nON 

I 

foreclosure sale, in which case the servicer would meet the time foreclosure. Borrowers would submit baseless crror assertions 

limit in Ii 1024.35(e)(3)(i)(B) by complying with the requirements of last minute for the purpose of delaying foreclosures. 

§ 1024.35(e) before the earlier of30 days after receipt of the notice 

of error (excluding legal public holidays, Saturdays, and Sundays) or 

the date of the rescheduled foreclosure sale." 

The statement that servicers "may" cancel or postpone a f()reclosure 

sale is not necessarily true. Tbey will not be able to do so in all cases. 

27. I5-daycxtension The general response time lor error assertions is 30 days, extendable to The IS-day statutory extension should be available if the error 

, should be available long 45 days upon notice to the borrower. The 15-day extension is not is received more than 45 days bd(lfe a scheduled torcclosurc s

before a foreclosure sale, always available. Asserted (b)(9) and (b)(10) errors, which relate to 

§ 35(e)(3) foreclosures, require responses by the earlier of 30 days or the date of 

(lreclosure, § 35(e)(3)(i)(C), without any extension. § 35(e)(3)(ii). 

Ifthe foreclosure sale is scheduled for more than 45 days in the future, 

the servicer should be able to extend the response time. 

28. Borrower requests for Section 35(0)(4) requires servicers to provide upon request "copies of Aner providing requested doculIlents, the servicer should not b

inlormation on which documents and information relied upon by the servicer in making its required to respond to requests for further documents on which 

servicer relied - multiple determination that no error occurred[.]" [f a servicer provides all 

requests, § 35(e)(4) documents required to be provided, the request should be closed and We request clarification tbat if the servicer determines an error 

responses to further requests for documents relied on should not be occur and corrects it, providing documents relied on is unneces

required. 

29. Borrower requests for Sometimes the infonnation a servicer relies on will be a screen shot of There should be no need for costly systems changes to alter the 

information on which account activity. Servieers' systems arc not always designed to provide and not the substance of the information. It should he permissi

servicer relied -l(lrm printouts. and may not be in a j()rm or format that is consumer-friendly. servicers to provide information in a form different trom the foshould not matter, A screen shot of account activity, for example, will use "hieroglyphic" inJ(ll'mation when the servicer used it, and that conveys the sam

§ 35(e)(4) codes and terminology that thc serviceI' understands but that a consumer relevant information. There should not be an elevation of form 

does not. substance. For example, if a consumer alleges a payment waS 

---

21 

81767.117

SERVICING - REGULATION X 

TOPIC ISSUE .' s'14.TION 

I on the wrong date, the servicer should nol be required to send a 

I 

I shot, but should be able to send a leIter that says. "our records r

that we received your payment due March 1,2013 on March 1

We applied your payment as of March 16, 2013." 

30. Attorney work product Section 35(e)(4) does not require servicers to supply information that is It should be clear that servicers are also not required to divulge 

should not be subject to confidential, proprietary, or privileged. information protected by the attorney work-product doctrine, e

mandatory disclosure. that information is not privileged. These lerms arc not synonym

§ 35(e)(4) See Federal Rule of Evidence 502. 

31. General descriptions Section 35(e)(4) provides: It should be permissible for servicers to include a general descr

of materials withheld materials withheld, to meet the IS-day deadline. It may not be 

should be sullieient, "If a seryicer withholds documents relied upon because it has reasonably possible to produce a privilege log that quickly, and 

§ 35(e)(4) determined that such documents constitute confidential, proprietary should not be required. A statement such as the foJlowing shou

or privileged information, the servicer must notify the borrower of permissible: 

I its determination in writing within 15 days[.]" 

"We are not required to provide you with materials that are 

confidential, proprietary, privileged, or that arc attorney wo

produet. We do not include any such information." 

-, 

32. Frivolous or abusive The error resolution process is not required when an error notiee alleges The error resolution procedure should not apply to frivolous or 

error asseliions should not a duplicative or overbroad error. That could mean it does apply to error assertions. 

require a response, § 35(g) frivolous or abusive error assertions, For example, habitual late payers 

could send a baseless, but different, error assertion for each late 

payment to delay adverse, but accurate, eredit reporting. 

33. Error assertions that We recommend that servicers should not be required to respon

are the subject ofpending assertions that arc the subject of pending litigation because any 

litigation should not requirement would interfere with the discovery process overse

require a response, S 35(g) neutral courts and the rules of procedure and evidence. 

34. Error assertions buried § 35(g)(l)(ii) provides: It is not clear how servicers are to reconcile these two provision

--------------

22 

81767.118

SERVICING - REGULATION X 

TOPIC ISSt.JE '. . RECOlVlMENDATTON 

in abusive error assertions, recommend an additional example of an overbroad or unduly 

§ 35(g)(1)Oi) "To the extent a servicer can reasonably identify a valid assertion of burdensome error assertion: 

an error in a notice of error that is otherwise overbroad, the servicer 

shall comply with the requirements of paragraphs (d), (e) and 0) of "A submission that is unreasonably lengthy in relation to w

this section with respect \0 that asserted error." appears to assert." 

Comment 35(g)(I)(ii)-1.iii appears to contradict the regulation. It 

provides that an unduly burdensome error assertion includes: 

"Assertions of errors in a form that is not reasonably understandable 

or is included with voluminous tangential discussion or requests for 

inlormation, such that a servicer cannot reasonably identify tram the 

notice of error any error for which § 1024.35 requires a response." 

35. Untimely error The regulation does not require responses to error assertions submitted No response should be required more than a year aller a service

assertions, more than a year after the loan balance was paid in fulL Alter a short assignee, or both, execute with a borrower or borrowers a shor

§ 35(g)(l )(iiiJ(BJ sale, deed-in-lieu, or sale-leaseback, whether the loan is paid "in full" deed-in-lieu of foreclosure, sale-leaseback, or similar nont'eten

may not be clear. especially in states that do not permit deficiency foreclosure alternative. 

judgments. 

36. Notice to borrower Section 35(g)(2) provides: Servicers that receive duplicative. overbroad, untimely, abusiv

I that servicer is not required frivolous error assertions should not be required to repeatedly s

to respond to error "If a servicer determines that, pursuant to this paragraph (g), the § 35(g)(2) notice that no response is required. I assertion, §35(g)(2) servicer is not required to comply with the requirements of 

paragrsphs Congress directed the CFPB to put an end to abusive QWRs. R

(d), (e) and (i) of this section, the servicer shall notify the 

borrower of its determination in writing not later than ftve days § 6(k)(1J(B). There is no reason serviccrs should remain requi

(excluding legal public holidays, Saturdays, and Sundays) afler respond to abusive notices or inquiries. 

making such a determination. The notice to the borrower shall set We recommend that a serviceI' be required to send no more tha

l forth the basis under paragraph (g)( 1) of this section upon which the servicer has made such detcrmination.H § 35(g)(2) notices in response to similar error assertions in con

with the same loan. 

23 

81767.119

SERVICING -REGULATION X 

TOPIC ISSUE , .. . RECOMMENDATION 

Borrowers can repeatedly send the servicer the same notice of error over 

and over again, and the serviceI' would have (0 send the non-responsive 

response each time, This is unduly burdensome on the servicer and 

offers no consumer benefit. 

37. Limits on "d verse Section 35(i) provides: To prevent borrower abuse, this prohibition should not apply a

credit reporting, § 35(i) servicer determines that a response is not required. Otherwise

"After receipt of a notice of error, a servicer may not, for 60 days, late payers could send a baseless, but ditferent, error assertion 

furnish adverse information to any consumer reporting agency late payment to delay adverse, but accurate, credit reporting. 

regarding any payment that is the subject of the notice of error." 

Information Requests, 

§ 36 

38. Scope of requests that The § 35 definition of error is limited to servicing-related errors. There Including origination information in the scope of the informati

require responses, § 36(a) is no analogous definition of information request. A QWR that requests request procedures would create a "back-door" discovery proc

and 3 6C 1)(1 )(iii) infonnation to servicing the mortgage loanH is an information especially in light of both the ability-to-repay rule and the 

request, but non-QWR information requests do not need to relate to Administration's approach to disparate impact liability. We ag

servicing. the CFPB that discovery should be overseen by an impartial ju

can weigh the importance of the information against the costs 

Section 36(f)(l)(iii) says servicers do not need to respond to requests for producing it. 

information that is not directly related to the borrower's mortgage loan 

account. However, this is not limited to servicing information. It Ability-to-Rellav "Back Door" Discovery 

apparently requires servicers to provide any requested origination Consumers will have an incentive to establish that a purported 

infomlation. The CFPll states in its scction-by-section analysis: was not a QM loan, and will use this servicing rule tor pre-litig

fishing expeditions. As this was not the CFPB's intent, we rec

"lTjhe Bureau does not believe that the intormation request adding additional examples of irrelevant information to comm

procedures should replace or supplant ciyillitigation document 3 6(1)( I )(iii), inel uding: 

requests and should not be used as a forum for pre-litigation 

discovery." . lnlonnation that relates to whether the loan was originated 

--

24 

81767.120

TOPIC 

SERVICING - REGULATION X 

ISSUE 

78 Fed. Reg. 10696.10761 (Feb. 14,2013). 

25 

RECOMMENDATION 

compliance with the ability-to-repay rule, 12 C.F.R. § 1026

Information that relates to the whether points and fees on th

defined in 12 C.F.R. § 1026.32(b), exceeded a threshold un

QM definition, the HOEPA definition, a similar definition u

state law, or under § 941 of the Dodd-Frank Act (risk retent

Disparate Impact "Back-Door" Discovery 

Borrowers have a strong incentive to show that a loan was orig

serviced, or treated in the secondary market, with a "disparate i

on a class, or on classes, of borrowers. Such allegations can le

large settlements without actual showing of impropriety, thereb

providing a strong incentive to use this servicing rule for pre-li

fishing expeditions. As this was not the eFPB's intent, we sug

additional examples in the same comment, including: 

Information that relates (0 any loan other than the borrower

that is serviced by the servicer to whom the information req

made; 

Inilmnation that relates to any loan application or loan appl

other than the borrower's application and (he borrower; 

Infonnatiol1 that relates to any borrower or loan applicant o

the borrower who made, or on whose behalf was made, the 

information request; Information that relates to the practices 0 r the servicer or th

originating lender in connection with loans, loan applicatio

loan defaults generally, including the borrower's loan and o

loans, borrowers, or applicants. 

Risk Retention is Irrelevant to Consumcrs 

81767.121

SERVICING - REGULATION X 

TOPIC ISSUE tAmON. 

I Comment 36(i)(l)(ii)-Li treats as confidential, proprietary or p

1 

information regarding the servicer's profllability and informati

provided to investors. Risk retention information does not affe

borrower's obligations, the borrower's loan payments, or any 

the borrower's experience with the loan, so servicers should no

required to produce this information outside of actual discover

overseen by an impartial judge. We suggest adding to the exam

I 

"Information that relates to any risk retention or other requi

that may arise in connection with the loan or its securitizati

i Dodd-Frank § 941." 

139. Single intake address, Section 36(b) permits servicers to designate an address for submissions We request clarification that it is permissible to designate a sin

§ 36(b) of information requests. i address for submissions of error assertions, information reques

QWRs. 

40. Change of intake Section 36(b) requires notice ofa change in a designated intake address, ' We suggest that if the new address is included on or with the l

address, 36(b) but does not specify by when. Comment 38(b)(5)-1 provides that periodic statement delivered before the change becomes effect

servicers may notify borrowers of the information request process by a should be sufficient. 

notice (mailed or delivered electronically) or a website. 

If a servicer will designate the existing QWR address as the in

I address for information requests, no separate notice should be 

I when this rule becomes effective. 

41. Providing the Comment 36(b)-2 provides: This would be very broad, ineluding even oral communication

designated address, recommend that the address need be provided only: 

comment 36(b)-2 "I[ a servicer establishes an address thal a borrower must use to . Upon request; and 

request information, a servicer must provide that address to the . In periodic statements or coupon books . 

borrower in any communication in which the servicer provides the 

bOlTower with contact information f()f assistance fhnTI the serviccr. ll 

26 

81767.122

SERVICING - REGULATION X 

TOPIC ISSUE .. ... maN 

This would be overbroad, as discussed under comment 35(c)-2 above. 

42, Format of information Section 36(d)(l) requires servicers to provide available requested There should be no need for costly systems changes to alter the 

provided should be ioformation, Some requested information will be available in the form and not the substance oIlhe information, It should be permissi

irrelevant, § 36(d)(I) of a screen shot of account activity, The systems that produce the servicers to provide in\(ll'lnation in a form diflerent from the io

screen shots are not always designed to provide printouts, and may not which the servicer stores the ini(lrInation, and that conveys the 

be in a form or format that is consumer-friendly, A screen shot of relevant information, There should not be an elevation of form 

account activity, for example, will usc "hieroglyphic" codes and substance, For example, if a consumer asks when a payment w

terminology that the serviceI' understands but that a consumer does not. applied, the serviceI' should not be required to send a screen sh

i should be able to send a letter that says, "our records reflect tha

received your payment due March J, 2013 on March J6. 2013, 

I applied your payment as of March 16,2013:' 

43, Reasonableness Comment 36(d)(l)(ii) provides examples of when information is or is A reasonableness standard should apply to § 36(d)(1) as well a

standard of information not available, using the terms "ordinary course ofbusinGss," § 36(1)(1 l(iv), A reasonableness standard needs to weigh both: 

availability does not "extraordinary efforts;' and "reasonable eHorts," These are subjective · The servicer's actual costs, in both time and money; consider all relevant standards, so it is not clear what compliance requires, · The usefulness of the information to the borrower in under

information; additional the terms of the loan and security instrument, or in perfOlln

examples needed. I For example, comment 36(d)(1)(ii)-2.iii gives an example of the loan, 

comment 36(d)(I)(ii) I information being available "through reasonable efforts in the ordinary 

COUl'se of business" when the servieer has a legal right to access the A reasonableness standard should not take into account the use

information and the actual ability to find it. This does not consider the of the informatiollto (he borrower lor "back-door" discovery o

cost of traveling to the facility and making the search, inappropriate purposes, 

The examples seem to consider whether it is physically possible to We urge additional, much more specific, exanlples, such as: 

retrieve the intormation before the deadline, which is appropriate, 

However, none of the examples considers the cost to the servicer, and · If a servicer stores requested information offsite, or in a for

none weigh that cost against the useJulness of the information to the likely not accessible to the borrower, then whether the info

borrower for an appropriate purpose, is available depends on whether the servieer can retrieve th

inJormation, in a formal likely accessible to the borrower. w

27 

81767.123

TOPIC 

44. Format of information 

provided, comments 

36(d)(l )(ii)-2.i and 

36(1)(1 )(iv)-l.iii 

SERVICING - REGULATION X 

Section 36(1)( J)(iv) does not require a response to intonnation requests 

that are unduly burdensome, using a reasonableness standard: 

"An inf,mnation request is unduly burdensome if a diligent servicer 

could not respond to the information request without either 

exceeding the maximum time limit permitted by paragraph (d)(2) of 

this section or incurring costs (or dedicating resources) that would 

be unreasonable in light ofthc circumstances." 

Comment 36(d)( I )Oi)-2.i provides that intormation is available when: 

"The servicer's personnel have access in the ordinary course of 

business to audio recording liles with organized recordings or 

transcripts of borrower telephone calls and can identify the 

communication referred to by the borrower through reasonable 

business efforts:' 

Comment 36(1)( I )(1\')-1.iii provides that information need not be 

delivered: 

"lIln specine formats, such as in a transcript. letter 

columnar format. or spreadsheet. when such infonnatlOn 

28 

RECO.MMENDATION 

time limits in g 36(d)(2), at a cost that is reru;onable, in relathe apparent usefulness ofthe information to the borrower'

understanding of the terms orthe loan and security instrum

borrower's performance on the loan. 

If a servieer stores requested information offsite, and in the 

course ofbusincss goes to the off-site storage facility once 

calendar month, the information is available only if the serv

obtain the information in a regular trip to the oi'fsite facility 

to retrieve the information and deliver it in accordance with 

within the time limit in § 36(d)(2J. 

If a servicer stores requested intormation in a location whe

was an accident, disa5tcr, power failure, snowstorm, or sim

that makes delivering the information within the § 36(d)(2) 

unreasonably difficult, the information is unavailable. 

If a servicer has available a recording of a relevant call but not 

transcript of it, the serviceI' is not required to transcribe the cal! 

comply with the inrllrmation request requirements. If the form

recording is not compatible with consumer devices, must the se

deliver something the consumer cannot use? 

81767.124

SERVICING - REGULATION X 

TONC '. '. ISSUE ., .. ' ." n "nOr 

45. Frivolous or abusive I Section 36(f)(1) provides that serviccrs are not required to respond to Frivolous or abusive requests should not require a response. E

information requests I information requests that are duplicative, overbroad, or unduly in a regulation or commentary would be helpful. We suggest t

should not require a . burdensome. This could mean a response is required \0 frivolous or following examples: 

response, § 36(1)( 1) abusive information requests. 

· Apparent back-door discovery requests, even if not, individ

Comment 36(f)(l)(iv)-1 provides examples of overbroad or unduly overbroad or unduly burdensome. For this purpose, multip

burdensome requests that are similar to abusive QWRs under CUlTent information requests regarding the same loan may be consi

law. This is appropriate. together even if submitted separately or at different times. 

I · Requests about underwriting standards that the loan origina

However, we are concerned that when those abusi ve requests no longer or did not use. 

require responses, the abusive requests will change form just enough to · Requests for information about how a lender, settlement ag

rail outside the examples in this comment For example, instead of mortgage broker set or sets loan terms or loan cllarges. 

sending one overbroad request, new requests may take the form of a · Requests for information about how a servicer set or sets it

large number of narrow. but not overlapping, requests. This would servicing or default charges. 

defeat the purpose of preventing abusive requests. 

· Requests for information about how a service provider set 

charges. 

· Requests about any risk retention requirements that may be I applicable to the loan. 

i · Requests about a diftercnt loan, even ifthe serviceI' is the s

scrvicer. 

46. Requests Jar I We recommend that servicers should not be required to respon

information that are the I requests f(Jr infOlmation that are the subject of pending litigatio

subject of pending I because any response requirement would interfere with the dis

I litigation should not I process overseen by neutral courts and the rules of procedure a

require a response, § 36(f) evidence. 

47. Attomey work product Section 36(f)(l)(ii) does not require servicers to supply inlormation that It should be clear that servicers are also not required to divulge 

should not be subject to is confidential, proprietary, or privileged. information protected by the atto11ley work-product doctrine, e

mandatory disclosure, that iniormation is not privileged. These tel111S are not synony

29 

81767.125

SERVICING - REGULATION X 

TOPIC . IS$UE , RECQMMENDA TIOl'S 

§ 36(1)(l)(ii) See Federal Rule of Evidence 502. 

48. Information requests Section 36(f)(l)(iv) provides: It is not clear how servicers are to reconcile these two provisio

buried in abusive recommend an additional example of overbroad or unduly burd

information requests, "To the extent a servicer can reasonably identify a valid information information requests: 

§ 36(1)(l)(iv) request in a submission that is otherwise overbroad or unduly 

burdensome, the servicer shall comply with the requirements of "A submission that is unreasonably lengthy in relation to w

paragraphs (c) and (d) oflhis section with respect to that requested appears to request." 

inf()fmation. l ' 

I Comment 36(f)(l)(iv)-l.ii appears to contradict the regulation. It 

. provides that an unduly burdensome request includes: 

"Requests f'lf information that are not reasonably understandable or 

are included with voluminous tangential discussion or assertions of 

errors!.]" 

49. Untimely requests, Section 36(J)(1)(v) does not require responses to information requests No response shoulJ be required more than a year after a servic

§ 36(t)(1)(v) submitted more than a year after the loan balance was paid in full. After assignee, or both. execute with a borrower or borrowers a shor

a short sale, deed-in-lieu, or sale-leaseback, whether the loan is paid "in deed-in-lieu of foreclosure, sale-leaseback, or similar nonreten

full" may not be clear, especially in states that do not permit deticiency foreclosure alternative. 

judgments. 

50. Notice to borrower Section 36(1)(2) provides: Servicers that receive duplicative. overbroad, untimely, abusiv

that servicer is not required frivolous information requests should not be required to repeat

to respond to information "If a servicer determines that, pursuant to this paragraph (t), the the § 36(t)(2) notice that no response is required. 

request, § 36(1)(2) servicer is not required to comply with the requirements of 

paragraphs (c) and (d) of this section, the servicer shall notify the Congress directed the CFPB to put an end to abusive QWRs. 

borrower ofits determination in writing not later than live days § 6(k)(1)(B). There is no reason servicers should remain requi

(excluding legal public holidays, Saturdays, and Sundays) after respond to abusive notices or inquiries. 

making such a determination. The notice to the borrower shall set 

30 

81767.126

SERVICING-REGULATION X 

TOPIC ISSUE IDATWN 

forth the basis under paragraph (1)( 1) of this section upon which the We reeommend that a servicer be required to send no mure tha

servicer has made such determination,}' § 36(1)(2) notices in response to similar information requests in 

connection with the same loan. 

Borrowers can repeatedly send the servicer the same request for 

information over and over again. and the serviceI' would have to send 

the non-response notice each time. This is unduly burdensome on the 

sefvicer and offers no consumer benefit. 

5!. General descriptions If a servicer determines that it is not required to deliver requested It should be permissible for servicers to include a gerleral desc

oCmaterials withheld infol1llation, it must notify the borrower within only nve days: materials withheld, to meet the 5-day deadline. It would usual

should be sufticient, possible to produce a privilege log in only five days, and one s

§ 36(f)(2) "The notice to the borrower shall set [Olih the basis under paragraph be required. A statement such as the following should be perm

(1)(1) ofthis section upon which the servicer has made such 

uetcrminatiDll," "We are not required to provide you with materials that are 

contidential, proprietary, privileged, or that are attorney wo

product. We do not include any such information." 

I Force-Placed Insurance, 

§ 37 

52. Servicers need to be There have been court cases questioning whether servieers cm1 require We request that the CFPB make very clear thal: 

able to require sufficient required Insunmce. See.' . A servicer that complies with § 37 has the right to require i

insurm1ce coverage. § 37 coverage in an amount, and of a type, that the servicer dete

Kolbe v. BAC Home Loans Servicing. 695 F.3d 111 (lst CiL 2012), permitted or required by the security instrument. investor g

reversing dismissal of claims that requiring flood insurance coverage safety and soundness standards, or that is required by law. 

equal to the replacement cost. and above the amount required by the . The servicer may require more Hood insurance coverage th

NFIA, because the claims state a plausible breach of contract. NFlA requires, such as to cover the replacement cost of the 

property. This is an important protection that can prevent 

Lass v, Bank of America. 695 F.3d 129 (1st CiL 2012), reversing consumers Ii'om losing their homes. as well as a safety and 

dismissal of claims, holding that lender did not have discretion to soundness requirement. 

31 

81767.127

SERVICING - REGULA TlON X 

. .:.. TOPIC ;c;:: lSS(JE 

madill' the flood insurance requirement during the life orthe loan. . The amount of required insurance coverage may increase d

Ii fe of the loan. 

FlI,wnrlh v IfS Rank 12-0256 (N.D. Ca. 2012), denying lender's . A property that was not in a special flood hazard area C'SF

motion to dismiss a putative class action because the mortgage can be origination may, in the fblure, be designated as in an SFHA

read to restrict lender's discretion in force-placing !load insurance. which case the serviceI' should be able to require an approp

amount of !load insurance coverage. 

Casev". eitiballk. et. 01. 5:12-cv-820 (N.D.N.Y. 2013), denying motion 

to dismiss claims that mortgages did not permit serviceI' to increase the 

amount of required !lood insurance coverage. 

Arnett v Bank ofAmeric:a, 874 F. Supp.2d 1021 CD. Or. 2012), denying 

defendant's motion for judgment on the pleadings in putative class 

action because the mortgage docs not give the mortgagee the right to set 

the amount of Hood insurance required. 

This type of litigation should be unnecessary. Consumers can be 

seriously harmed by insufficient insurance coverage. For that very 

reason, servicers have a right to require insurance coverage in an 

amount, and of a type, that is permitted or required by the security 

instrument, investor guidelines, safety and soundness standards, or that 

is required by law. 

53. Servicers need to Section 37(a) provides: Servicers should be able to require insurance coverage even w

require flood insurance mandated by applicable law or when not available under the F

when not required by the "For the purposes of this section. the term 'force-placed insurance' This is both a consumer protection and a safety and soundness 

FDPA, § 37(3) means hazard insmance obtained by a servicer on behalf (lfthe protection. 

owner or assignee of a mOltgage loan that insures the property 

securing such loan." The CFPB should state in a comment that the statement in the 

Form MS-3(D) that insurance "is required" can mean is requir

The delinitioll does not include flood insurance required by the FDPA. , serviceI' even ifit is not required by applicable law, or was req

32 

81767.128

TOPIC 

54, Detinition of forceplaced insurance and 

properties remapped out of 

a SFHA, § 37(a)(2) 

SERVICING - REGULA nON x 

1SSUE 

Section 37(3)(2)(i), Servicers sometimes require flood insurance: 

On properties in an SFHA but not in a participating community, so 

tbe FDPA docs not apply and docs not require insurance, 

On properties in an SFHA but in a Coastal Barrier Resource Act 

("CBRA") and Otherwise Protected Areas ("OPA") zones, where 

the FDPA does not apply and does not require insurance, 

On a property that was designated as in an SFHA at origination, and 

later designated as out of an SFIIA, 

On a property that is in certain areaS not in an SFHA, such as a 

Mississippi Grant Program, 

The Model Notices appear only to apply to instances where insurance 

"is required:' Required by whom or what is unclear, 

Section 37(a)(2) detines force-placed insurance to exclude insurance 

required hy the FDPA. What is the status offload insurance retained 

on a property that is remapped out a f a SFHA (or on a property thaI is in 

a CBRA, OPA, or non-participating community)? 

Ifa servicer requires flood insurance on a property for the life of the loan, even if the property is remapped alit ofa SFHA after origination, 

sucb insurance should not be considered force-placed insurance unless 

the servicer is required to force-place an NFIP MPPP policy or forceplace a private flood insurance policy, Continued maintenance ofa 

horrower-purcbased flood insurance policy obtained as a condition of 

origination is not force-placement This is consistent with § 1024,17 

which distinguishes force-placed insurance from situations in which a 

servicer renews horrowers' own hazard insurance policies. We seek 

clarity ofihis facL [( appears that the regulation permits renewal of 

33 

RECOMMENDATION 

when making, increasing, extending, or renewing a loan, even 

propeny is no longer in a SFHA G,ee the next item), 

In all cases, we believe that ohtaining or renewing a borrowerpurchased !load insurance policy even ifnot mandated by the F

not force-placed insurance and does not trigger § 37, Otherwis

servicers that continue to escrow and pay tor borrower-purchas

insurance on a property that was located in a SFHA at origina

later remapped out of a SFHA should not be considered to be f

placing insurance, Because servicers arc not required to track 

continuing SFHA slatus of a property by law, servicers can and 

sometimes do require flood insurance for the life ofthc loan ev

mandated by FDPA to do so, 

81767.129

SERVICING - REGULATION X 

We note that the laws governing flood insurance are not federal 

consumer fmaneiallaws within the CFPB' s authority, Congress 

directed prudentialrcgulators to require lenders to look at 

status at origination but not throughout the life of the loan: 

regulation direct regulated lending institutionsnot to make, increase, extend, or renew any lORn secured by 

improved real estate or a mobile home located 01' to be located in an 

area that has been identilied by the Administrator as an area having 

special 1100d hazards and in which 1100d insurance has been made 

available under the National Flood Insurance Act of 1968 [42 USC 

400 I et seq.], unless the building or mobile home and any personal 

property securing such loan is covered for the term orthe loan by 

flood insurance in an amount at least equal to the outstanding 

principal balance of the loan or the maximum limit of coverage 

made available under the Act with respect to the particular type of 

property, whichever is less[ r 

42 USC § 4012a(b)( 1) (emphasis added), Required insurance 

premiullls must be escrowed in certain circumstances, 42 U.S,c. 

§ 40 12a(d), but "[IJhis subsection shall apply only with respect to any 

loan made, increased, extended, or renewed aller the expiration of the 

t-year period beginning on September 23,1994," ld, at (d)(5) 

(emphasis added), This does not require servicers to track whether a 

34 

81767.130

SERVICING - REGULATION X 

TOPIC .' ISSUE JATION 

property that was in a SFHA at origination remains in one. The 

prudential regulators considered, but rejected, requiring sen'icers to 

track whether properties remain designated as in SFHAs: 

"Proposed question and answer 2 explained that, lIpon a FEMA map 

change that results in a building or mobile home securing a loan 

being removed from an SFHA, a lender is no longer obligated to 

require mandatory flood insurance. The Agencies received one 

comment from an industry group suggesting the guidance in 

proposed question and answer 2 be amended to add language 

encouraging lenders to promptly remove the flood insurance 

requirement from a loan when the building or mobile home securing 

the loan is removed from an SFHA by way of a map change. The 

decision to require nood insurance in these instances is typically 

made on a case-by-case basis, depending on a lender's risk 

management practices. The Agencies do not believe that a blanket 

statement encouraging lenders to remove flood insurance in such 

instances is an appropriate position; therefore, the question and 

answer is adopted as proposed." 

74 Fed. Reg. 35914. 35916 (Julv 21, 2012). And: 

"The agencies reiterate their view that the Reform Act docs not 

require lenders to engage in retroactive or prospective portfolio 

reviews or any other specific method for carrying out their responsibilities under the Federal flood insurance statutes. The 

Reform Act clearly requires lenders to check the status of security 

prope11y for loans when triggered by the statutory tripwires. The 

Reform Act did not add remappings to the list of statutory tripwires. 

35 

81767.131

SERVICING - REGULATION X 

TOPIC ISSUE RECOMMENDATION 

The Reform Act does not require lenders to monitor for map changes, and the agencies will not impose such a requirement by 

regulation," 

I 

61 FecI. Reg. 45684.45693 (August 29,1996). 

The prudential regulators do not have authority to require 

I map tracking. The prudential regulators are, but not the CFPB is not, 

authorized to implement flood insurance laws. The CFPB does not 

have authority to require map tracking that Congress and I the prudential regulators have explicitly rejected. 

55. Insurance as a When voluntary insurance coverage is unavailable, lenders may require ! We recommend that in these cases, tbe insurance not be define

condition of a loan when the borrower to enter into the lender's force-placed insurance program I force-placed under S 37(a)(2). 

voluntary coverage is as a condition of making the loan. I 

unavailable, § 37(a)(2) 

56. Reasonable response Section 37(c) requires servicers to notify borrowers before force-placing We recommend that servicers be permitted to require borrower

time, § 37(c) and (g) insurance. Section 37(g) requires sen'ieers to refund premiums tiJr have sufficient insurance coverage to demonstrate that coverag

duplicative force-placed insurance iflbe borrower demonstrates serviceI' within a reasonable amount of time, such as 60 days f

sumeient insurance coverage, but apparently without any requirement first date of coverage, as a prerequisite to applicability of § 37(

that the borrower act in a reasonable anlOum of time. 

57. Evidence Comment 37(c)(I)(iiiJ-2 makes clear that a serviceI' may require a We recommend cross-referencing comment 37(c)(1 )(iii)-2 in c

demonstrating insurance, declaration page or other similar information, and may reject evidence under §§ 37(d)(2)(U) and (g), to make clear that the same stand

comment 37(c)(J )(iiiJ-2 of insurance that does not "provide{ J conl1rmalion" of the information. applies under those provisions as well. 

This is quite helpful. 

The same standard should apply uniformly, including under 

§§ 37(d)(2)(ii). (e)( Il(iil, and (g). There is a cross-reference to this 

comment in comment 37(e)(1)-I, which is also quite helpllll, There is 

36 

81767.132

TOPIC 

58. Additional information 

in a disclosure, § 37(0)(4). 

(d)(4), (0)(4) 

SERVICING - REGULATION X 

no cross-reference in comments under §§ 37(d)(2)(ii) or (g). The 

standard under these provisions. absent a comment, would be "evidence 

demonstrating" insurance coverage. Evidence may be substantially less 

reliable or accurate than a declaration page, and may not be a 

confirmation at aiL 

RECOMMENDATION 

The regulation prohibits including additional information on the 

insurance notices. Some additional information may be appropriate. 

We request 1110dcllanguagc for disclosures as follows: 

37 

A statement providing the borrower with the correct mortg

clause; this ensures the documentation [or next year's rene

makes it to the right place, potentially avoiding the need fo

notil1catiotl again next year. This is both a consumer conv

and a courtesy. 

For bankruptcy cases, language that this disclosure is not a

to collect a debt. The section-by-section analysis in Regula

contains this language: 

"For example, servicers may include a statement such a

extent your original obligation was discharged, or is sub

automatic slay of bankruptcy under Title 11 of the Unit

Code, this statement is for compliance and/or informati

purposes only and does not constitute an attempt to coll

or to impose personal for such obligation. How

Creditor retains rights under security instrument, inc

81767.133

59, Additional pages, 

§ 37(c)(4), (d)(4), (0)(4) 

60. Estimated premiums, 

§ 37(d)(2)(i)(D), 

(e)(2)(viii)(C) 

SERVICING-REGULATION X 

The regulation requires notices to be separate: 

.,/\ servicer may not include any information other than information 

required by [specified] paragraphs [varies] in the written notice 

required by [sped fied] paragraph 

pro;-ide such additional information to a 

of paper in the same transmittal." 

Notices under § 37(d)(2) and (0)(2) require an estimate ofinsllfancc 

premiums when the servicer does not Know the exact cost. It is unclear 

how servicers will be required 10 estimate premiums. Comment 

37(e)(2)(i)(D)-1 states that the estimates must be based on information 

"reasonably available" to the servicer when the disclosure is provided, 

but it is not clear what type of information servicers must or may use. 

The comment also states that an estimate based on the borrower's 

delinquency status is permissible, but does not state whether servicers 

must consider delinquency status in all cases, 

be estimated, but draw 

38 

an escro\v account for payment 

A statement that the insurance may not protect the consum

interest in the property. 

We also request clarification that it is permissible to include th

number on the disclosures. This is impOltant for borrowers whmore than one property, and it is important for servicers' need 

manage their records. 

It should be permissible to include additional ini(lrmation on th

side of one piece of paper. This would be consistent with com

.l9(b)(2)-1 and -2. which permit servicers to combine 45-day 

delinquency notices with other information as long as all slatem

meet the clear and conspicuous standard of § 

The fact that an estimated premium amount turns out to be 

should!,er Sf' not be a violation of § 37, a UDAl', or a UDA

We suggest examples ofhQW servicers will be permitted to 

premiums, such as: 

o Give a range of dollar amounts; 

o Use the average premium of force-placed insurance at a

in the past twelve months on a sample of loans, regardl

how the sample is selected; 

c Use 150 percent ofthe east of the most recent voluntar

insurance policy on the property. 

Servicers should be permitted to draw attention to the fact 

amount is estimated, such as on the hack orthe p

81767.134

TOPIC 

I 61. Renewal of policies I that predate January 10, 

12014, § 37(e) 

62. Annual renewal 

notices, § 37(e)(5) 

SERVICING - REGULATION X 

I How the new IOree-Dlaeeo policies in effect on January 10,2014. apply to them is not clear. 

Section 37(e)(5) requires annllal renewal notices, but docs not define 

"year" as a calendar year or 365 days. it provides: 

';A servicer is not 

paragraph (c)(1 ) 

to provide the written notice required by 

section more than once a year. 

39 

RECOMMENDATION 

an insurer, is not based on the same inlonnation an insurer 

use, and that the actual cost may be much different than the 

estimate, all should be 

We request clarification that a policy that was effective on Janu

2014 that is renewed is subject to the renewal requirements in 

but does not need to go through the 45-day notice process for n

policies. 

We request clarification that a serviceI' may send a renewal not

before the policy expires, and renew the policy on the expiratio

We also request clarification of annual notice timing. If a servi

a notice 011 June 1 in year 1. is the next notice due by the next J

by December 31, in year 2? Operationally, it may be easier to 

notices at the same time in each calendar year. This should be 

permissible. This would bc consistent with annual notices und

Regulation P (consumer financial privacy) § 1016.5, which pro

reasonable Ilexibility: 

"(a)(1) General rule. You must provide a clear and conspi

notice to customers that accurately relleets your privacy po

practices not less than annually during the continuation of t

customer relationship. Annually means at least once in any 

12 consecutive months during which that relationship exist

may define the 12-consecutive-montb period, but you must 

to the customer on a consistent basis. 

(2) Example. You provide a notice annually if you define t

consecutive-month period as a calendar year and provide th

notice to the customer once in each calendar year following 

81767.135

SERVICING - REGULATION X 

if a customer opens an aCC(lunt on any day of year 1, you m

provide an annual notice to that customer by December 31 

2." 

Refunds, § 37(g)(2) Section 37(g)(2) requires that, aftcr cancelling a policy. servicers must; We request clarification that the servicer may either make a dir

refund or place it i[1 the borrower's escrow account. 

"Refund to such borrower all force-placed insurance premium 

charges and related fees paid by such borrower for any period of 

overlapping insurance coverage and remove from the borrower's 

account all force-placed insurance charges and related fees for such 

period that the serviceI' has assessed 10 the borrower:' 

64. Bonofide and Section 37(h)(2) requires charges for three-placed insurance to be bona We request clarification that the charge can include lhe cost of 

reasonable charge, I .fide and reasomble, dctlned as: premiums, as well as the servicer's cost of administering its fo

§ 37(h)(2) I "[Al charge for a service actually performed that bears a reasonable placed insurance. 

I relationship to the servicer's cost of providing the service, and is not otherwise prohibited by applicable law." 

Servicing Policies and 

Procedures, § 38 

65. Compliance standard Section 38(a) requires servicers to "maintain policies and procedures We request c!aritlcation that: 

under § 38(a) that are reasonably designed to achieve" a list of objectives. The CFPB The failure to achieve an objective is not itselfa violation o

explains: regulation; 

The servicer's selection of "l'e'L,onably designed" policies 

"This revision [from the proposed rule.! will also allow the Bureau to procedures does not require the most conservative or most 

protect borrowers through robust supervision and enforcement oflhe possible policies and procedures, or the most advanced tec

servicing policies, procedures, and requirements set forth in available; and 

1024.38 without having to demonstrate a pattern or practice of The factors affecting the reasonableness of the policies and 

40 

81767.136

SERVICING - REGULATION X 

TOPIC ISSUE RECOMMENDATION 

procedures include: 

The compliance standard is not clear. 0 The costs and resources involved in implementing, revi

maintaining the policies and procedures; and 

0 The servicer's need, and its a!TIliates' needs, to allocate 

i 

reSOllrces to come into compliance with other rules, suc

Dodd-Frank rules. 

66. Consumer complaints, Comment 38(a)-1 provides that servicers must base their policies, I Servicers should not be required to base their policies, procedu

comment 38(a)-1 procedures, and requirements on) among other things, the servicer: s I requirements on baseless, unfounded, or irrelevant complaints. 

history of consumer complaints. Not all complaints are valid or 

accurate, and some do not relate to servicing matters at all. 

67. Delegating corrections, CommenI38(b)(1)(ii)-1 provides: The servicer, the service provider who made the error, or anoth

to service providers) I service provider, should be permitted to make a correction. Th

comment 38(b)(1 )(E)-l I "Errors committed by service providers. A servicer's policks and of the information used in a correction should not be relevant. 

procedures must be reasonably designed to provide for promptly recommend amending the language as 1011ows: 

obtaining information from service providers to tadlitate achieving 

the objective of correcting errors resulting from actions of service "Errors committed by service providers. A servicer's polic

providers, including obligations arising pursuant to § 1024.35." procedures must be reasonably designed to provide for the 

or a service provider to promptly obtainffig information fr

Servicers should have the flexibility to delegate to service providers the sen ise p,e, ide,s to facilitate achieving the objective of cor

I task of correcting a service provider's errors. The comment appears to errors resulting fl'OI11 actions of service providers, including i require the servicer to correct such errors directly, even if this is not the obligations arising pursuant to § 1024.35." 

most effective method. It also assumes that information must come 

from a service providerj when notice of an errol' may come from) for 

example, the borrower. The source of the information is irrelevant. 

68, Providing inf()rmatiol1 An objective under § 38(b)(I)(iii) is to: This objective should not create a "back-door discovery" aven

"w ith respect to" the suggest that it be limited to "reasonable requests for inf()fmati

mortgage loan, "Provide a borrower with accurate and timely inlonnation and respect to servicing the borro\verls mortgage loan.)' 

§ 38(b)(1)(iii) documents in response to the borrowcr'.s requests for i.nformation 

41 

81767.137

SERVICING - REGULATION X 

,----.. _-. ----

TOPIC ISSUE 

with respect to the borrower's mortgage ]oan[.]" 

This includes matters that are well heyond the scope of a scrvicer's role, 

and could reach contidential, proprietary, privileged information or 

attorney work product. See the comments ahove under Scope of 

requests that require responses, § 36(a) and 36(f)(] )(iii). 

69. Information to An objective under § 38(b)(iv) is to: It should he limited to "all consumer mortgage loans they own 

investors about "all servicer services." 

mortgage loans they own, "Provide owners or assignees of mortgage loans with accurate and 

§ 38(b)(l)(iv) current information and documents about all mortgage loans they I own[.]" I I This would include loans the investor owns that another servicer 

I services) and would include commercial loans. 

70. Identifying the I An ohjective under § 38(b)(vi) is to: We recommend removing this objective. At a minimum, it shosuccessor in interest, revised to read: 

§ 38(b)(l)(vi) I "Upon notification of the death of a borrower, promptly identify and 

facilitate communication with the successor in interest orthe 

"Upon notification oflhe death ofa borrower and of the ho

deceased borrower .... " successor in interest, promptly facilitate communication wi

successor in interest . ... 

It is not necessarily possible to identity the successor in interest 

"promptly." The borrower's family may not know, and may not agree. 

Some estates are litigated for years over this question. 

I We are uncertain what problem the eFPB is trying to address with this 

objective. The family of a deceased borrower typically tries to avoid 

losing the property. Often, the family simply continues making 

payments without notif}'ing the servicer of the harrower's death. ! 

42 

81767.138

SERVICING - REGULATION X 

TOPIC / ISSUE 'Tio", 

Servicers answer questions and continue to send periodic statements and 

other disclosures. It is not clear what additional information the CFPB 

intends for the servicer to communicate to the family. 

71. Transferring Section 38(b)(4) provides that the servicing policies and procedures The transferor and transferee should be able to agree on what 

information in a servicing must be reasonably designed to ensure that the servicer can: infolll1ation is required to be to transferred. This is consistent w

transfer, § 38(b)(4) § 38(b)(4)(ii), which seems to contemplate that the transferee w

"As a transferor servicer, timely transfer all inlormation and the contractual right to receive the information it needs. If the 

documents in the possession or control of the servicer relating to a delivers all the information the agreement requires, there shoul

transferred mortgage loan to a transferee .... " need to transfer additional information. 

This should not require a transferor scrvicer to deliver "all" information, There is no reason to restrict information the transferor may ret

including all copies of documents. The transferor, under § 35, will be 

required to respond to inf()rmation requests for a year after the servicing 

transfer, so the transferor will need to retain sufficient information to do 

so. Section 38(c)(1) requires transferor servicers to retain records for a 

year after a transfer. 

If there is a transfer of servicing but no change in the document 

custodian, not all the information will need to be transferred. In this 

case, there should be no requirement that the transferor or custodian 

transfer the custodian' s tiles at all. 

72. Privileged or protected Comment 3 8(b)(4)(i)-2 requires: There should be an exception to this comment that penl1its tran

information in a servicing decline to transfer information that is privileged or otherwise p

transfer. comment "A transferor servicer's policies and procedures must be reasonably from disclosure under any applicable law or investor requireme

38(b)(4)(i)-2 designed to ensure that the transfer includes ... any analysis by a 

servicer with respect to potential recovery from a nonperforming 

mortgage loan, as appropriate." 

43 

81767.139

SERVICING - REGULATION X 

protected. ServiceI', do not own records related to Fannie Mae or 

Freddie Mac loans and may not have authority to transfer protected 

materials. For example. some information may be protected by the 

attorney-client privilege. and the privileged information is the GSE's 

property. The servicer should not be required to wai ve a GSE' s 

privilege. 

Fannie Mae's Servicing Guide at * 40] provides: 

"All records pertaining to mo!1gage loans sold to Fannie Maeincluding but not limited to the following-are at aHtimes the 

prope!1y of Fannie Mae and any other owner of a participation 

interest in the mo!1gage loan: [lengthy list omitted.] ... These 

documents and rec{lfds arc Fannie Mac's property regardless of their 

physical form or characteristics or whether they are developed or 

originated by the mO!1gage loan seller or servicer or others. The 

mortgage loan originator, seiler, or scrvicer; any service bureau; or any other party providing servlees in connection with servicing a 

mOl1gage loan jilr, or delivering a mO!1gage loan to, Fannie Mae will 

have no right to possession of these documents and records except 

under the conditions specified by Fannie Mae. Any of these 

documents and records in possession of the mO!1gage loan 

originalOr, seller. or servicer, any service bureau, nr any other pa!1y 

providing services in connection with selling a mortgage loan to, or 

servicing a mo!1gage loan for, Fannie Mae arc retained in a custodial 

capacity only" 

Freddie Mac's Servicing Guide at § 52.5 similarly provides: 

44 

81767.140

SERVICING - REGULATION X 

ISSUE RECOMMENDATION 

"All documents in the Mortgage file, all data related to Mortgages 

owned or guaranteed by Freddie Mac to which the Serviccr obtains 

access in connection with any agreement with Freddie Mac, 

including, without limitation, data in the documents in the Mortgage 

lile (collectively, Mortgage data) and all other documents and 

records related to the Mortgage of whatever kind or description 

(whether prepared or originated by the Servieer or others, or whether 

prepared or maintained or held by the Servicer or others acting for 

and on behalf of the Servicer), including all current and historical 

computerized data liles, will be, and will remain at all times, the 

property of Freddie Mac. All of these records and Mortgage data in 

the possession ofthe Servicer arc retained by the Servicer in a 

custodial capacity only .... Except as expressly authorized by 

Freddie Mac in writing, Servicers may not use or disclose, or 

authorize or permit third parties to use or disclose, these records or 

Mortgage data for any other purpose. including, without limitation, 

resale or licensing of Mortgage data, either alone or with other data." 

73. Informing borrowers Section 38(b)(5) requires servieers to have policies and procedures These appear inconsistent. The regulation is limited to inform

of how to submit error reasonably designed: borrowers of how to submit error assertions and information re

assertions and information The comment appears to also require informing consumers of 

requests, § 38(b)(5) "to ensure that the servicer informs borrowers of the procedures for rights to submit error assertions and info111mtion requests and h

submitting written notices of error set fOlth in § 1024.35 and written lea111 more about their rights. It also appears to require making 

information requests set forth in § 1024.36." available a description o!'the applicable procedures, nit just for 

submitting, but also for processing and responding to error ass

Comment 38(b)(5)-1 provides that servicers may comply: atld information requests. 

"by including in the periodic statement ... a brief statement We suggest that the CFPS rather than servicers is in a position 

informing borrowers that borrowers have eeltain rights under borrowers oftheir legal rights. We recommend that servicers 

45 

81767.141

TOPIC 

74. Compiling servicing 

tile in five davs. Q 38(c)(2) 

75. Scrvicer's 

part "fthe 

§ 38(c)(2)(iiil 

76. Report of" data fields, 

§ 38(c)(2)(iv) 

SERVICING - REGULATION X 

ISSUE 

Federal law related to resolving errors and requesting information 

about their account and that they may learn more about their rights 

by contacting the servicer, and a statement directing borrowers to a 

Web site that provides a description of the procedures set torth in 

102435 and 1024.36. Alternatively. a servicer may also comply 

§ I 024.38(b)(S) by including a description of the procedures set 

forth in §§ 1024.35 and I 024J6 in the written notice required by 

§ 1024.35(c) and § 1024.36(b)." 

Section 38(c)(2) requires servieers to retain certain information "in a 

manner that facilitates com oiling sLIch documents and data into a 

servicing file within nvc 

detincs the servicing file to include: 

"Any notes created by servicer personnel reHeeting communications 

with the borrower about the mortgage loan account[.]" 

In some circumstances. a servicer may be required to produce this 

information, However. 5crvicers' notes may not be in language plain 

enough for consumers to understand. 

Section 38(c)(2)(iv) requires servicers to maintain and to be able to 

access: 

"To the extent applicable, a report of the data fields relating to the 

borrower's mortgage loan account created by the servicer's 

electronic systems in connection with servicing practices[.]" 

The section-by-section analysis explains that this: 

46 

required to inform consumers of how to submit error assertions 

information requests, which certainly would indicate that they 

so. We suggest that this should be sufticient. 

The five-day requirement should mean business days and not c

days. Ifit is calendar day and a there is a weekend or a holiday 

the five days, the servicer could have as little as two days \0 co

which is unreasonably shOlto 

If a servicer is required to produce its notes to a consumer. we 

clarification that the servieer may produce a summary of its no

"translation" into plain language. 

We recommend that if a servicer maintains data in a manner th

facilitates accessing, within tivc business days. each data tield 

loan. the servicer should be deemed in compliance. Preparing 

printing a repon of the data ticlds sbould not be required. 

It should be clear that § 38 and the requirement to report all da

is t(lf the Duroose of servicer access to data and for reporting to 

81767.142

SERV[CING - REGULATION X 

TOPIC .. ISSUE RECOMMil:NDATION 

"[Mleans a report listing the relevant data fields by name, populated It should be clear that §§ 38 ancl36 do not require servicers to 

with any specific data relating to the borrower's mortgage loan all the data lields to a borrower who requests a servicing file. W

account.') the CFPB to indicate in Ollicial Staff Commentary that requiri

servicing file that identilies all, or even a number of, data fie

78 Fed. Reg. 10696, 10787 (February 14, 20lJ). would be an overbroad and unduly burdensome request, and m

include proprietary information. 

The purpose of this requirement is unclear. It appears to be designed so 

that servicers and CFPB examiners will have access to loan data. If this If the CFPB expects that servicers will provide information abo

is so, then the purpose or requiring a "report listing the relevant data data fields to the borrower, limitations must be placed on the 

Iields" appears unnecessary. If a servicer needs to know, for example, requirement. We request that servicers be required to provide 

the current escrow balance on a loan, the servicer's staff knows how to borrower with only those data fields necessary to resolve an er

lind that information. What is the purpose of a report that "we store request or necessary to answer a specitic information request (e

escrow account balances lor escrowed loans"? The reference to "data servicer need only accesses the data necessary to answer the qu

fields" is problematic because it is overbroad and vague. The term but need not provide all data tields upon request). Proprietary, 

encompasses thousands of data elements without limitation. It is confidential, privileged or protected information should never 

unclear why servicers who have access to their data should be required required to be disclosed. 

to create a new report of data Iields. In a supervisory case, ifthe CFPB 

finds that a servicer cannot aCcess data it needs, then perhaps a report 

may be appropriate. Otherwise, this provision seems an exercise in 

creating unnecessary paperwork withollt addressing an identilied 

problem. 

77. Data fields timing Section 38(c)(2)(iv) requires servieers to maintain and to be able to Servicers should be able to provide the information in the data 

§ 38(c)(2)(iv) access; of a specific date ifthat is aU that is required to respond to the 

needs or to the examiner. 

"To the extent applicable, a report of the data fields relating to the 

borrower's mortgage loan account created by the servicer's 

electronic systems in connection with servicing practices[.]" 

47 

81767.143

SERVICING - REGULATION X 

TOPIC. .... ISSUE <OATlON 

What point in time must be reflected in the "report ofthc data fields['?]" 

78. January 10,2014 Comment 38(c)(2)-1 provides that the servicing file requirement does Servicers should not be required to maintain information they a

compliance date, comment not apply retroactively: unable to obtain. If a transferor servicer fails to or is unable to 

38(c)(2)-1 relevant information, the transferee should not be in violation o

"A servicer complies with § 1024.38(0)(2) ifit maintains law, whether the information was created before or after Janmu

information in a manner that facilitates compliance with 2014. 

I § 1024.38(c)(2) beginning on or after January 10, 2014. A servicer is not required to comply with § 1024.38(c)(2) with respect to 

I information created prior to January 10,2014," 

I This is certainly helpful, but docs not address situations when a serviceI' 

is unable to obtain records, such as when a transferee acquires servicing 

from a bankrupt transferor servicer. 

Early Intervention, § 39 

79. Live contact within Section 39(a) provides: We request clarification that the servieer need not attempt to e

day 36 of delinquency, I live contact tor each delinquent payment in a continuing delinq

§ 39(a) "A servicer shall establish or make good faith efiorts to establish 

live contact with a delinquent borrower not later than the 36th day of We request clarification that servicers have flexibility to comp

the borrower's delinquency[.j" investor requirements that dilTer tram the regulation in the eve

disaster. 

Comment 39(a)-1.i explains: 

"Delinquency begins on the day a payment sufficient to cover 

principal, interest, and. if applicable, escrow for a given billing cycle 

is due and unpaid, even if the borrower is afforded a period after the 

due date to pay before the servicer assesses a late fee:' 

48 

81767.144

"'TOPIC 

RO, Date . 

after servicing transfer, 

comment § 3 9(a)- Liii 

81. Good faith efforts to 

establish live contact, 

comment 39(a)-2 

SERVICING - REGULATION X 

If there is a disaster and an investor instructs a sen'icer of loans in the 

area to cease collection-related communication for a period of lime, this 

could conflict with the 

39(a)-1.iii provides: 

"During the 6O-day period beginning on the eflective date of transfer 

of the servicing of any mortgage loan, a borrower is not delinquent 

for purposes of § 1024.39 iftbc transferee servicer learns that the 

borrower has made a timely payment that has been misdirected to 

the transferor servicer and the transferee servicer documents its l11es 

accordingly\" 

Comment 39(a)-2 provides, in part: 

"Good faith efforts to estahlish live contact consist ofreasonable 

steps under the circumstances to reach a borrower and may include 

telephoning the borrower on more than one occasion or sending 

written or electronic communication encouraging the borrower to 

establish live contact with the servicer." 

49 

RECOMMENDATION 

It is helpful that this applies only if the transferee is aware that 

borrower made a timely payment to the transferor, 

A transferee should be required to treat only one misdirected p

from the same borrower as timely, There is no need to notify b

repeatedly of the same information, One misdirected payment 

an errol". but the second one is not. The borrower may a

that the transferor will not cash check, meaning mailing a cwould bounce to the transferor is a mcthod to avoid having a d

payment treated as delinquent. 

The requirement that the transteree treat a payment as 

the serviceI' has not received it should nev'er apply to any 

scrvicer's duties to investors, it should only apply to the servic

duties with regard to the borrower. We recommend a commen

this ciear, 

We recommend c1arHication that a servicer is deemed to have 

"reasonable dYort" to solicit a borrower if over a period of at !

calendar days the servicer made a minimum of lour telephone 

the last known phone numbers ofrccord, at dil1ercl1l times of t

81767.145

SERVICING - REGULA nON x 

I TOPIC ISSUE . RV£'h 

must do, it does not identity which "circumstances" are relevant. 

82. Prom ptly informing Servicers must attempt to make live contact within 36 days of We recommend additional clarity. 

borrowers ofloss delinquency. Comment 39(a)-3.ii provides: . It should be permissible to mail information on loss mitigat

mitigation options, options within five days of establishing live contact. 

comment 39(a)-3.ii 'Tf]he servicer must provide [loss mitigation] information promptly . lrthe servicer is unable to make live contact because the bo

after the servicer establishes live contact. A servicer need not notify does not respond to outreach, it should be permissible to se

a borrower about any particular loss mitigation options at this time; information on loss mitigation options within five business 

if appropriate, a servicer need only inform borrowers generally that the 45-day delinquency notice. 

loss mitigation options may be available. If appropriate, a serviceI' 

may satisfy the requirement in § 1024.39(a) to inform a borrower 

about loss mitigation options by providing the written [45-day 

delinquencyJ notice required by § 1024.39(b)(1), but the serviceI' 

must provide sllch notice promptly after the servicer establishes live 

contact." 

This does not make clear when it is "appropriate" to include the 

information on loss mitigation options in thc 45-day delinquency notice. 

83, Authenticating an Comment 39(a)-4 provides: The time servicers spend waiting ror a borrower or agent to pr

agent before providing 

I 

information verifying the agent's authority should not count ag

inilltmation on loss "Section 1024.39 does not prohibit a servieer from satisfying the servicer's compliance with the requirement to make live conta

mitigation options, requirements § 1024.39 by establishing live contact with and, if send the 45-day delinquency notice. 

comment 39(a)-4 applicable, providing information about loss mitigation options to a 

person authorized by the borrower to communicate with the servicer This recommendation is the same treatment in comments 35(a

on the borrower's behalf. A serviccr may undertake reasonable 36(a)-I, relating to the time to respond to error assertions and 

procedures to determine if a person that claims to be an agent ofa information requests. Those comments permit servicers to tre

borrower has authority from the borrower to act on the borrower's error assertion or information request as received "[ u ]pon rece

behalf, for example, by requiring a person that claims to be an agent such documentation" from the borrower that the agent has auth

of the borrower provide documentation from the borrower stating act on the borrower's behalf. It is also similar to Regulation Z 

50 

81767.146

SERVICING - REGULATION X 

TOPIC ISSUE u IATION 

that the purported agent is acting on the borrower's behalf." 36(c)(3)-I, which permits creditors to verify the authority of an 

who requests a payoff statement before the time for delivering 

statement begins to run. 

84. One notice during 180 Section 39(b)(1) requires a written notice within 45 days ofa loan We request clarification that a written notice is not required mo

I days, § 39(b)(l) becoming delinquent. It also provides: once during any ISO-day period, even ifthc borrower cures and 

I I redefaults one or more times during the 180 days. 

I I .,/\ servicer is not required to provide the written notice more than 

I once during any 180-day period." We request claritication that a serviccr need only provide one 4

I delinquency disclosure if the borrower remains delinquent, lor 

If a servicer mails a 45-day delinquency notice on February IS. the tor 300 consecutive days because that borrower is only 45-days 

borrower comes current on March 1, and does not make the April I or delinquent once. 

May I payments, is a new 45-day delinquency notice required? 

We request clarification that. if the loan in the example were to 

delinquent, the second notice must be mailed on or bell)!'e 180 

after February 15. 

, Continuity or Contact, I §40 

86. Authenticating an Comment 40(a)-1 provides: I The time servicers spcnd waiting lor a borrower or agent to pro

agent before assigning information verifying the agent's authority should not count ag

personnel and assisting "/\ servicer may undertake reasonable procedures to determine if a servicer's compliance with the requirement to assign personnel 

borrower through agent, person that claims to be an agent of a borrower has authority ii'om begin assisting the agent. 

comment 40(a)-1 the borrower to act on the borrower's behalf, for example by 

requiring that a person who claims to be an agent ortlle borrower This recommendation is the same treatment in comments 35(a)

provide documentation from the borrower srating that the purported 36(a)-l, relating to the time to respond to error assertions and 

agent is acting on the borrower's behalf." information requests. Those comments permit servicers to trea

error assertion or information request as received "Iu]pon recei

51 

81767.147

SERVICING - REGULATION X 

TOPIC .··ISSUE .. 

. ..... RECOMMENDATION 

such documentation" from the borrower that the agent has auth

act on the borrower's behalf. It is also similar to Regulation Z 

36(c)(3)-I, which permits creditors to verify the authority oCan 

who requests a payoff statement before the time for delivering 

statement begins to run. 

87. Two consecutive Section 40(a)(2) requires servicers to make contact personnel available: We request clarification that this means that the borrower did n

payments without a late a late charge because the two consecutive payments were made 

charge, § 40(a)(2) "[Ulntil the borrower has made, without inclirring a late charge, two or within any grace period, and not that the servicer is required 

consecutive mortgage payments in accordance with the terms of a applicable late fees after a permanent modification. 

permanent loss mitigation agreement." 

88. Complete payment Section 40(b)(2)(i) requires servicers to maintain policies and Servicers should not be required to retrieve information they ar

history, § 40(b)(2)(i) procedures reasonably designed to ensure that the personnel assigned to able to obtain. This provision should be consistent with: 

a delinquent borrower are able to timely retrieve a "complete record of · Section 38(.0)(2)-1, which provides that the servicing file the borrower's payment history[.J" This presumes the complete history requirement does not apply retroactively. 

will always be available, but it may not be. · Comment 39(a)-I.iii, which acknowledges that a transferor 

may not be aware of a payment sent to the transferee within 

of a servicing transfer. 

· The possibility that a (mnsferar serviceI' may be unable to t

relevant information. 

89. Providing error Section 40(b)(4) provides: We request claritlcation that this does not require a separate no

assertion information, every borrower to which personnel are assigned, by each of tho

§ 40(b)(4) "A servicer shall maintain policies and procedures reasonably assigned persons. We recommend that the servicer be permitte

designed to ensure that servicer personnel assigned to a delinquent provide the information in any reasonable manner, and that pro

borrower ... lplrovide a delinquent bOlTower with infonnation the information in a periodic statement or with a 45-day delinq

about the procedures tor submitting a notice of error pursuant to notice is per se reasonable. 

§ 1024.35 or an information request pursuant to § 1024.36." 

It should not matter who provides the ,nf(HUWUOn, only that someone 

52 

81767.148

SERVICING - REGULATION X 

TOPIC 

does. 

Loss Mitigation 

Procedures, § 41 

See a/so the entry under § 31, Exceptions to the definition of loss 

mitigation option 

90. Number ardays before Section 41 sets several requirements and prohibitions based on the We very strongly urge the CFPB to amend its regulation to me

10reclosure, § 41 generally number of days belore a foreclosure sale. This presumes the servicer time periods with certainty. There should be no litigation over 

knows precisely how many days until a foreclosure sale will occur, but servicers' ability to predict jorcclosure sale dates. Tllerc shoul

this may not be the case. For example, § 41(b) requires servicers who notices that confuse or misinform borrowers. 

receive incomplete loss mitigation applications to notify borrowers of 

the missing information, and of a deadline for submitting that The regulation should not interfere with servicers' ability to me

information that may be based on the date that is 38 or 90 days before a I requirements. 

foreclosure sale. The servicer will not know this date. A notice under 

§ 41(b)(2)(i)(B) to the borrower that there is a deadline for completing 

the application, but that the servicer does not know the deadline, would 

be required but would also be more confusing than helpful. 

Suppose a servicer notifies a borrower on March 5 that the deadline is 

June 1, which is the date on which the financials become slale under 

§ 41(b)(2)(ii)(a), and 110 lOrcclosure is yet scheduled. If on March 30, 

the servicer learns that a foreclosure sale is scheduled for April 30, the 

application deadline would be advanced. This will cause the borrower 

to feel cheated, and UDAAP litigation is a likely result. although the 

servicer did as the regulation directed. Moreover, the servicer in this 

could he found to have violated the regulation for having sent a 

that did not state "the earliest remaining date" within the meaning 

41(b)(2)(ii). This requires servieers to do the 

53 

81767.149

SERVICING - REGULATION X 

TOPIC .. ISSUE ' R:ECOMMENDATlON 

fundamentally unfair, 

The section-by-section analysis explains: 

"For example, § 1024,4 I imposes requirements with respect to 

complete loss mitigation applications received more than 37 days 

before a foreclosure sale, This is consistent with the National 

Mortgage Settlement and GSE requirements," 

18 Fed. Reg, 10696,10822 (Feb, 14,2013), The regulation measures 

time quite differently than the 50-state settlement agreement, the GSEs, 

or FHA. Notably, the 50-state settlement, the GSEs, and FHA do not 

use unknown dates in setting their timeframes. 

The tollowing arc apparent inconsistencies between the regulation and 

the GSE requirements: 

. Section 41(c)( 1) requires evaluation of a complete loss mitigation 

application within 30 days, if the servicer receives it more than 37 

days hefore a foreclosure sale even if the date o[the sale is 

unknown. The GSEs require the same if the application is received 

before a foreclosure referral; but if the application is received after 

the referral, whether the GSEs penni! 30 days to evaluate the 

application depends on the scheduled foreclosure sale. If an 

application is received when a foreclosure sale date is unknown, the 

requirements appear inconsistent. The regulation appears to require 

the servieer to know the unknown. If a servieer assumes that a 

foreclosure is more than 37 days away and begins to evaluate an 

application, and within 15 days learns that the foreclosure sale is 14 

what is required is unclear. 

54 

81767.150

SERVICING - REGULATION X 

require a foreclosure referral), the servicer continues to try to 

obtain missing information but the borrower does not provide it, the 

servicer should be permitted to refer the loan to foreclosure on day 

120. Section 4 1 (c)l2)(ii) seems to imply that the servicer must wait 

"for a significant period of time under the circumstances" for the 

borrower to complete the application. Ten days may not be "3 

signillcant period of time" and the regulation appears inconsistcnt 

with the GSEs' requirements. 

Section 41(t)(1) prohibits serviccrs [rom making the "tirst notice or 

filing" (a vague term, as discussed below) until the loan is "more 

than" 120 days delinquent. The GSEs usually require a loreclosure 

referral by day 120, a day earlier tban the regulation apparently 

permits. This is not workable. 

Section 41 (g) prohibits moving tor a foreclosure sale if the borrower 

submits a complete application after the first notice or filing and 

more than 37 days before a foreclosure sale, even i[thal sale date is 

unknown. This requires compliance witll the unknown. The GSEs 

do not require a delayed foreclosure action if a complete application 

is received 38 or more days before a scheduled foreclosure sale 

because there is enough time to review the application and to 

complete the pre-foreclosure certification. See Fannie Mac's Aril 

25,2012 revision to Announcement 2Q1l-08R, FAQ 37. 

There is no GSE requirement that servicers identify a date in any 

notice that could potentially "spring back" and make the notice 

55 

81767.151

9 L Submitting or 

receiving applications. 

§ 41 generally 

serviccr's discretion, 

§ 41 (a) and comment 

41(c)(I )-1 

SERVICING - REGULATION X 

inaccurate after the consumer receives it and, 

detrimentally relics on it. 

A significant difference between the regulation and the requirements of the 50·state settlement, the GSEs, and FHA is that the regulation creates 

a private right of action under § 41. Penalties for noncompliance with 

the 50·stale settlement and the GSE and FHA requirements exist, but 

only when the servicer docs not comply with known requirements. 

Under § 41, liability for a servicer's inability to guess foreclosure sale 

dates, sometimes 90 days into the future. will result. Litigation over 

blind guesses of events far oil into the future would be unreasonable, 

and the cost oftha! litigation would need to be included in the future 

cost 0 f consumer mortgage credit. 

Section 41(1)(2) and (g) use the phrase "a borrower submits a complete 

loss mitigation application" but elsewhere the regulation uses the phrase 

"serviceI' receives" a complete loss mitigation application or something 

similar. Sec 

"A borrower may enforce the provisions of this section pursuant to 

section 6(1) ofRESPA (12 USc. 2605(f). Nothing in § 1024.41 

imposes a duty on a servicer to provide any borrower with any 

speeitie loss mitigation option. Nothing in § 1024.41 should be 

construed to create a right tor a borrower to enforce the terms of any 

agreement between a scrvicer and the owner or assignee of a 

mortgage loan, including with respect to the evaluation lor, or offer 

of; any loss mitigation option Of to eliminate any such right that may 

exist pursuant to applicable law." 

56 

We request clarit1cation that there is no difference between 

phrases, and that an application is not complete until the servic

actually receives everything the servicer requires the borrower 

. 

_ 

regulators cannot enforce § 41 because they arc not "a borrowe

941 (a). 

The CFPI3 should state explicitly in a comment that lailure to 

is in no circumstance a breach of a mortgag

contract with a borrower, a violation of Regulation X, a UDAf

UDAAP. 

81767.152

SERVICING REGULATION X 

TOPIC ISSUE .. 'ATION .. 

Comment 41(c)(I)-1 provides: 

"The conduct ofa servicer's evaluation with respect to any loss 

mitigation option is in the sale discretion of a servicer. A servicer 

meets the requirements of § l024.41(cj(I)(i) if the servicer makes a 

determination regarding the borrower' 5 eligibility for a loss 

mitigation program. Consistent with § 1024.4I(a), because nothing 

in section 1024.41 should be construed to permit a borrower to 

enforce the terms of any agreement between a servicer and the 

owner or assignee of a mortgage loan, including with respect to the 

evaluation for, Or provision of, any loss mitigation option, 

§ 1024.4 l(c)(1) does not require that an evaluation meet any 

standard other than the discretion of the servicer." 

This comment is quite helpfuL 

93. Definition 0 floss I Comment 41(c)(2)0).1 states thm nothing in § 41(c)(2)0) prohibits a A servicer may offer a moditication based on, instead of a com

mitigation application, servicer Ii'om offering loss mitigation options to a borrower who not application, a certain number of days delinquent, a FICO score

§ 41(b)(I) submitted a loss mitigation application. the property being within an acceptable federally declared disa

In this case, must the servicer evaluate the borrower (br all loss 

"For example, if a serviceI' otTers trial loan modification programs to mitigation options pursuant to § 41(c)7 

all borrowers who become 150 days delinquent without an 

application or consideration of any information provided by a Does the response change if the serviceI' requires a signed hard

borrower in connection with a los" mitigation application, the affidavit? 

servicer's oner of any such program does not violate 

§ 1024.41 (c)(2)(i), and a serviceI' is not required to comply with 

§ 1024.41 with respect to any such program, because the offer orthe 

I loss mitigation option is not based on an evaluation of a loss mitigation application." 

57 

81767.153

TOPIC 

94. Reasonable due 

diligence, § 41(b)(I) 

95. Notice of missing 

application information and application deadlines, 

§§ 4 I (b)(2)(i)(B) and 

41(b)(2)(ii) 

SERVICING - REGULATION X 

ISSUE 

---

Section 41(b)(1) provides: 

"A servicer shall exercise reasonable diligence in obtaining 

documents and information to complete a loss mitigation 

application." 

Comment 41 (b)( 1 )-4.1 gi,es as an example of reasonable diligence: 

"A serviceI' requires additional infonnation lj-om the applicant. such 

as an address or a telephone number to verify employment; the 

serviceI' contacts the applicant promptly to obtain such information 

after receiving a loss mitigation application[.J" 

This acknowledges the fact that the initial notice may not be able to 

include each piece of information conceivably required to complete an 

application. In tlve dU}H, the servicer will have time for an initial 

review. but not time jar full underwriting, Underwriters may later 

determine additional information is required. 

Section 41(b)(2)(i)(B) requires s""icers to notify borrowers within live 

business days of any information missing from a loss mitigation 

application, if the serviceI' receives a complete applicatiol1more than 45 

or more days before a Joreclosure sale. Section 41 (b )(2)0i) notices: 

I "[MjUSl state that the borrower should submit the documents and 

58 

RECOMMENDATION 

Two notices need to be permitted. The first notice is early. wit

days, but is therefore limited to an initial review. Thcreafier, th

servicer may determine that more specific information is requir

servicer should be permitted to request the more specific inionn

after the initial notice, as long as the initial notice listed all info

the serviceI' then knew would be required to make the applicati

complete. 

Wc request clarification that placing a notice in the mail that st

then-known in/onnation is missing, within flve days ofreedpt 

incomplete application, is reasonable due diligence within the m

of§ 41(b)(1). 

We recommend that a sen-ieer later be able to notify the borrow

additional underwriting inic>rInation that is required. If this is n

permitted, the servicer would need to be able to deny the applic

because the servicer cannot determine whether the application 

investor mitigation requirements. 

We recommend adding to the commentary that one example of 

reasonable diligence is sending two letters following up On the 

documents. This standard is consistent with Treasury's HAM? 

program. 

There needs to be certainty about the deadline for completing l

mitigation applications. Given that the rule requires a notice o

at day 45 of delinquency, and that starting a foreclosure is proh

before day 121 of delinquency, borrowers will have at least 76 

complete a loss mitigation application. This is more than ampl

so there is no reason for unworkable rules. 

81767.154

SERVICING - REGULATION X 

TOFIC ISSUE 

information necessary to make the loss mitigation application 

complete by the carliest remaining date of: We do not object to permitting borrowers to submit non-duplic

(A) The date by which any document or information submitted by a complete applications late in a delinquency. However, the requ

borrower will be considered stale or invalid pursuant to any for evaluating these applications necd to be defined by knowll 

requiremellts applicable to any loss mitigation option available to the deadlines. 

borrower; 

(B) The date that is the 120th day offhe borrower's delinquency; We recommend: 

(C) The date that is 90 days before a foreclosure sale; or Removing the requirement to identify the list of four dates. 

(D) The date that is 38 days before a foreclosure sale." Incomplete applications should not delay otherwise approp

foreclosures. Otherwise, incomplete applications would be

There are several issues with this notice requirement: easy tool for delaying otherwise appropriate foreclosures. 

The servicer may not know whether the borrower submitted the Especially given that the borrower has already had ample t

information 45 or more days before a foreclosure sale, and therefore should be unnecessary. 

may not know whether the notice is required. Non-duplicative, complete applications submitted after the 

If the foreclosure sale date is unknown but the servicer sends a of delinquency should not delay a foreclosure. Evaluation 

notice stating that the deadline is, for example, under (A), 75 days ill late applications should be required only iflhere is time to 

the luture, but a foreclosure sale is therealler scheduled lor a date the application belore a scheduled foreclosure sale date. 

earlier than the deadline the servicer gave the borrower, the notice Servicers should be permitted to set reasonable deadlines [

would be more confusing fhan helpful. of a complete application, such as: 

0 [n fhis event, does the rule require a servicer to postpone the 0 The 90th day of a delinquency; and 

foreclosure sale? 0 The earlier of (i) 38 days before a scheduled foreclosur

0 If so, may servicers set the date at which documents become 30 days after a notice of missing documents. These da

stale as the earlier of X days 01' the date of a scheduled would vary depending on how close to foreclosure the 

foreclosure sale? is (e.g. a 30-day timeline Jar the borrower to return mi

Deadlines (C) and (D) will oilen be unknown. If a servicer must tell documents may not be reasonable if judgment and/or t

a borrower that the deadline is 90 or 38 days before a foreclosure scheduling of the foreclosure sale by the court are pen

and that the serviceI' does not know what date that is, the notice Diligent borrowers will complete their applications wi

would be more confusing than helpful. 90 of delinquency. If they "ait untiliater, they risk lo

Requiring servicers to send a potentially inaccurate or misleading opportunity to appeal a modification denial, and they r

59 

81767.155

SERVICING - REGULA nON x 

"The borrower's income must be supported by documentation that is 

not more than 90 days old as of the date the servicer tirst determines 

that the borrower submitted a complete Borrower Response Package 

[application]." 

Freddie Mae's guide is similar. See § 65.18(a). 

60 

application. but will have some certainty in designing comp

procedures. 

If the borrower submits an incomplete application, notice to 

borrower of what is missing should also slate: 

o The borrower should complete the application as soon a

possible; 

The servicer will need 30 days to evaluate the applicatio

is complete; 

o If a foreclosure sale is scheduled before the 30·day eval

period, the servicer may not be able to complete its eval

Servicers should be permitted to provide a generic statemen

when documenls become stale. A statement that "the docu

you submit remain current and we can use them for 90 to 1

after their effective date" should suffice. Otherwise the dis

could get linworkably long because the borrower may have 

submitted, for example, a bank statement dated February I, 

paystub dated March 1, and different slale dates may apply 

different documents. Five days may be too ShOl1 to compil

complete list of the expiration date of each document. We 

recommend that a general warning that delays in completin

application could cause documents to become too old, and 

require the borrower to submit updated information. 

Servicers should he able to encourage borrowers to submit 

as soon as possible. lfthc stale date of docum

81767.156

TOpiC 

SERVICING-REGULATION X 

ISSUE 

based on the date ofa complete application (as with the GS

servicer will not know that date, In this case, servicers sho

be required to notify borrowers ofa speeifie stalc date, 

We do not object to disclosures about the foreclosure timel

we cannot support reguiring disclosures that son'icers do n

how to complete, Any time1ine disclosures should be gene

should be permissible to state that some of the events may 

already passed, 

If a serviceI' notifies a borro\-ver of missing information and 

borrower thereafter supplies some, but not all, of the specif

inlormation, a second notice should be permissible. but not 

because it would be redundant. 

If a borrower does not submit the specified information by 

deadline. servicers should be permitted to close the request 

incomplete information, This would not preclude the borro

completing the applicmion later if there is lime for the serv

evaluate the application, 

The required notice of missing information should be restri

then-relevant information, For example, if a borrower app

loan moditication, the servicer should only tell the borrowe

missing inlormation needed for a moditication application. 

servicer does so. but the borrower docs not obtain a moditi

and latcr applies for a sh0I1 sale, the earlier communication 

missing modification inlormation should not be a violationwould seem consistent with comment 41(c)(1)-3. which pe

servicers to reguire additional third-party inl()flnation fllr a 

home retention option. 

that when a borrower submits an The or this notice is to communicate that failure to co

61 

81767.157

TOPIC 

documents, 

§ 41(b)(2)(i)(BJ and 

(b)(2)(ii) 

97. Evaluation for all loss 

options 

§ 4 I (c)(1)(i) 

SERVICING - REGULATION X 

incomplete application, the servicer must notify the borrower of: 

"the additional documents and information the borrower must 

sllbmit to make the loss mitigation application complete. 

Section 41(b)(2)(ii) requires the same notice to: 

"state thai the borrower should submit the documents and 

information necessary to make the loss mitigation application 

complete ... " 

Section 42(c)(I)(i) provides that, in some circumstances, a servicerthat 

receives a complete loss mitigation application must: 

"Evaluate the borrower for all loss mitigation options available to 

the borrowcrl.}" 

Comment41,c)(JJ-3 provides: 

"A serviccr's oncr of a 11011-home retention option may be 

conditional upon receipt of further information not in the borrower's 

possession and necessary to establish the parameters ofa servicer's 

offer. For example, a servicer complies with the requirement for 

evaluating the borrower for a short sale option if the servicer offers 

the borrower the opportunity to enter into a listing or marketing 

period agreement but indicates that specifics of an acceptable short 

sale transaction may be subject to teuther information obtained from 

an appraisal or title search" 

These appear inconsistent. 

62 

RECQMMENQATION 

appncatlon by a deadline would have negative consequences [o

borrower. The servicer should be able to communicate this in 

language. A notice that the borrower should complete the appl

soon as possible, and must complete it in time lor the serviceI' t

to evaluate it, woule! be appropriate. 

clariflcation that there may be two evaluations. Th

after receipt of a modification application, is for a t

permanent modi!1catiol1. Thereafter, ifno modification occurs

the borrower and property arc eligible tor a noo-retention alter

the servicer should be able to require additional information to 

a non-retention alternative, 

We also request clarification that if a servicer's or government 

waterfall allows the servicer to by-pass home retention offers w

borrower docs not want to retain the home, that servicers need 

evaluate the borrower for home retention options. Similarly, i

borrower is uninterested in a modification, there should be no 

requirement to evaluate the borrower for a modification, or to 

borrower of missing modification application information. 

FHA and other short-sale programs prohibit offering a shalt sa

marketing period until an appraisal and title are complete. The 

implies that servicer must olTer the marketing period lirst beto

agencies' conditions are met. This lorces servicers to be out o

81767.158

TOPIC 

98, Third party fails to 

submit required application 

information, § 41(c)(2)(ii). 

§ 41(h) and § 38(b)(2)(v) 

SERVICING - REGULATION X 

Section 41 (c)(2)(ii) provides: 

"[Ilf a servicer has exercised reasonable diligence in obtaining 

documents and information to complete a loss mitigation 

application, but a loss mitigation application remains incomplete il)r 

a significant period oHime under the circumstances without further 

progress by a borrower to make the loss mitigation application 

compiete, a servicer may, in its discretion, evaluate an incomplete 

loss mitigation application and otTer a borrower a loss mitigation 

option:' 

Section 38(b)(2)(v) requires servicers to have policies and procedures 

reasonably designed to ensure that servicers can: 

"Properly evaluate a borrower who submits an application for a loss 

mitigation option for all loss mitigation options for which the 

borrower may be eligible pursuant to any requirements established 

by the owner or assignee of the borrower's mortgage loan and, 

where applicable, in accordance with (he requirements of 

§ 1024.41." 

A servicer may receive all information required irom a borrower but. 

due to reasons beyond a sc:rviccr1s control f may not receive all 

information required from a third party. In this case, the servicer will 

not be able to evaluate the application, 

RECOMMENDATION 

compliance with one of the rules. 

Both orthc cited provisions need to take into account the possi

a servicer may receive all information required from a borrowe

fj'om a third party. In this situation, we recommend that the sc

elect to do any or all anhe j()llowing: 

Treat the application as incomplete for purposes of § 41(0)

and 41 (g), So that evaluation orlhe application is permissib

required. 

Treat the borrower as not eligible for the loss mitigation ap

within the meaning of § 3S(b)(2)(v), because a "proper" ev

is not possible. 

If a servicer denks an application tor a modification and the b

appeals, the servicer has only 30 days to decide the appeal. If 

servicer requires third party information to determine an appea

receive the servicer should be permitted to deny t

Section 4I(d)(I) requires denial notices to state: , We request clarification that a summary of the primary reasons 

63 

81767.159

100. First foreclosure 

notice or filing, § 41 (D(I), 

(1)(2), (g) OJ, and 

§ 35(bJ(9) 

SERVICING - REGULATION X 

"jf a borrower's complete loss mitigation option is denied for any 

trial or permanent loan modification option available to the 

borrower ... a servicer shall state in the notice sent to the 

borrower ... (1) The specific reasons for the servicer's 

determination for each such trial or permanent modification 

option[·r 

Section 41 (1)( I) and OJ prohibit making "the first notice or filing 

required by applicable law lor any judicial or non-judicial foreclosure 

process" until a loan is 121 days delinquent. lfa borrower submits a 

complete loss mitigation application within the first 120 days of delinquency, § 41 (1)(2) prohibits the servicer Irom making "the first 

notice or flling required by applicable law for any judicial or nonjudicial foreclosure" until the servicer processes thc application. 

. Section 41 (g) in some cases prohibits moving [or a foreclosure I judgment or sale "after a serviceI' has made the first notice or filing 

64 

We request clarification that if a borrower or property do not m

modification eligibility criteria (e.g.. owner-occupancy). that th

modiflcation is not "available to the borrower." Otherwise, the 

could be required in these cases to unnecessarily run the NPV 

calculate the DlI, and so on, and list these if they are additiona

fl)r denial. 

We request clarification orthe proccdure if a borrower is 

simultaneously approved for one modification and denied tor a

Is a denial notice required? 

Is an appeal available'! If so and the borrower appeals the 

modification, but the date for accepting the approved modi

lapses while the appeal is pending, and the borrower loses 

appeal, is the approved modification available to the borrow

The servicer should be able to require the borrower to acce

comply with the approved loss mitigation option. pending 

a denied modification, or to reject the approved loss mitiga

option. Otherwise, the terms oflhe offered mitigation coul

materially altered by arrearages or tax or insurance paymen

We suggest instead that the first notice or flIing be limited to th

action required by law as dellned by FHA, referred to as the fi

action (i.e., an action that will be publically available, even ift

elapses bel(,rc it actually becomes public): 

"!fUD considers /()I'cclosure instituted \I hen the mortgagee 

tirst public action required by law such as t1ling a complain

petition. recording a notice of default, 01' publication or a 

sale. Merely posting notice on the property is not sufficien

81767.160

SERV[CING - REGULATION X 

or non-judicial foreclosure 

is pending. Section 35(b)(9) defines an error 

the llrst notice or filing required by applicable law 

or non-judicial foreclosure process in violation of 

or 0)." 

Comment 41(1)(1 H explains (emphasis added): 

"The first notice or Hling required by applicable law refers to any 

document required to be filed with a court, entered into a land 

record, or provided to a borrower as a requirement for proceeding 

with ajudicial or nonjudicialloreelosure process. Such notices or 

filings include, Jar example, a foreclosure complaint, a notice of 

default. a notice of election and demand, or any other notice that is 

required by applicable law in order to pursue acceleration ofa 

mortgage loan obligation or sale ofa property securing a mortgage 

loan obligation:' 

This definition of the "first notice or l1ling" is unclear, contradictory. 

and unworkable, and is unrelated to nonpayment defaults. 

As amended, Regulation X rcquires a notice to a borrower who is 45 

days delinquent. That 45-day delinquency notice is required before a 

servicer can foreclose, and therefore, that notice under § 41 (e )(2) and 

65 

action must be established as a public record through a filin

recording, or a publication in a newspaper 0 f general circul

required by law:' 

HUD Claims Handbook 4330A, Chapter 2-2 (1994). HUD's MLetter 2005-30 lists "the rtrS! legal action necessary to initiate 

lbreclosure on a mortgage and of the typical security instrumen

each state." This letter identifies as the "first legal action" only 

actions, such as a recorded notice of deHmlt, tiling forcclosure 

documents with a public trustee, filing a complaint. publication 

newspaper of general circulation. and so on. Unlike § 41, FHA 

consider sending a notice to the borrower, alone, as the first no

filing initiating a foreclosure. 

Fannie Mae does not usc this "Ilrst legal action" standard. but i

reguires thaI the loan be referred to an attorney (or trustee) to i

tbreclosure by the 120'h day of delinquency. provided any appl

state law notice and waiting period is met. FNMA Announcem

201 I-08R (page 17). The first "public action" as deHned by FI

would generally occur after the referral to fbreclosure attorney. 

Either the FHA or the GSE standard would be workable. The 

standard contradicts itself. 

81767.161

TOPIC 

SERVICING-REGULATION X 

days delinquent. 

Regulation Z requires servicers to modily the periodic statement when a 

loan is 45 days delinquent by including additional information. This 

information similarly could fall within the meaning ofthe "first notice 

or filing," and appears to be a "notice of default" within the comment's 

list of examples of what the regulation prohibits. This 45-day 

requirement also appears to be prohibited until the loan is 121 days 

delinquent. 

Additionally. if a delinquent borrower calls a servicer about the default, 

it would be difficult I(lr the serviceI' to avoid giving the borrower 

inf(mnation about a default. In effect, the servicer could be "required" 

to provide "notice" of the default by phone, but that appears to be 

prohibited before the loan is 121 days delinquent. 

The requirement to attempt to establish live contact could also be a 

notice to a borrower required belore proceeding with a foreclosure, 

Making personnel available by phone to a delinquent borrower 

apparently also is a notice to a borrower required before foreclosure. 

Section 41(1)(1) is not limited to written notices. 

Moreover, the deiinitioo appears to vary based on investor 

For example, if investor A alTers no loss mitigation and 

B does, and B's borrower submits a Joss mitigation application, 

to Drovide that borrower with a notice of receipt, 

66 

81767.162

SERVICING - REGULATION X 

TOPIC; ISSUE .un mON 

. delinquent. 

Further. not all foreclosures are based on payment default. For 

example, a borrower may demolish the home and refuse to rebuild it, 

may sell the property to a friend or family member without the 

servicer's consent. or may store hazardous substances on the property, 

and thereby be in default even if all payments are timely. Nonpayment 

defaults should be completely exempt from § 41 because they are 

unrelated to the borrower's ability to pay. or to the benelit of loss 

I 

mitigation options. These are examples of strategic defaults, not of need for consumer protection. 

Even if the "first notice or filing" were to exclude all RESPA and TILA 

notices. the contradictory requirements problem would remain because 

states and investors require various notices to delinquent borrowers 

before the loan is 121 days delinquent. 

FHA's regulations require certain servicer actions within time limits 

measured from the date of delinquency. FHA extends the time when 

state law or bankruptcy law prohibit the FHA timetines, but not when 

another federal law, slIch as Regulation X, prohibit the FHA timelincs. 

Therefore, servicers cannot comply with both FHA and CFPB rules. 24 

c'F.R. § 203.355(c) provides: 

"(c) Prohibition offoreclosure within time limits. Ifthe laws of the 

State in which the mortgaged property is located, or Federal 

bankruptcy law: I 

(I) Do not permit the commencement of foreclosure within the time I 

limits described in paragraphs (a), (b), (g). (h) and (i) of this section, 

67 

81767.163

SERVICING REGULATION X 

TOPIC ISSUE ,HUN 

the mortgagee must commence foreclosure within 90 days atter the 

expiration of the time during which roreclosure is prohibited; or 

(2) Require the prosecution of a foreclosure to be discontinued, the 

mortgagee must recommence the l(,reclosure within 90 days after 

the expiration of the time during which foreclosure is prohibited," 

101. Preforeclosure I The heading to § 41(1). but not the body oflhe regulation, refers to a We request confirmation that servicers may refer a loan to 

referral or filing, § 41 \ prohibited foreclosure "referraL" Section 41 (1)(1) prohibits, not a counsel at any time, as long as the first notice or filing is not m

I referral, but only a first notice or filing, before day 121 of a impermissibly early. The GSEs often require referral to delinquency. day 120 of delinquency, and this needs to remain permissible. 

I referral to foreclosure should not be a "lirst notice or filing." 

1102. No foreclosure liling If a borrower has vacated or surrendered a property, delaying a We request clarilication that attcr a borrower vacates or aband

for 120 davs needs foreclosure would increase community blight, a disservice to everyone, I property, the property should be deemed not the borrower's pr

I exception;. § 41(1)(1), Delaying a foreclosure would also unnecessarily impose property residence within the meaning of § 30(c)(2), so that §§ 39 throu

. (1)(2), (g) (j), and maintenance costs 011 the borrower. not apply. 

§ 35(b)(9) 

103. Appeals of ofler or Section 41(h)(I) provides that borrowers may appeal denied We request claritication that denials of modifications may be 

denial, § 41(h) moditkation,: appealable, but offers of modilications are not appealable. 

,·tAl servicer shall pennit a borrower to appeal the servicer's 

determination 10 deny a horrower's loss mitigation application for 

any trial or permanent loan modification program available to the 

borrower," 

Section 41(h)(2) provides that borrowers have 14 days to appeal an 

offer: 

"A servicer shall permit a borrower to make an appeal within 14 

days after the servicer provides the offer of a loss -mitigation option 

68 

81767.164

104. Appeals, § 41 (h) and 

comment 41 (h)( I )-2 

105, Duplicati"e loss 

mitigation requests and the 

regulation's effective date, 

§ 41(i) and comment 410)-

1 

SERVICING - REGULA nON x 

ISSUE 

to the borrower pursuant to paragraph (c)(1)(ii) oftbis section:' 

Section 41( d) requires denial notices to include inionnation about any 

i appeal available. 

Section 41(h) permits borrowers that submitted their complete 

applications at least 90 days before a foreclosure sale to appeal denial of 

"a borrower's loss mitigation application for any trial or permanent loan 

modification program available to the borrower:' 

Comment 41(b)(I)-2 provides: 

"1 [jf a borrower requests that a servicer determine if the borrower is 

'prequalil1ec!' for a loss mitigation program by evaluating the 

borrower against preliminary criteria to determine eligibility till' a 

loss mitigation option, the request constitutes a loss mitigation 

npplication:; 

Section 41(i) provides: 

"A serviceI' is only required to 

section for a single complete loss 

borrower's mortgage loan account.'j 

Commcnt41(i)-1 proyides: 

with the requirements of this 

application for a 

"A transieree serviceI' is required to comply with the requiremenls of 

§ 1024.41 regardless of whether a borrower received an evaluation 

of a complete loss mitigation application Irom a transtcror servicer." 

69 

RECOMMENDATION 

We request clarification that: 

A modification is not "available" when the property or loan 

eligible, such as if the property is not owner-occupied when 

occupancy is required for a modification. 

If the prequalificatioll application is for a modification, a de

the prequaliticatiol1 is not subject to appeaL If a borrower d

prcqualify lill' a modification bccause, for example, thc pro

not owner-occupied, that modification is not "available to t

borrower" under § 41 (h). 

A borrower's rejection of a modification afTer is not appeal

Acceptance of a modification offer, Ic)llowed by a default o

modification, is not a denial subject to appeal. 

We support reviewing applications for which loss mitigation is 

realistic possibility, but we cannot support permitling loss miti

applications, with private rights of action, for the purpose of de

inevitable foreclosure. 

We recommend that the CFPB clarify that § 41: 

Docs not apply retroactively. 

Applies to borrowers who have been evaluated for loss mit

before January 10,2014 only if: 

The borrower has demonstrated a material change in fi

for a loss mitigation option. and 

81767.165

SERVICING- REGULATION X 

TOPIC ISSUE RE,COMMENDATlON ',' 

, 

for borrowers who have been evaluated before January 10,2014 when 2014 under investor guidelines that do not require a second 

the regulation becomes effective, this could be rather disruptive if those evaluation after foreclosure referraL 

borrowers can be evaluated again. It could cause a spike in "new" If servicing is transferred after the transferor t()und a borrower 

applications. lor which servicers would need to staff up temporarily, to submit a new application, the transferee should not be requir

which would be operationally disruptive, Additionally, a second accept a new application merely because of the fact of transfer. 

evaluation of a borrower who has been denied loss mitigation, or who 

breached a trial payment plan or a modif.cation agreement, may violate 

investor 

_ 

... _----"_ .. 

70 

81767.166

SERVICING - REGULATION Z 

TOPIC ISSUE " ... mON 

Disclosures of Post 

Consummation Events, 

§ 20 

106. Implementation date Sections 20( c) and (d) require notices to borrowers based on the number We request clarifIcation that §§ 20(c) and (d) do not require no

for rate reset notices, of days until an adjustment will oecur. How this will apply to loans for loans that will adjust after January I (J, 2014, but for which ther

§ 20(c) and (d) which the adjustment will occur shortly attcr January 10,2014 is insufficient time to prepare and send the notices after January 

unclear. Servicers should not need to begin complying with the regulati

it is effective. That is, when a notice is required X days before 

adjustment. the notice sh{)uld not be required ifthe adjustment 

fewer than X days alter January 21,2014. 

107. Coverage, Section 20(c) requires rate reset notices when a rate adjustment results We request clarification whether § 20(c) or (d) notices are requ

ond(d) payment change. Section 20(c)(2) states when the notices are loans on which the APR may decrease but not increase after 

required for ARM loans. Sections 20(c)(1)(i) and (d)(l)(i) denne an consummation. 

ARM loan to include only closed-end loans in which the APR may 

increase after consummation. 

108. Annual statement The amendments to § 20(e) remove the existing requirement to send We request clarifIcation that continuing to send such disclosure

removed, § 20( e) annual statements when a rate adjusts but there is no payment I remain permissible. 

adjustment. 

109. Definition of Section 20(c)(2) applies to loans: We request clarification of whether the two words "adjLIsLmcnC

adjustment, § 20(e)(2) refer to the rate adjustment date or the payment adjustment dat

"[Ojriginated prior to January 10,2015 in which the loan contract 

requires the adjusted interest rate and payment to be calculated 

based on the index figure available as of a date that is less than 45 

days prior to the adjustment date," 

81767.167

TOPIC 

II O. Definition oflast 

payment, § 20(c)(2)(ii) and 

20(d)(2)(iii)(C) 

Ill. Step increases and 

trial or permanent 

modifications. 

§ 20(c)(2)(iiiJ and (v) 

SERVICING - REGULATION Z 

It also requires disclosures: 

"[Flor the first adjustment to an ARM if it occurs within 60 days of 

consummation and the new interest rate disclosed at consummation 

pursuant to § 1026.20(d) was an 

Sections 20(c)(2)(ii) and LIJ(d)lL)lll1)(C) reqUire a 

interest-only or negative anlOrtization payments, including how the 

current and new payments ate allocated to principal, interest, and 

escrow. Both provide: 

"The current payment allocation disclosed shall be the payment 

allocation for the last payment prior to the date of the disclosure." 

Comment 20(c)-2 provides that rate reset notices are not required in 

connection with a loan modification, but that: 

"[S]Ubscqllcnt interest rate adjustments resulting in a corresponding 

payment change occurring pursuant to the modi tied loan contract. 

however, ate subject to the requirements of § 1026.20(0)." 

It is common Jar rate reductions in HAMP permanent modifications to 

apply for five years. after which the rate can step up by up to one 

percentage annually until it reaches a cap. Comment 20(c)(l)(ii)-3.iii 

provides that § 20(c) does not apply to fixed-rate step-rate loans. 

Similarly, comment 20(d)(I)(ii)-2.iii provides that § 20(d) does not 

apply to fixed-rate step-rate loans. Section 20(c)(2)Oii) requires a 

disclosure of how the rate adjustment is determined, including: 

"(A) The specific index or formula used in interest rate 

72 

We request model language to describe lhe rute adjustment and 

payment after a moditication if it is a step adjustment. 

For a loan that has a trial payment plan bolore it is modified, a

trial rate is lower than the pre-trial plan rate, is this adjustment 

connection with a modification" even there is no modification 

not. we request model Janguage for the required disclosure. 

For a loan that has a trial payment plan at a reduced rate, but th

permanently modified for any reason. the rate will revert to the 

plan rate. Is a reset notice required regarding the rate reverting 

trial plan rate although there is no modification? If so, we requ

model language. 

81767.168

SERVICING - REGULATION Z 

TOPTC ISSUE RECOMMENOATION 

adjustments and a source of information about the index or formula; 

and 

(B) The type and amount of any adjustment to the index, including 

any margin and an explanation that the margin is the addition of a 

certain number of percentage points to the index, and any 

application of previously foregone interest rate increases from past 

interest rate adjustments." 

Section 20(c)(2)(v) requires a disclosure of how the new payment is 

determined, including; 

"(A) The index or formula used; 

(B) Any adjustment to the index or formula, such as the addition of iJ 

margin or the application of any previously foregone interest rate 

"Any limits on the interest rate or payment increases at 

rate adjustment and over the life of the loan, as applicable, 

the extent to which such limits result in the creditor, assignee, or 

servicer foregoing any increase in me interest rate and the earliest 

date tbat such foregone interest rate increases may apply to future 

interest rate adjustments, suhject to those limits." 

Comment 20(e)(2)(iv)-1 provides; 

"Interest rate carryover, or foregone interest rate increases, is the 

amount of interest rate increase foregone at any ARM interest rate 

adjustment that, subject to rate caps, can be added to liJture interest 

73 

clarification that rale caps and floors and an indicat

rate is rounded are permitted disclosures on AMi n

when the ARM loan does not provide for interest rate carr

81767.169

TOPIC 

13. Payment-option 

ARM loans. § 20(c)(2)(vi) 

SERVICING - REGULATION Z 

rate adjustments to increase, or to onset decreases in, the rate 

dctennined by using the index or iormula. The disclosures required 

by § 1026.20(c)(2)Ov) regarding foregone interest rate increases 

apply only to transactions permitting interest rate carryover." 

Comment 20( c)(2)(ii)(A)-1 allows servicers to round the interest rate 

pursuant to the ARM contract. See also 20(d)(2)(iii)(A)-I 

Can an interest rate ilOOf adjustment, lifetime cap, and rounding factors 

be included or described in the ARM disclosures? The commentary 

implies lilctime caps and interest rate floors are only permitted on the 

ARM notices for interest rale carryover loans required under § 20(e) 

and (d). 

"If applicable, a s(mement that the new payment will not be 

allocated to pay loan principal and will not reduce the loan balance. 

If the new payment will result in negative amortization, a statement 

that the new payment will not be allocated to pay loan principal and 

will pay only pan orthe loan interest, thereby adding to the balance 

of the loan, Iflhe new payment will result in negative amortiz.ation 

as a result of the interest rate adjustment, the statement shall set fOlih 

the payment required to amortize fully the remaining balance at the 

new interest rate over the remainder 0 f the loan tenn." 

74 

RECOMMENDATION 

clarilication 01 whether the disclosure must include 

i auocanon tor the current and new minimum payment amounts

I whether the disclosure must include the allocation for each pay

option, and if so, where. Examples of how these disclosures ar

completed would be most helpful. 

81767.170

SERVICING - REGULA nON Z 

-

TOPIC 1 ISSUE " ,ilUl"! 

to" the model forms" I to the model forms without jeopardizing the safe harbor. For e

I for loans that will continue to have a "Iuok back" period of less 

I days, servicers will need to modify the language regarding the 

I notice that will be given prior to payment changes, This shoulI jeopardize the safe harbor, 

115, Timing of initial Section 20(d) provides: I We request confirmation that any initial adjustment notice requ

adjustment notice in a connection with a modifted loan, or a loan that has a trial paym

modification, § 20(d) "The disclosures shall be provided to consumers at least 210, but no regardless of whether the loan is permanently modified, may b

more than 240, days before the first payment at the adjusted level is delivered at the time orthe modification (trial or permanent) of

due" If the tirst payment at the adjusted level is due within the first within 30 days a!lcr acceptance of a trial modification period. o

210 days after consummation, the disclosures shall be provided at 130 days after execution and return ofthe modification agreeme

consummation. H 

116. Assumptions, § 20(d) Section 20(d) requires initial rate adjustment between 210 - 240 days I A borrower who assumes a loan aSSllmes all its terms and discl

before the first payment is due at the adjusted leveL I We request elari fication thatlhc fact of an assumption docs oa

I adjustment notice requiremeots. 

117, Estimated initial rate Initial rate adjustment notices may be required long betore the rate i Examples of how estimates are to be made would be quite help

adjustments. § 20(d)(2) adjustment is known. I disclosures to be based on worst-case assumptions about rate c

I there is a cap on the llrst adjustment and a life-of:loan cap, mu

I servicer usc the worst of the two? 

118, Initial adjustmeot in a Section 20(d) requires a disclosure "in connection with the initial rate We request clarification of the following: 

modification. § 20(d) and adjustment pursuant to the loan contract.'· Comment 20(d)-2 provides: · The distinction between the "adjustment occurring in [a] lo

comment 20( d)-2 modification" and the "ioitial adjustment occurring pursua

"Under § 1026.20( d). the interest rate adjustment disclosures are modified loan contract!' 

required only fbr the initial interest rute adjustment occurring · Ifthe l1rst rate adjustment on a loan is the reduction with a 

pursuant to the loan contract. Accordingly, creditors. assignees, and payment plan, this is not a rate adjustment "pursuant to the 

servicers need not provide the disclosures lor interest rate contract" so that no initial adjustment disclosure is required

adjustments occurring in loan modifications made for loss mitigation • If a rate is lowered for a trial payment plan and is contractu

purposes. The initial interest rate adjustment occurring pursuant to 

75 

81767.171

SERVICING - REGULATION Z 

TOPIC 

119, Initial adjustment 

notice in a lixcd-rate steprate loan. comment 

20(d)! I )(ii)-2.iii 

120.Disclosmes of initial 

rate adj ustmcnts in 

modilied loans, 

§ 20(d)(2)(iv) and (vi) 

12 L Modification as an 

alternative to a rate 

adjustment, § 20(d)(2}(x) I 

ISSUE 

the modified loan contract, however, is subject to the requirements 

of § 1026,20(d)." 

Comment 20(d)( I )(iiJ-2.iii provides that § 20(d) does not apply to fixedrate step-rate loans, 

If § 20(d) may apply in connection with trial or permanent loan 

modifications. how to disclose the initial rate adjustment will need 

clarity. 

Section 20(d)(2)(x) requires disclosure ofalternatives to a rate 

adjustment. including: 

1----------1 Prohibited Acts, §36 i ""'"":. 

"(C) Modifying the terms orthe loan with the creditor, assignee, or 

scrvicer; and 

(D) Arranging payment !()rbeamncc with the creditor, assignee, or 

I Section 36(b) [in the LO compensation linal rulel provides that § 36(c) 

76 

... 

reduced with a permanent modiJication, this is not a rate ad

"pursuant to the loan contract" so that no initial adjustment 

disclosure is required, 

If a rate it reduced for a trial payment plan and the loan is n

modified t()y any reason, so that the rate reverts to the pre-t

rate, this is not a rate adj ustment "pursuant to the loan cont

that no initial adjustment disclosure is required, 

If an AR.M loan rate adjusts, the loan is later modified with 

rate adjustment, and the rate later adjusts a third time, to w

adjustment does § 20(d) apply? 

We request clarification of whether § 20(d) applies to fixed-rat

modilied loans on which the rate may step up atter a modificat

If any initial rate adjustment notices arc required in connection 

modi lications or permanent modil1cations, we request mode! l

for § 20(d)(2)(iv) and (vi) disclosures, 

I· We recommend that the servicer be permitted to qualify this la

so as not to incorrectly cause the consumer to believe these op

available or likely available, for example by adding: 

"Not all loans qualify for modiJication or jllrbcarance. You 

us if you would like to learn about these possibilities." 

We reyuest claritication of the applicability of § 36(c) to BELO

81767.172

SERVICING - REGULATION Z 

TOPIC 

BELGes, 36(b) 

Periodic Statements, § 41 

does not apply to HELOCs. 

Section 36(c)(3), relating to payolI statements, applies to "a consumer 

credit traosaction secured by a consumer's dwelling[.]" The section-bysection aoalysis to the Regulation Z servicing rule provides: 

"[Tlhc Bureau believes it is appropriate to interpret 'fILA section 

1290 [payoff statements] to include BELOCs and other open-ended 

lines of credit secured by a consumer's dwelling in the payoff 

statement 

This may not he consistent with an agreement a reinstated borrower 

makes to pay default fees over time, Servicers and hnrrowers should 

have flexibility (0 work out repayment or default fees. 

It does not accommodate trial plans, borrowers in bankruptcy whose 

payment amount has changed, and borrowers in foreclosure, 

124. Inapplicable to I Section 41(a)( 1) provides that § 41 applies only to closed-end loans. 

77 

RECOMMENDATION 

If a loan is in a trial plao, during which posting monthly pa

not required, posting payments should not be required. 

For reinstated loans, servicers may hold funds in suspense t

greater than a contractual payment. but are intended to pay 

legal or other default fees as agreed until the default fees ar

For borrowers in bankruptcy, the payment amount may be 

than the pre-bankruptcy payment amount. In these cases, i

be permissible to hold funds in suspense until there is enou

make the bankruptcy payment amount. 

For loans in f()reclosure, is should be permissible to hold fu

suspense that are greater than a periodic payment. At this p

loao is accelerated, so there is no periodic payment. 

We request clarification that this determination is made at orig

If a HELOC later becomes a closed-end loan, servicers may no

81767.173

SERVICING - REGULATION Z 

TOPiC . ISSUE ,', " IATION, 

the capacity to produce all the periodic stalement disclosures, i

especially the transaction activity, 

12S, Definition of billing Section 41(a)(I) requires a periodic statement for each "'hilling cycler.]" We request clarification that it is permissible for the servicer to 

cycle, § 41(11)(1) and Comment 41(bH provides that it may be provided "no laterthan" foul' statements upon the earlier of receipt of a payment or within io

§ 2(a)(4) days aHer the close of a courtesy period, although it may be provide ofa courtesy period, as § 41(a) appears to permit. 

earlier. 

In this example, the April 6 statement will cover March 16lhro

Section 2(a)(4) defines billing cycle as: AprilS (21 days), The May 17 slatement will cover Apri16lhr

May 17 (42 days), Is this permissible even though the amount 

"[T]hc interval between the days or dates of regular periodic between statements varies by more than lour days, because a s

statements, These intervals shall be equal and no longer than a within four days aller the courtesy period is the "regular day o

quarter ofa year. An interval will be considered equal if the number the statement? 

of days in the cycle does not vary more than [nul' days from the 

I regular day or date of the periodic stalemem," 

Assume the Joan payments are due the 1" or tile munth and have a 15-

day courtesy period. Assume a servicer sends a statement March 15, 

Assume the borrower then makes the April payment on April 5 and the 

servicer sends a statement on April 6 reflecting the April 5 payment and 

all activity since March 16. The April 6 statement also rellects the May 

payment due, Assume the borrower does not make the May payment 

until ailer the courtesy period, and a statement is generated May 17. I 

126, Timing of statement, Comment 41(b)-l provides: We request clarification oflhe meaning of the word "generally

comment 4J(b)-1 there circumstances when the periodic statement is required be

"Delivering, emailing or placing lhe periodic statement in the mail days atter the cOllrtesy period? 

within four days ordose of the courtesy period oflhe previous 

billing cycle generally would be considered reasonably prompt." We request conf]rmation that the lour days are business days a

calendar days. Otherwise, on a three-day weekend, and 

78 

81767.174

SERVICING - REGULATION Z 

TOPIC ISSUE . tAT.ION 

without Saturday mail, there would not be enough time to prep

statements. 

127. Form of statements, Section4l(e) provides that proper use of the model forms complies with We request c!arit1cation of the types of changes that servicers c

§ 41(e) I 4I(c). to the model torms without jeopardizing the safe harbor. For e

can servieers provide more detail in the explanation of the amo

I (§ 41 (d)(2)(i)) to include the monthly amount needed to pay fo

I S0'oo' II d) '''1'''' ",.""",,,;.,,<10,0", req"'=".'. '"" products the borrower requested? \128. Layout of statement, As long as the periodic statements arc clear and conspicuol s

§ 41(d) will require costly retooling simply to move information to a different should be permitted to alter the layout 

I location without any substantive chmlge. The costs are exceptionally 

I I "' gh ,'''' '"" '"" ,,," "" """." ,. p km",,;;", , g=' In the alternative, we request an extended compliance period lo

I I many other regulatory amendments. The cost is llIueasonable in reformatting the periodic statements until servicers' implement

I 

relation to any consumer bendit. resources are not so overstretched. These would be almost no 

difference to consumers. We request an additional year. 

129. Borrowers in The regulation will require servicers to continue to pwviJe periodic Sending periodic may not technically violate the ha

bankruptcy, § 41 (d)(2) statcments to borrowers in bankruptcy, while bankruptcy entails an laws in some jurisdictions, but is inconsistent with their spirit a

automatic stay and requires collection acti vities to cease. The CFPB In other jurisdictions, the rule may conflict directly with comm

explains: We urge the eFPB not to put servieers at cross purposes to the 

bankruptcy courts. A simple disclaimer on what otherwise app

"The Bureau understands that certain laws, such as the FDCPA or be a debt collection notice may be insufficient to satisfy bankru

the Bankruptcy Code, may prevent attempts to collect a debt from a courts. In trustee "pay-all" jurisdictions, sending the periodic 

consumer in bankruptcy, but does not believe these laws prevent a statements may confuse borrowers who must send all mortgag

servicer from sending a consumer a statement on the status of theil' payments through the trustee. 

loan. The final rule would allow servicers to make changes to the 

statement as they believe are necessary when a consumer is in Section 41 should usc language as in § 39(c) to the effect that n

bankruptcy; such servicers may include a message about the § 41 requires communication with a borrower in a manner pro

and altematively present the amount due to reflect the applicable law, 

payment -". determined by the individual h"nkrllnt.cy 

-----

79 

81767.175

TOPIC 

130. Explanation of 

amount due for delinquent 

borrowers, § 41 (d)(2) 

SERVICING - REGULATION Z 

ISSUE" 

proceeding." 

78 Fed. Reg. 10902, 10966 (February 14,2(13) (footnote omitted). 

Section 39(c), regarding live contact with delinquent borrowers, 

provides; 

"Nothing in this section shall require a servicer to communicate with 

a borrower in a manner otherwise prohibited by applicable law:' 

Assume the borrower's monthly payment is $1000. Assume the 

borrower does not make the March payment within the courtesy period 

and a statement generated on March 18 retlects a late fee of $50. For 

the "amount due" on the top of the first page ofthe March 18'" 

statement. the amount would be $2050 (i.e. the March payment and the 

80 

RECOMMENDATIQN 

Servicers should be able to comply with any bankruptcy court o

a bankruptcy court orders a servicer to cease sending periodic 

statements, servicers should be able to comply with the court's 

We request clarification that when a servicer has a legal opinion 

is common law that sending a periodic statement would be inco

with applicable law. that the servicer need not send that period

statement. 

The official staff commentary should restate what is in the prem

ensure that this important clarification is pm1 of the regulation. 

preamble states: "The final rule would allow servicers to make 

to the statement as they believe are necessary when a consume

bankruptcy; such servieers may include a message about the ba

,md alternatively present the amount due to reflect the payment 

obligations determined by the individual bankruptcy proceedin

Fed. Reg. 10902, 10966 (February 14,2013). This claritication 

also add that servicers may exclude information or not send a s

at all if providing thc information or statement is inconsistent w

common law or court orders or if the borrower is in Chapter 13 

trustee "pay-all" jurisdiction. 

At a minimum, the CFPB should be explicit that providing a pe

statement to a borrower in bankruptcy per se cannot be a UDA

The grouping at the top of the (,m11 should not be misleading. 

line disclosure docs not accommodate past due amounts, espec

when there are more than one, so they should be included only 

elsewhere. 

81767.176

TOPIC 

13 1. Explanation 0 f 

amount due for borrowers 

in bankruptcy or 

foreclosure or after 

SERVICING - REGULATION Z 

currcnt April payment plus the $50 late fee). The grouping would read: I [f there arc past due amounts. they will need additional explana

Account number: 12345 

Payment Due Date: April! 

Amount Due: $2050.00 

[fpayment is received after 4115, $50 late fcc will be charged. 

This is misleading about when payments were due, and what is 

necessary to avoid a late fce: 

I his indicates that the entire amount is due April 1. However, 

$1000 of that amount was due on March I, and $50 was due March 

16. 

ft also indicates that a late fee will be charged if the borrower does 

not pay $2050. In fuct, there would be a late fce ooly if the 

borrower does not pay $2000. 

There is a concern lhat servicers could be sued under UDAl' and 

UDAAp laws lor displaying information in this misleading manner. 

The H-30(B) model fonn suggests that the coupon on the statement 

should rellect $2050. Many servicers list tI,e amount of PIT I and late 

fees on their statement as the total amounts owed by the customer on the 

loan, but on the coupon list only the contractual amount that is due for 

the next month to avoid a late fee. 

The Explanation of Amount due contains the necessary detail. 

If the CFPB will continue to require disclosure of the total amo

in addition to past due amounts in the first grouping, we make 

recommendations: 

Servicers should be permitted flexibility to also disclose th

amount is the total amount due at differing due dates, and t

payment required 10 avoid a late fee may differ from what i

disclosed in this grouping. 

Servicers who comply with the regulation should per se be 

nol to have committed a UDAP or a UDAAp. 

Section 41 (d)(2) requires disclosure of, We request guidance on how the disclosure should be prepared

is no monthly payment amount after acceleration or maturity. 

"The following items, grouped together in close proximity to each may not be any amouot due in a bankruptcy. 

other and located all the first page ufthe statement: 

hr"okoo'wn clarification that in 

81 

81767.177

SERVICING - REGULATION Z 

TOPIC . • ISSUE REl:OM1VIIl'Nn\.TION 

how much, if any, will be applied to principal, interest, and escrow 13 borrowers under §§ 41{d)(l) and (2), it is permissible to use 

and, if a mortgage loan has multiple payment options, a breakdown . The amounts due under the bankruptcy plan; or 

of each ofthe payment options along with information on whether 

the principal balance will increase, decrease, or stay the same for 

. The post petition amount. 

each option listed; Also in disclosing the past payment breakdown under § 41{d)(3

(ii) The total sum of any fees or charges imposed since the last breakdown would be based on the contractual terms lin Chapte

statement; and For Chapter 13 cases, the servicer must have the flexibility to r

(iii) Any payment amount past due," pre- and post-petition amoums, and any other speeial payment 

pursuant to court requirements, 

For borrowers in bankruptcy or foreclosure, it is unclear what this 

disclosure must contain, 

132, Disclosure of fees, Section 41 (d)(2)(ii) requires disclosure of: We request clarification ofthc extent to which fees may be agg

§ 41(d)(2)(ii) and (d)(4) as under § 4l(d){2)(ii) and perhaps comment 41(d)(4)- !.iii, or 

"The total sum of any fees or charges imposed since the last I itemized, as under § 41(d)(4), 

statement[Y I We request clarification that identifying the fee as property pre

Section 41(d)(4) requires disclosure of: is sunicient, and that multiple similar charges may be aggregat

fees may need to be entered manually, 51 flexibility is helpful. 

"A list of all the transaction activity that occurred since the last 

statement. For purposes of this paragraph (d)(4), transaction activity We request clarification that the fees charged sinee the last stat

means any activity that causes a credit or debit to the amount does not include fees lor services rendered but for which the am

currently due, This list must include the date of the transaction, a not yet known and for which the account has not yet been char

brief description of the transaction, and the amount of tho transaction 

lor each activity on the list" We request confirmation that amounts included in the regular m

payment, e,g" private mortgage insurance that is part of the es

Comment 41(d){4)-Liii provides that the disclosure should include: payment, and optional product payments, need not be separate

disclosed as fees or charges on the Transaction Activity requir

"The imposition of any fees (for example late fees)[,J" § 4 1 (d)(4), 

82 

81767.178

133. What must be done 

to apply suspended funds, 

§ 4 I (d)(5) 

134. Definition of page, 

§ 4 1 (d)(5), (d)(8) 

SE.RVIClNG - REGULATION Z 

Section 41(d)(5) provides that periodic statements disclosures include: 

"If a statement reHects a partial payment that was placed in a 

suspense or unapplied funds account, information explaining what 

must be done tor the funds (0 be applied:' 

This plainly requires disclosure of what the borrower must do to have 

the lunds applied to a full payment. 

Section 51.18 of the Freddie Mac guide permits applying a payment thaI 

is within $50 oftbe contractual amount, even if it is less than a full 

payment, by reducing the amount applied to the escrow balance. 

Section 41 (d)(5) provides: 

"The information Inllst be on the front page of the statement or, 

alternatively, may be included on a separate page enclosed with the 

periodic statement or in a separate letter." 

83 

the amount of a single activity. For example, if the m

contractual payment is $1000 ($700 interest, $100 principal, an

escrow) and the borrower paid $1000 each on March 5 and 10, 

statement could show principal of $200, imerest of $1400, and 

of$400 in the Past Payments Breakdown. In the Transaction A

section, the same statement would show "315113 Payment Rece

Thank You $1000" and "3/1 Oil 3 Payment Received - Thank Y

$1000" so that each payment would not need to be broken dow

separately. 

We request clarification that a narrative statement (e.g. "when 

contractual payment is received") or a total dollar amoullt can 

rather than requiring an actual itemization of how the funds wo

applied to principal, interest, and escrow. 

We request confirmation that if a servicer applies a partial paym

is within $50 orthe contractual payment, the servicer may show 

shortage amount as part of the amount due, and may show the 

application in the past payment breakdown and transaction acti

We recommend that the reverse side ofa piece of paper be dee

"separate page" for these purposes. 

We request clarification of the definition of "page" and "first p

electronic statements. It would be preferable not to define the 

to instead permit the serviceI' to include all information an 

81767.179

SERVICING - REGULATION Z 

TOPIC lSSUE '.TION 

Section (d)(8)has similar language. reasonable location, consistent with the clear and conspicuous 

, of § lO26.l7(a)(l). 

135. Delinquency I Section 41(d)(8) pmvides that delinquency information may be We request clarification that such disclosures in a separate lette

information On a separate • provided "on a separate page enclosed with the periodic statement or in sent before the periodic statement is scnt. 

page, § 41(d)(8) a separate letterlJ' 

For example, assume a borrower sends a partial payment on th

the month but the servicer sends periodic statements after the c

period. Could this servicer send the partial payment disclosure 

promptly after recdving the partial payment? As this notice 

I 

acknowledges receipt of the partial payment and informs the b

what is necessary tor the funds to be applied, this notice may p

default, and should be permissible before delivering the period

statement. 

J 36. Definition of I We suggest above, under Regulation X, Exceptions to the definition of These should be exceptions to the delinition of delinquency un

delinquency, § 41(d)(8) • loss mitigation option, § 31, some workout arrangements thut are § 41(d)(8). The requirements for disclosing delinquency infor

technically defaults, but for which the servicer agrees not to pursue its a periodic statement should be inapplicable, as discussed above

normal collection activities, in exchange tor a borrower's agreement to 

make payments as agreed with the servicer. 

137. Date of delinquency. Section 42(d)(8)(i) provides that periodic statements disclosures include We request clarification of whether this includes or ignores any 

S 41 (d)(8)(i) the date the consumer became delinquent. period. If a payment is due on the 1st und there is no late fcc u

16th, what is the dale of delinquency? 

138. Notification of Seclion4l(d)(8)(ii) requires delinquency information to include: We request clarification that this requires a general mention of 

possible delinquency expenses rather than a breakdown of individual potential expen

expenses, § 4J(d)(8)(ii) "A notilication of possible risks, such as foreclosure, and expenses, 

that may be incurred if the delinquency is not cured[.]" 

139. Amount needed to Section 4J(d)(&)(vi) requires disclosure of: We request claritlcation of whether the "amount needed to brin

bring the loan current, account current" is the amount of the next scheduled payment, 

84 

81767.180

SERVICING - REGULA nON Z 

"rOPIC 

§ 41(d)(8)(vi) 

140. Periodic statement 

exemptions, § 41(e) 

ISSUJ): 

"The total payment amount needed to bring the account current!.]" 

This is not a defined term. 

Periodic statements arc not required for reverse loans, timeshare plans, 

and when coupon books are permitted. However, they are required 

while a loan is in a trial payment plan, and after it is accelerated or has 

matured. The model forms simply arc not designed for these situations. 

The required information includes the monthly payment amount, under 

§ 41(d)(2)(i), 

What is the monthly payment amount during a trial payment period? 

Disclosing the monthly payment after acceleration could strongly 

imply that the loan has not been accelerated. There is no monthly 

periodic payment after acceleration or maturity. Telling borrowers 

otherwise would be a serious disservice. 

The required infOlmation includes all activity since the last statement, 

under §41(d)(4), For a defaulted loan, this could amount to 

reinstatement amounts rrovided on a monthly basis. The benefits of 

such a disclosure arc outweighed by the costs of producing them. 

The rule does not address the point in the foreclosure process after 

which periodic statements are no longer required . 

1141. . Coupon books for Coupon books. rather than periodic statements, are permissible for 

daily simple interest loans tixed-rate loans if a servicer provides certain information. 

with a fixed rate, I § 41(e)(3} 

142. Updated coupon 

85 

RECOM)'>fENDATION 

it includes any unpaid late fees lor prior late payments, and wb

synonymous with all amounts due on the loan. 

There should be no requirement for periodic statements after a 

accelerated or has matured because the model lonn does not 

accommodate these circumstances. 

The CrrB should not require periodic statements after a loan i

to foreclosure. Servicing personnel assigned to a borrower are 

to provide all information a borrower requests, so additional di

especially disclosures that could be misleading, should not be r

If the CFrB will require periodic statements after a borrower i

to foreclosure. we recommend model language and examples. 

We recommend model language and examples of completed m

!,mns for loans in a trial payment plan. A trial payment period 

actually a delinquent loan even if the borrower is making the tr

payments. 

At a minimum, the CFPB should make clear that providing a re

periodic statement during a trial payment plan or after accdera

under no circumstances a UDAP or lJDAAP, 

We request clarification of whether coupon books are permissi

! daily simple interest loans that have a fixed rate. 

I We request clarification of whether coupon books are permissi

81767.181

S.ERVICING - REGULATION Z 

TOPIC ISSUE . RECOMMENDA'TION . 

I books for ARM , ARM loans if the servicer updates the coupon book with each p

loans§ 41(e)(3) I change, and includes the information specified in § 4I(e)(3) 

143, Fixed-rate. non- We request clarification of whether a servicer may send neither 

escrowed loans paid by coupon book nor periodic statements to borrowers who have a 

ACH. §41(e)(3) rate, non-escrowed loan that is not 45 days delinquent. and who 

ACH. These borrowers have agreed to pay by ACH, and the p

do not adj ust, so there appears no reason to send periodic statem

coupon books. 

I 144. Small servieer A conSllmer may sell a home and provide financing to the buyer. The We request clarification of whether, in this case, assuming the 

exemption lor seller- seller may ask a bank to process regular payments, with an agreement federally-related mortgage loan, the bank must include this loa

tlnanced loans. § 41(e)(4) that the bank is responsible solely tor collecting regularly scheduled ! counting the number of loans it services tor purposes oflhe sm

payments and that it has no responsibilities if the loan becomes servicer exemption. 

delinquent, 

145. Temporarily The small servicer exemption applies to servicers that service no more We request clarification that a loan thaI the servicer will no! se

servicing loans subject to a than 5000 loans. Small scrvicers commonly originate loans, with a I does not count towards the 5000 loan small servicer dc('nition. 

forward commitment at commitment at origination to sell the loan and release the servicing, 

origination, although the secondary market transfer may not take place 

§ 41(e)(4)(ii)(A) simultaneously (lypically it occurs in 30 days or less). 

J 46. Definition of small The small servieer exemption depends on the number ofloans serviced We request elaritlcation that the § 1026.32(a)(2) delinition of a

st:rviccr's affIliate, by a servieer and its affiliates. applies for the small servicer exemption in both Regulation X 

§ 41(e)(4)(iiil Regulation Y. This definition provides: 

"A/filiale means any company that controls, is controlled b

under common control with another company, as set forth i

Bank Holding Company Act of 19561.]"' 

86 

81767.182

CONSUMER MORTGAGE COALITION 

GUBJANCE for MORTGAGE ORIGtNATION REGULATIONS 

to the BUREAU 01<' CONSUMER FINANCiAL I)ROTECnON 

J)OClfment 

June3. :2013 

81767.183

HIGHEST PRIORITY 

Ability to Repay Regulation ...............................................................................................................................................................................................................................

I. Self-employed consumers ...........................................................................................................................................................................................................................

2. Planned retirement .....................................................................................................................................................................................................................................

3. Calculation of loan payment and OTI.. .....................................................................................................................................................................................................

Points and Fees ....................................................................................................................................................................................................................................................

4. Both an affiliate and a non affiliate may provide services .......................................................................................................................................................................

5. }<-inanced points and fees and total loan amount ......................................................................................................................................................................................

6. Treatment of finance charge exclusions ....................................................................................................................................................................................................

7. points tied to non-LLPA risk factors ........................................................................................................................................................................................

B. Definition of interest rate without any discount points ...........................................................................................................................................................................

9. The interest rate compared to the APOR .................................................................................................................................................................................................

lO. Sufficient rate reduction to exclnde discount points ............................................................................................................................................................................

ll. Points and fees paid by an employer .....................................................................................................................................................................................................

QM Eligibility ......................................................................................................................................................................................................................................................

l2. Creditor-paid principal cnrtailments ....................................................................................................................................................................................................l3. Agency standards unrelated to ability to repay - representations and warrants; jumbo loans .....................................................................................................

14. Agency standards in written agreements ..............................................................................................................................................................................................

15. Agency standards change after consummation ....................................................................................................................................................................................

16. Assumptions .............................................................................................................................................................................................................................................

Residual Income ..................................................................................................................................................................................................................................................

17. Need for a residual income test .............................................................................................. : ...............................................................................................................

lB. Identifying and quantifying items relevant to residnal income, and determining what residnal income is sufficient ..................................................................

19. Living expenses ........................................................................................................................................................................................................................................

20. Basis for determination ..........................................................................................................................................................................................................................

21. Consistence with ECOA and FCRA ......................................................................................................................................................................................................

2 

81767.184

Loan Originator Compensation Regulation .....................................................................................................................................................................................................

22. Assisting a consumer ...............................................................................................................................................................................................................................

23. Bonus as proxy ........................................................................................................................................................................................................................................

24. Referral to a loan originator ..................................................................................................................................................................................................................25. EEOC guidance against using credit reports and criminal histories .................................................................................................................................................

HOEPA Regulation .............................................................................................................................................................................................................................................

26. HOEPA APR ...........................................................................................................................................................................................................................................27. Counseling disclosure requirements are needed ..................................................................................................................................................................................

Ability to Repay ...................................................................................................................................................................................................................................................

28. Relevance of oral information ................................................................................................................................................................................................................29. Credit history, DTI, and residual income .............................................................................................................................................................................................

30. Relevance of LTV to ability to repay ....................................................................................................................................................................................................31. Community lending exemption ..............................................................................................................................................................................................................

MEDIUM PRIORITY 

Affiliate Fees ........................................................................................................................................................................................................................................................

32. Exemptions from points and fees ..........................................................................................................................................................................................................33. Creditor-paid affiliate fees ....................................................................................................................................................................................................................

QM Eligibility ......................................................................................................................................................................................................................................................

34. Payments from a subsidy account ........................................................................................................................................................................................................35. Loan term for balloon and 10 loans .....................................................................................................................................................................................................36. Agency standards unrelated to ability to repay ...................................................................................................................................................................................

37. GSE written waivers ..............................................................................................................................................................................................................................

Fair Lending .......................................................................................................................................................................................................................................................

38. Ability-to-repay and disparate impact .................................................................................................................................................................................................

Record Retention ...............................................................................................................................................................................................................................................

39. Record retention .....................................................................................................................................................................................................................................

81767.185

Loan Originator Compensation and Qualification ..........................................................................................................................................................................................

40. Employees who change jobs but not employers ...................................................................................................................................................................................

LOWER PRIORITY 

Points and Fees ....................................................................................................................................................................................................................................................41. Hazard and credit property insurance .................................................................................................................................................................................................

Ability to Repay ...................................................................................................................................................................................................................................................

42. Underwriting standards based on empirical information ...................................................................................................................................................................

43. Comparatively low rates of delinquency and default ..........................................................................................................................................................................44. Reliance on consumer statements ..........................................................................................................................................................................................................45. Evidence that an ability-to-repay determination was not reasonable or in good faith ....................................................................................................................46. Length oftimely payments as an indicator of ability to repay ...........................................................................................................................................................47. Verification of property taxes with government-provided information ............................................................................................................................................

48. Debt or liability specified in appendix Q ..............................................................................................................................................................................................

49. OTI calculation in § 43(e)(2)(vi) and appendix Q ................................................................................................................................................................................

50. Contingent liabilities ...............................................................................................................................................................................................................................

51. Verification of simultaneous loan by promissory note ........................................................................................................................................................................52. Water bills should be excluded from mortgage-related obligations ..................................................................................................................................................53. Roommate or boarder ............................................................................................................................................................................................................................

Refinance of Nonstandard Loan ........................................................................................................................................................................................................................

54. Use of proceeds of standard mortgage ..................................................................................................................................................................................................

55. Thirty days as "generally" a reasonable amount of time ....................................................................................................................................................................

56. Payment calculation for nonstandard loan - relevance of actual prepayments ...............................................................................................................................

Loan Originator Compensation and Qualification ..........................................................................................................................................................................................

57. Revising compensation plans .................................................................................................................................................................................................................

58. Long term loan performance .................................................................................................................................................................................................................

Appendix Q ..........................................................................................................................................................................................................................................................

59. Applicability ............................................................................................................................................................................................................................................

4 

81767.186

60. Verification of part-time employment .................................................................................................................................................................................................

61. Conclusive evidence of no debt collection ............................................................................................................................................................................................

62. Income reasonably expected to continue .............................................................................................................................................................................................

63. Cost of tax transcripts ...........................................................................................................................................................................................................................

Other ...................................................................................................................................................................................................................................................................

64. Definition of "offer" for alternative offer ............................................................................................................................................................................................

65. Fully-indexed rate for step-rat. loans ..................................................................................................................................................................................................

66. Nonjudicial foreclosure ....................................................... ; .................................................................................................................................................................

67. FHA or Regulation Z definition of loan amount .................................................................................................................................................................................68. Typographical error ..............................................................................................................................................................................................................................

81767.187

HIGHEST PRIORITY 

TOPIC PROVISlQN .. RIU'''''' m·""l4.TION 

Ability to Repay Regulation 

I. Appendix Q § LD.4.c requires consumers to provide: We request clarification that this permits creditors to rely on do

consumers that the consumer or the consumer's company generates, and th

"Year to date profit and loss (P&L) statement and balance sheetrT audited financial statements are not required. 

2. Planned retirement Comment 43(c)(I)-2 provides: Comment 43(c)(I)-2 gives the required consideration only for a 

I 

consumer who states a plan to retire within 12 months, and the 

"A change in the consumer's circumstances after consllmmation (for gives the required documentation only lor consumers who plan 

example, a significant reduction in income due to ajob loss or a in three years. Neither states what is required in other circumst

significant obligation arising from a major medical expense) that retirement only relevant if a consumer plans to retire in 12 mon

cannot be reasonably anticipated from the consumer's application or yeurs? If not, what is required in the case of a consumer who s

the records used to determine repayment ability is not relevant to plan to retire in 4, 5, 10, or 20 years, or who does not have a pl

determining a creditor's compliance with the rule. However, if the retirement date? 

I application or records considered at or before consummation indicate there will be a change in a consumer's repayment ability How definite must a future possible income reduction be belore 

I after consummation (t<lr example, if a consumer's application states creditor must consider it? 

that the consumer plans to retire within 12 months without obtaining 

new employment or that the consumer will transition from full-time Do the answers to these questions differ under § 43(c) and appe

to part-time empioyment), the creditor must consider that 

infom13tion under the rule." 

, 

Appendix Q § I.B.i note I provides: 

"Elfective income for consumers planning to retire during the first 

three-year period must include the amount of: 

I 

a. Documented retirement benefits; 

b. Social Security payments; or 

e. Other paymenW expected to be received in retirement. 

3. Calculation ofloan I Loan payment amounts and DTI ate calculated ditTerently depending on Creditors that make an intended QM loan that due to error is no

81767.188

TOPIC 

payment and OTI 

HIGHEST PRIORITY 

PROVISION 

which standard the creditor uses. 

General repayment abilitv (non-OM) 

For loans with no balloon. 10 period, or negative am0l1ization, 

creditors must calculate the loan payment using the greater of the 

introductory rate or the fully-indexed rate. § 43(c)(5)(i). If creditors calculate OTJ, they must use the payments on: the 

covered transaction; simultaneous loans; mortgage-related 

obligations; and current debt obligations. alimony. and child 

support. § 43(c)(7). 

General OM definition 

Under the general QM definition, the loan payment is based on the 

maximum rate during the first live years. § 43(c)(2)(iv)(A). 

The required 43 percent OTI is determined using the payments on 

the covered transaction; simultaneous loans; and mortgage-related 

obligations. § 43(e)(2)(iv). 

Special agency OM definition 

The ageneies also have standards. Fannie Mae, for example, bases 

loan payment calculations on an ARM loan using the greater of the 

note rate plus 2% or the fully-indexed rate, but using the note rate if 

it is llxed for longer than five years. Fannic Mae Selling Guide 

§ B3-6-04. 

Fannie Mae bases OTT ealculations on monthly payments on 

il1stallment debts that extend beyond ten months, and sometimes 

debts that do not extend ten months, plus alimony, child 

maintenance payments that extend beyond 

7 

lUl:COMMENDATION 

loan will try to show compliance with the general repayment ab

requirements. To do so, would a creditor need to establish the 

amount, OTT, and residual income calculated under the general 

repayment ability standards? At a minimum, ifthe creditor has 

information that shows a highcr payment amount. lower OTT, a

higher residual income than required under the non-QM standa

creditor should be able to use that information to show complia

81767.189

HIGHEST PRIORITY 

" " " TOPIC PROVISION " RECOMMENDATION 

Points and Fees 

4, Both an affiliate and a Points and fees include 4(0)(7) charges paid to service providers that arc An affiliate may collect a fee and retain a nonaftiliate to perfor

nonaftiliatc may provide affiliated with the creditor, but exclude similar fees paid to a service, For example, a creditor may pay a fee to an aftiliated 

services nonaffiliate, § 32(b)(I)(iii), insurance agent who conducts a title examination, and who also 

part of the fee to an unaftilia!ed title insurer for insurance, We 

confirmation that charges paid to affiliates arc limited to amoun

affliiate retains, 

- This should be the case even if the combined charge is orig

Ipaid to the aftilia!e, This should be the case regardless of whether the amount is disclosed to the consumer because the points and fees calcu

not required to be disclosed, 

5, Financed points and Section 32(b)(4) defines the total loan amount as depending on whether If the consumer prepays some but not all closing costs, or some 

fees and total loan amount certain points and fees are financed: all arc paid from loan proceeds, how docs the creditor determin

fees arc financed and which the consumer paid? 

"The total loan amount for a closed-end credit transaction is 

calculated by taking the amount financed, as determined according I 

to § 1026, 18(b), and deducting any cost listed in § 1 026.32(b )(1 )(iii), i 

(iv), or (vi) that is both included as points and fees under 

§ I026.32(b)(l) and lin anced by the creditor" 

6, Treatment of finance The definition of points and fees includes several items that are defined We request clarification that items excluded from the finance c

charge exclusions as finance cbarge items under §§ 4(a) and 4(b), Points and fees also under § 4(c) - (c) are not included in points and fees unless the

include additional items, in §§ 32(b)(l)(ii) - (vi) and (b)(2)(ii) - (viii), included in points and fees in §§ 32(b)(I)(ii) (vi) or (b)(2)(ii) 

However, the points and fees defmition does not expressly address items 

excluded from the finance charge definition under § 4(c) - (e), 

7, Discount points tied to The section-by-section analysis for the ability-to-repay rule states: We request clarification that, aside from LLI'As, when a credit

non-LLI' A risk factors a consumer the opportunity pay points to buy down a rate the c

"To the extent that creditors offer consumers the opportunity to pay I would otherwise charge to compensate for additional risk facto

points to lower the interest rate that the creditor would otherwise i points are bona fide discount points if they otherwise satisfy th

81767.190

HIGHEST PRIORITY 

TOPIC " PROVISION " " . . .en'iI10N 

charge to recover the lost revenue trom the LLPAs, such points may, ! requirements of § 1026J2(b)(1)(i)(E) or (Fl, 

if they satisfy the requirements of § 1026.32(b)(1 )(i)(E) or (F), be I 

excluded from points and fees as bona fide discount points," I 

I 

78 Fed, Reg. at 6408,6430 (Jan, 30, 2013), 

8, Definition ofinterest Section 32(b)(I)(i)(E) and (F) exclude bonafide discount points "if the We request confirmation that creditors arc not required to offer 

rate without any discount interest rate without any discount does not exceed" specified levels, with exactly zero discount points as a prerequisite to excluding 

points points from points and fees, 

I We request clarity about identifying the undiscounted rate, A c

could compensate for risk factors on a loan by charging points, 

increasing the rate, or by a combination of the two, A creditor 

offer a rate with exactly zero discount points, For example, a c

might offer a consumer the following options: 

· A rate of 4,000% with a credit (0 the borrower of ,25 points

· A rate 01'3.875% with the bOlTower paying .25 points; and · A rate 0[3,750% with the borrower paying ,75 points. 

In this example, which rate is the interest rate without any disc

9. The interest rate Section 32(b)(I)(i)(E) and (FJ exclude bonafide discount points "if the We request confirmation that the "interest rate" is the interest r

compared to the APOR interest rate without any discount does not exceed" specified leyels, not the APR, 

We request clarification of the interest rate on an ARM loan an

I rate loan, 

10, Sufficient rate Section 32(b)(3)(i) provides: On ARM loans, it is a common industry practice for discount p

reduction to exclude buy down the introductory rate, We request conformation that 

discount points "The term honafide discount point means an amount equal to I points that buy down the introductory rate on an ARM loan rat

percent o[the loan amount paid by the consumer that reduces the the rate after recast are "consistent with established industry pr

interest rate or time-price differential applicable to the transaction for anlount of reduction in the interest rate" wi

based on a calculation that is consistent with established industry of § 3-2(b)(3 lei) and (ii), 

81767.191

TOPIC 

Ii. Points and fees paid by 

an employer 

HIGHEST PRIORITY 

PROVISION 

practices for determining the amount of reduction in the interest rate 

or time-price differential appropriate for the amount of discouot 

points paid by the consumer," 

Section 32(b)(3)(ii) uses very similar language, 

Currem 32(a)( I)(ii) defines points and fees to include mnounts 

"payable by the consumer at or before loan closing[.]" As revised in the 

BOEPA rulemaking, this provision refers to the points and fees 

definition in § 32(b)(I) and (2) in the ability-to-repay rule, This 

definition includes points and fees "known at or before consummation" 

, without regard to who pays them, 

10 

RECOMMIj:NDATlON 

Limiting points and fees to those known at or before consumm

helpful because QM, QRM, and !IOEPA status must be known 

consummation. 

We suggest points and lees should also be limited to amounts t

consumer actually pays, We request claritication that if a cred

an amount, or tails to charge it to the consumer; the amount is 

included in points and fees, 

In a corporate relocation loan, an employer may pay points or f

employee's mortgage loan. 

We request confirmation that employer-paid points and fee

excluded from the finance charge and from points and tees 

they are an expense to the employer and a benefit to the co

We request confirmation that if employer-paid points arc in

the finance charge, they can be excluded from points and fe

bonafide discount points even though they are not 

the consumer" under § 43(b)(l)(i)(E) and (F), 

applicable requirements, 

We also request confirmation that amounts paid by a 

by a third party who provides closing cost assistance, arc 

excluded, 

81767.192

HIGHEST PRIORITY 

QM Eligibility 

12. Creditor-paid principal Section 43(0)(2)(i) provides that a loan qualifies as a QM loan if, among Some flexibility is warranted for loans that help consumers pay 

I curtailments other things, it: the principaL A creditor may offer a loan on which the credito

provides principal curtailments tied to the amount of deposits t

"provides for regular periodic payments that are substantially equal, consumer has with the creditor. These curtailments reduce the 

except for the effect that any interest rate change after I balance and shorten the loan term, but do not alter the monthly 

consummation has on the payment in the case of an adjustable-rate We request confirmation that this curtailment benefit does not 

or ste -rate mol't age .j" a loan from QM eli ibilit,. 

13. Agency standards Proposed comment 43(e)(4)-4 provides that a loan that meets the special We support this proposal. 

unrelated to ability to repay agency QM delinition does not need to meet agency standards unrelated 

- representations and to repayment ability: It can be difficult to separate requirements that address only th

warrants; jumbo loans consumer's ability to repay from underwriting requirements th

"However, the creditor need not satisfy standards that arc wholly other risk factors. The GSEs and agencies generally require 

unrelated to assessing a consumer's ability to repay that the creditor representations and warrants that a loan has been originated in 

is required to perform such as requirements related to selling, compliance with all applicable law. We request confirmation t

securitizing, or delivering already consummated loans and any representations and warrants, are not underwriting 

requirement that the creditor must perform after the consummated requirements, and therefore noncompliance with representation

loan is sold. guaranteed, or endorsed for insurance such as document warrants is irrelevant to QM status. 

custody, quality control, or servicing." 

14. Agency standards in Proposed comment 43(e)(4)-4.1 provides that a loan can be a QM if: 

written agreements 

"The loan conforms to the relevant standards set forth in the Fannie 

Mae Single-Family Selling Guide or the Freddie Mac Single-Family 

Seller/Servicer Guide in effect at the time. or to standards set forth in 

a,vritten agreement between the creditor and Fannie Mac or Freddie 

11 

81767.193

HIGHEST PRlORlTY 

TOPIC .PROViSION RECOMMENDATION 

Mac that permits variation from the standards of those guides[.)" which there is a written agreement or understanding that the 

will not be subject to repurchase or indemnification demand

eligible for and retain special agency OM status. 

A loan for which a creditor cures errors after consummation

accordance with GSE and agency standards, retains special 

M status. 

15. Agency standards Proposed comment 43(e)(4)-5 provides: This comment appears to assume that it is possible to know wh

change after CDnsummation DU recommendation would have changed if accurate informati

"[Elach loan should be evaluated by the creditor based un the facts been input While DU and LP have processes for re-running lo

and circumstances relating to the eligibility of that loan at the time of do not always allow for re-running the loan using the same ver

consummation." DU or LP or the same credit report used to originate the loan, 

recommend that the CFPB work with the GSEs to allow credito

The comment gives two examples of DU input errors that are rUll DU and LP with the same AUS versioll and the same credi

discovered after consummation, Barring that, if the credit report or DU or LP has changed, will 

LP recommendation be evidence of com liance or noncom lia

16, Assumptions Comment 43(a)-1 provides: We recommend that § 43 not apply to assumptions. Ifit does, 

request confirmation ofthe f(lllowing: 

"In general, § 1026,43 applies to consumer credit transactions • If an assumed loan is held in portfolio, it can qualify for OM 

secured by a dwelling .... In addition, § 1026.43 does not apply to under the special agency OM definition. 

any change to an existing loan that is not treated as a refinancing The rule docs not apply to a loan originated before the regu

under § 1026.20(a)." e!Tcctive date and assumed after that effective date. 

If an assumable ARM loan is a OM, the regulation will not 

It is unclear whether assumptions are subject to the rule. An assumption a subseqllent assumption of that loan. Otherwise: 

involves a change to an "existing loan" but the requirements to provide 0 What is the introductory rate under § 43(c)(5)(i)'1 

disclosures on assumptions are in § 20(b), while § 20(a) requires 0 What is the "maximum interest ratc that may apply durdisclosures for refinancings. first five years after the date on which the first regular p

avment will be due" in § 43(e)(2)(iv)(A)? 

Residual Income 

17. 

12 

81767.194

HIGHEST PRIORITY 

---

. TOPIC l'KUVllSIUN RECOMMENDATION 

income lest the regulation on how to define and calculate residual income a

"[T]he Bureau belicves that providing broad standards for the level of residual income is sufficient. We strongly urge the CF

definition and calculation of residual income will help preserve wait years before establishing residual income standards. We 

flexibility if creditors wish to develop and refine more nuanced I recommend permitting use of the VA residual income test, at l

residual income standards in the future. The Bureau accordingly the CFPB creates a replacement test. 

does not tind it necessary or appropriate to specify a detailed 

methodology in the final rule for consideration of residual income." 

* • * 

"The Bureau expects to study residual income further in preparation 

for the five-year review of this rule required by the Dodd-Frank Act." 

78 Fed. Reg. at 6487 and 6528 (Jan. 30,2013). ! 

18. Identifying and Comment 43(c)(I)-l.iLB.5 provides that evidence that a credilor's Both §§ 43(c) and 43(e) use a residual income concept, but the 

quantifying items relevant ability-tn-repay determination was not reasonable or in good faith may regulation and commentary do not set any standard. Clarity is 

to residual income. and include: identifying which items are and are not relevant to residual inc

determining what residual to quantify the relevant items, whether the household is releva

income is sufficient 'The creditor disregarded evidence that the consumer may have the applicant. and in determining how much residual income is 

insufficient residual income to cover other recurring obligations and sufficient. Further, it is not clear whether the same standards a

expenses, taking into account the consumer's assets other than the under §§ 43(c) and 43(e). 

property securing the loan, atter paying his or her monthly payments 

for the covered transaction, any simultaneous loans, mortgage- Identifying what is relevant to residual income 

relaled obligations, and any CUlTen! debt obligations[.]" It is quite unclear what is included in and excluded from residu

income. 

[n addition, to make non-QM loans under § 43(c). creditors are required . Under § 43(c), what expenses, other than those enumerated 

to consider either residual income or DTI, but neither is specitied. § 43(c)(2)0) through (vi), are relevant to residual income') 

. Does the characterization of these fees as "obligations" in 

To make higher-priced QM under § 43(e)(J )(ii)(B), creditors must be 43(c)(I)-Lii.B.5 mean to exclude amounts spent on food. c

able to determine: and gasoline because they are largelv discretionary? What 

13 

81767.195

TOPIC 

HIGHEST PRIORITY 

-

PROVISION 

··that the consumer's income, debt obligations, alimony, cbild 

support, and the consumer's monthly payment (including mortgagerelated obligations) all the covered transaction and on any 

simultaneous loans of which the creditor was aware at 

consummation would leave the consumer with insufficient residual 

income or assets other thao the value of the dwelling (including any 

real property attached to the dwelling) that secures the loan with 

which to meet living expenses, including any recurring and 

materialnon-deht obligations of which the creditor was aware at 

the time of consummution.'1 

The regulation and commentary do not define the terms above in bold. 

Comment 43(e)(1)(i1)-1 provides: 

"For example, a consumer may rebut the presumption with evidence 

demonstrating that the consumer's residual income was insufficient 

to meet living expenses, such as food, clothing, gasoline, and health 

care, including the payment of recurring medical expenses of which 

the creditor was aware at the time of consummation.. " 

14 

-

RECOMMENDA nON 

comparable standard under § 43(e)? 

Under § 43(e)(1)(ii)(B), what are living expenses, and recumaterial non-debt obligations? 

Is discretionary spending relevant? 

If one borrower pays a recurring child care bill while anoth

borrower does not, is child care a recurring obligation for e

borrower? 

To what extent are child care expenses, medical costs, food 

utilities, transportation costs, or federal, state and local inco

included or excluded? 

Quantifying the amounts for residual income items 

On what is the creditor is to detennine the amounts o

relevant residual income items? 

Can creditors rely on information provided by the consllme

What If the consumer does not track the rc!evant items? 

To what extent can creditors rely on average amounts inste

having to obtain customer-specific information? 

Do utility bills vary by geography? 

Do the relevant costs include actual costs even ifpart of the 

cost is discretionary? 

If a consumer informs a creditor about non-debt obligation

expenses, must the creditor document and verify them? 

Consumer or household? 

It appears under § 43(c) and 43(e) that residual income is comp

solely using the consumer's information. 

Should creditors consider only the information of applicant

Ifihe transaction is subiect to the right to cancel so that an 

81767.196

HIGHEST PRIORiTY 

Toprc rKUV l,)[Ul'l' ,TUJN 

who is not a borrower is defined as a "consumer" under § 

must or may that individual's information also be considere

. Should creditors consider information of other household m

who arc neither borrm-vers nor owners? 

. May creditors consider "income and assets to which the co

has a reasonable expectation of access" as under the recent

finalized Card Act standard, 12 C.P.R. § 1026.5I(a)(1)(ii)? 

What amount of residual income is sufficient" 

Ho\v are creditors and consumers to determine whether residua

is sufl1cient with neither numerical guidelines nor concrete gui

the factors that creditors must consider? 

For each ofthese questions, an answer is needed under both § 

§ 43(e). 

Substantially more clarity is needed before the regulation beco

effective. 

19. Living expenses Comment 43(c)( 1 )-I.iLB.5 provides that evidence that a creditor's Do recurring obligations and expenses in comment 43(c)( 1)-1.

ability-la-repay delermination was not reasonable or in good faith may differ from necessities in comment 43(c)( I)- I .ii.C? 

include: 

"The creditor disregarded evidence that the consumer may have 

insufficient residual income to cover other recurring obligations 

and expenses, taking into account the consumer's assets other than 

the property securing the loan, atter paying his or her monthly 

payments for the covered transaction, any simultaneous loans, 

mortgage-related obligations, and any current debt obligations[.]" 

i5 

81767.197

HIGHEST PRIORITY 

TOPIC PRv IDATION 

Comment 43(c)(1)-Lii,C provides: ! 

"lAJn ability-to-repay determination may he unreasonable or not in I 

good faith even though the consumer made timely payments f()f a 

significant period of time it; for example, the consumer was able to i 

make those payments only hy foregoing necessities such as food and heat:' 

20, Basis for determination Comment 43(c)(2)-1 provides: We request confirmation that reliance on agency and GSE guid

on appendix Q, is per se compliance with § 43, 

"A crcditor may, but is not required to, look to guidance issued hy We also request contlrmation that a creditor that relies on the V 

entities such as the Federal Housing Administration, the U,S, residual income standards, even lor non-V A loans, cannot later 

I 

Department of Veterans Affairs, the U,S, Department of Agriculture, to have "disregarded evidence that the consumer may have insu

or Fannie Mae or Freddie Mac while operating under the residual income" within the meaning 0[' comment 43(c)(I)-l.ii,

conservatorship oflhe Federal Housing Finance Agency," cannot be found to have left the consumer with insunicient res

income or assets with which to meet living expenses andrecurr

, material non-debt obligations under § 43(e)(1)(ii)(B), 

2 L Consistence with Comment 43(c)(1)-2 provides: To the extent that a creditor may need to ask ahout planned ret

ECOA and FCRA health carc expenses, child care expenses, income and obligatio

"A change in the consumer's circumstances aller consummation (for household members including a spouse, and medical informati

example, a signitlcant reduction in income due to ajoh loss or a requirements could conflict with ECOA and FCRA requiremen

significant obligation arising from a major medical expense) that Section 43(c)(2)(vi) requires consideration ofa consumer's "ch

cannot be reasonably anticipated from the consumer's application or support[T' Not requiring or permitting a creditor to ask a cons

the records used to determine repayment ability is not relevant to who is expecting a child ahout future child support is insut1icie

determining a creditor's compliance with the rule, However, if the remove the conflict of laws because it does not address whethe

application or records considered at or before consummation information the creditor may not request is relevant to ability-t

indicate there will be a change in a consumer's repayment ability determinations, 

alter consummation (tor example, if a consumer's application states 

that the consumer plans to retire within 12 months without obtaining We request more guidance about how creditors can request and 

new employment or that the consumer will transition from full-time information as required or permitted under § 43 without violati

16 

81767.198

HIGHEST PRIORITY 

TOPIC .' . cNOATloN 

to part-time employment), the creditor must consider that ECOA or FCRA, 

information under the rule," 

Comment 43(c)(I)-3 provides: 

"Section 1026.43(c)(1) does not require or permit the creditor to 

make inquiries or verifications prohibited by Regulation B, 12 CFR 

part 1002," 

Loan Originator Compensation Regulation 

22, Assisting a consumer Comment 36(3)- LLA,j provides that a loan originator includes a person We request conlirmation that a person who provides publicly a

who: loan rates, and who is not thereby a mortgage loan originator u

Regulation G, is not thereby also a loan originator under Regul

"Assist[s] a consumer in obtaining or applying for consumer credit 

by advising on specific credit terms (including rates, fees, and other 

costs)[T 

Section 36(a)(I) defines a loan originator as a person who for 

compensation: 

"[T]akes an application, offers, arranges, assists a consumer in 

obtaining or applying to obtain, negotiates, or otherwise obtains or 

makes an extension of consumer credit for another person; or 

through advertising or other means of communication represents to 

the public that such person can Of will perform any of these 

activities.'! 

Regulation G § 1007.1 02 de lines a mortgage loan originator as an 

individual who: 

17 

81767.199

HIGHEST PRIORITY 

-

TOPIC .... PROVISION .... RECOMMeNDATION 

"0) Takes a residential mortgage loan application; and 

(ii) Offers or negotiates terms of a residential mortgage loan for 

compensation or gain." 

23. Bonus as proxy Section J6(d)(I)(iv) permits compensation to a loan originator from a We request claril1cation that any such bonus is per se not a pro

non-deferred profits-based compensation plan that is determined with loan terms under § 36(d)(l). 

reference to the profits of the person nom mortgage-related business, if; 

among other things: But if that compensation is a proxy, another question arises abo

. The compensation paid to an individual loan originator does not in executives and attorneys. Many creditors have bonus pools tha

the aggregate exceed 10 percent of the individual loan originators nonmortgage profits. A senior executive or attorney who is no

total compensation corresponding to the time period for which the traditional loan originator occasionally steps in to resolve a cus

compensation plan is paid; or complaint, which may include adjusting fees or rates on a mOJ

. The individual was a loan originator for ten or fewer transactions application in process. Creditors do not necessarily track this 

consummated during the 12-month period preceding the date oftbe participation. The senior executive or attorney may receive a b

compensation determination. aller stepping in on more than ten applications in a year, or ma

a bonus of more than ten percent of total compensation for the 

period. We request conflrmation that this tangential activity do

mean the compensation is prohibited. The senior executive or a

in this case is not in a position to earn more compensation by s

the consumer to a worse loan. At the same time, the tangential 

assistance could taint an annual bonus, which would be disprop

to any potential steering. 

24. Referral to a loan Comment 36(a)-LiA.l provides that a loan originator includes a person We request clarilication that a employee ofa creditor who need 

originator I who: register as a loan originator under Regulation G is not a loan o

under Regulation Z if that employee refers a consumer to anoth

___ 

I "Rd.,.,] "w","moe m w., """" who i. 'h' employee of the creditor. ",i,i."i"" "m,,", '" ,,10", "",iom,,, R.I","." i.d"d" ""J oml 

or written action directed to a consumer that can atlirmativcly For example, assume that a bank teller is not a loan originator u

influence the consumer to select a particular loan originator or Regulation G because the teller does not take, or have access to

1 creditor to obtain an extension of credit when the consumer will pav application information and does not offer loan terms. A teller 

18 

81767.200

HIGHEST PRIORITY 

-' TOPIC PRJJVISION u .ATION 

for such credit." aware that a consumer is an existing mortgage customer of the 

The teller may accept a payment on the mortgage loan, or, whe

Comment 36(a)-4.I I.B provides that loan origination does not include consumer conducts a transaction with the teller, the bank's syst

persons who: alert the teller that the consumer has a mortgage with the bank 

that is likely higher than the current rate. In these circumstance

"[P]rovide loan originator or creditor contact information in teller may suggest that the consumer speak to the branch's regi

response to the consumer's request, provided that the employee does loan originator about a possible refinance to a lower rate. If ask

not discuss particular credit terms available trom a creditor and does teller will quote tbe publically posted rates for refinances. lfth

not refer the consumer, based on the employee'S assessment of the conversation results in a closed loan, the teller will receive a sm

consumer's financial cbaracteristics, to a particular loan originator or payment. This is an example of cross-selling, not steering. 

creditor seeking to originate particular credit transactions to 

consumers with those financial eharacteristics[.]" We request confirmation that this activity does not make the tel

originator under Regulation Z, thereby triggering the qualificat

requirements, the restrictions on permissible compensation, and 

not result in including the payment in points and fees under * 3

25. EEOC guidance against The EEOC provides guidance that inquiry into ajob applicant's credit The impact of the EEOC guidance and prohibitions will vary d

using credit reports and rating and similar information "generally should be avoided but that I on the definition of loan originator. For that reason, we are uns

criminal histories "[e]xceptions exist if the employer can show that such information is the prioritization of this issue. 

essential to the particular job in question." TI,e EEOC also discourages 

employers from using arrest and conviction records as an absolute [f every bank teller who cross-sells is a loan originator, the imp

measure to prevent an individual hom being hired except to the extent be large. We are not sure the EEOC would take the position th

tbat it is evident that the applicant cannot be trusted to perform the a few rcIatively minor negative items on a credit report should 

duties ofthe position when considering the circumstances. disqualify a person Irom being a bank teller. Such a position c

a disparate impact on certain classes of job applicants, We ther

urge the CFPB not to define loan originator this broadly, Cons

with the EEOC may be beneficial. 

We request confirmation that the background checks required b

I arc "essential to the f'articular job on guostion." We reguest 

19 

81767.201

HIGHEST PRIORITY 

TOPIC . PR" '''>IV' .. ' mATION 

confirmation that when § 36 prohibits employing a person beca

criminal history that this means "it is evident that the applicant 

be trusted to perform the duties of the position" within the mea

the EEOC' s langua2e. 

HOEPA Regulation 

26. HOEPA APR The HOEPA regulation defines high-cost mortgages to include loans on . For an ARM loan with mortgage insurance, should the mor

which the APR exceeds the APOR by a specified spread. However, the insurance premiums and termination date reJleet the same 

APR used in this definition is not the same APR used for consumer assumptions as are used for the disclosed APR or should th

disclosure purposes. Rather, it is: the interest rate assumptions used for the HOEPA APR'? 

. Should per diem interest included in the HOEPA APR calc

"(i) For a transac1ion in which the annual percentage rate will not renee! the actual charge based on the initial interest rate. or 

I vary during the term orlhe loan or credit plan, the interest rate in fully-indexed rate is higher, should the per diem interest be 

effect as of the date the interest rate for the transaction is set; to reflect that higher fully-indexed rate? I (ii) For a transaction in which the interest rate may vary during the 

telm of the loan or credit plan in accordance witb an index, the 

interest rate that results from adding the maximum margin permitted 

at any time during the term ofthe loan or credit plan to the value of 

the index rate in effect as of the date the interest rate for the 

transaction is set, or the introductory interest rate, whichever is 

greater; and 

(iii) For a transaction in which the interest rate mayor will vary 

I during the term ortlle loan or credit plan, other than a transaction described in paragraph (a)(3)(ii) of this section, the maximum I interest rale that may be imposed during the term of the loan or credit plan." 

I 27. COllnsehng dIsclosure I In RegulatIOn X, § I 024.20(a)( I) finalized !l1 the IIOEPA rule, reqUires , Creditors cannot beglll to work on the systems reqlllrements lo

I requirements are needed I delivery of: I producing this disclosure until the CFBP provides information 

I 

I content and format, the required data inputs to obtain informat

I "a clear and conspicuous written list of homeowners hip counseling . the CFPB or HUD data. and instructions for how to usc the inl

20 

81767.202

HIGHEST PRIORITY 

PROVISION .. RECOMMENDATJON .. 

organizations that provide relevant counseling services in the loan obtained Irom the eFPB or HUD to create that disclosure. We 

applicant's location." that the eFPB provide the necessary information as soon as po

it will be delayed, we request additional implementation time. 

The list must be provided lrom either: 

I 

To begin planning the implementation process, it is important t

(I) The Web site maintained by the Bureau for lenders to use in whether the disclosure will differ for loans that require and do 

I 

complying with the rcquirements of this section; or require counseling. 

(ii) Data made available by the Bureau or HUD [or lenders to usc in 

complying with the requirements of this section, provided that the 

data is used in accordance with instluctions provided with the data." 

21 

81767.203

MEDIUM PRIORITY 

TOPIC PROVrSION I ." RECOMMENDATION 

Ability to Repay 

28. Relevance of oral The section-by-section analysis provides: The comment appears to limit the creditor's required considerat

information '·the application or recordsL]" which may be inconsistent with t

"fA] consumer may seek to show that a loan does not meet the section-by-section analysis. Or arc there some types of orally 

requirements of a qualified mortgage by rclying on information volunteercd information that the creditor must considcr but oth

provided orally to the creditor or loan originator to establish that the ofinformation that only need to be considered ifthey are writte

debt-to-income ratio was miscalculated. Alternatively, a consumer 

may seek to show that the creditor should have known, based upon 

facts disclosed orally to the creditor or loan originator, that the 

consumer had insufl1cient residual incomc to be able to afford the 

mortgage. The final rule does not preclude the use of such oral 

evidence in ability-to-repay cases." 

, 

78 Fed, Reg. 6408, 6512 (January 30, 2013). Comment 43(c)(1 )-2 

provides: 

"[l]fthe application or records considered at or before 

consummation indicate there will be a change in a consumer's 

repayment ability after consummation (for example, if a consumcr's 

application statcs that the consumer plans to retire within 12 months 

without obtaining new employment or that the consumer will 

transition from full-time to part-time employment), the creditor must 

consider that information under the rule." 

29. Credit history. DTl, and Comment 43(c)(2)(viii)-1 provides: . For a non-QM loan, must there be some ditTerenee between 

residual income requirements, residual income requirements, or both, for ap

"'Credit history' may include factors such as the number and age of with good history compared to applicants with poor history 

credit lines, payment hislory, and any jUdgments, collections, or demonstrate that the crcditor considered credit history? 

bankruptcies .... The rule also docs not specify which aspects of . Could a creditor's dctermination to approve a loan to an ap

81767.204

MEDIUM PRIORITY 

credit history a creditor must consider or how various aspects of with a good credit score be appropriate if tl1e DTI andlor re

credit history should be weighed against each other or against other income requirement were less strict, on the basis that credit 

underwriting factors. Some aspects of a consumer's credit history, shows willingness to repay but not ability to repay? 

whether positive or negative, may not be directly indicative o[the . Is it sufficient to consider credit history in determining whe

consumer's ability to repay. A creditor therefore Illay give various make the loan but not the DTI andlor residual income requi

aspects ora consumer's credit history as much or as little weight as 

is appropriate to reach a reasonable, good faith determination of 

ability to repay." 

Comment 43 (c)(7)-3 provides: 

"The creditor may consider factors in addition to the monthly debtratio or residual income in assessing a consumer's 

repayment ability." 

30. Relevance of LTV to Comment 43(c)(1)-l.iLA.2 provides that evidence that a creditor's Neither the general ability to repay standard nor the QM standa

ability to repay ability-to-repay determination was reasonable and in good faith require a creditor to consider the LTV. Loans with higher LTV 

includes: higher delinquency rates during adverse economic conditions. 

creditor's underwriting standards do not treat high-LTV loans 

"The creditor used underwriting standards that have historically conservative manner than low-LTV loans, is this evidence that 

resulted in comparatively low rates of delinquency and default creditor's determination of ability to repay was not reasonable 

during adverse economic conditions[.r good faith? 

31. Community lending Section 43(a)(12) defines simultaneous loan as: The May 2013 ability-to-repay amendments provide an exemp

exemption the ability to repay requirement for certain creditors who typica

"another covered transaction or home equity line of credit subject to subordinate loans or forgivable grants for closing costs and do

§ 1026.40 that will be secured by the same dwelling and made to the payment assistance. We request confirmation that the subordin

same consumer at or before consummation of the covered or forgivable grant would not be a "covered transaction" or a 

transaction orl ifto be made after consummation, will cover closing "simultaneous loan" that the senior creditor must consider lor 

costs of the first covered transaction." repay purposes. 

. Otherwise, we request guidance on how the senior creditor 

consider this simultaneous loan. The creditor may not be a

accurately determine the payment amount on these IQans. 

23 

81767.205

MEDIUM PRIORITY 

· [fthe subordinate lien or forgivable grant is not a simultane

i! is not clear how the senior creuitor could verify the exem

We suggest that the CFPB or HUD proviue a website listin

entities. 

· We request guidance on how to verify the status of non-pro

whether they meet the requirements onhe exemption. 

Affiliate Fees 

32. Exemptions from points We request confirmation that points and fees do not include ite

and fees to a creditor's affiliate that are none oftbe following: 

· Finance charge items under § 4(a) or (bl; 

· Section 4(e)(7) charges; · Insurance items listed in 32(b)(I )(iy) or (b )(2(iy). 33. Creditor-paid affiliate Comment 32(b)( I )(i)-I provides: We request confirmation that if a creditor, rather than the consu

fees pays a charge to an affiliate. the charge is not included in point

"In general, a charge or fee is 'known at or before consummation' if I because it is not "imposed in connection with the transaction," 

the creditor knows at or before consummation that the charge or fce I 

will be imposed in connection with the transaction, eyen iflhe 

charge or fee is scheduled to be paid aller consummation," \ 

QM Eligibility 

34. Payments from a Section 34(e)(2)(i) requires QM loans generally to have "rcgular A loan may have substantially equal monthly payments, and a 

subsidy account periodic paymen.ts that are substantially equal[.]" account, from which a contribution is made to the monthly loan 

payments for an initial period of time. We request clarification 

these loans are eligible to be QM loans, regardless of whether t

borrower or the borrower's employer funds the subsidy accoun

35. Loan term for balloon Section 43(b)(6) defines the loan telm as the period of time to repay the For balloon and interest-only loans, is the loan term the "amort

aneilO loans obligation in full. Comment 43(b)(6)-1 gives an example: period on which the periodic amortizing payments are based" o

I"period oftime to pay the obligation in full"? 

"For example, a loan with an initial discounted rate that is fixed for 

the first two years. and that adjusts periodically for the next 28 years i 

24 

81767.206

MEDIUM PRIORITY 

I has a loan term of 30 years, which is the amortization period on which the periodic amortizing payments are hased:' 

36. Agency standards I Proposed comment 43(e)(4)-4 provides that a loan can maintain QM In some cases, it may be difficult to separate requirements that 

unrelated to ability to repay I status under the special agency QM definition if' only the consumer's ability to repay from underwriting require

that include other risk factors. Meeting post-consummation 

"the creditor [does] not satisfy standards that are wholly unrelated to requirements sometimes depends upon third partics, and a failu

assessing a consumer's ability to rcpay that the creditor is required third parties to meet these requirements should not cause the lo

to perform sllch as requirements related to selling, securitizing. or status, For example. in cscro\v states, Fannie Mae requires a fi

delivering already consummated loans and any requirement that the HUD-I signed by the settlement agent, but the creditor cannot 

creditor must perform after the consummated loan is sold. that the settlement agent provides it. Other examples include c

guaranteed, or endorsed for insurance such as document custody, f(lllow-up documentation such as recording documents and wo

quality or servicing," completion escrow documents. QM status needs to bc known 

consummation, so post-consummation requirements should be 

to QM status. We request confirmation that failure to meet po

I . consummation requirements does not cause a loss of QM statu

I Proposed comment 43(e)( 4)-4.i provides that a loan can maintain QM I regardless of who caused the tililure. !37. GSE written waivers i We request confirmation that a elSE's written wahcr of a I I status under the special agency rule ifit meets: I on an indiyidualloan or group of loans would allow the loans o

I 

to retain QM status. 

I "[ S]tandards set lorth in a written agreement between the creditor 

I 

and Fannie Mac or Freddie Mac that permits variation irom the 

I 

standards of [the GSE selling] guides[T 

Fair Lending 

38. ,hil;j and Will the CFPI3. DOJ, or Ill.CD bring disparate impact cases if c

disparate make only QM loans? 

[fa creditor has a Jloliey "fmaking only QM loans but one or 

loans are later deemed to be non-QM because of ambiguities in 

appendix Q, will that creditor be more susceptible to disparate 

liability? 

Guidance on how to reconcile the conmcting l'0licy goals of a

25 

81767.207

MEDIUM PRIORITY 

\ repav requirements and disparate impact would most helpful. 

Record Retention 

39. Record retention Section 25(8) (in the QM rule) and 25(c)(2) (in the loan originator We request confirmation that this does not require each consum

compensation rule) require: mortgage creditor nationwide to retain records showing every G

· Creditors to retain evidence of compliance with Regulation Z for standard applicable to each loan, every Dl! and LP amendment

two years; and information input into DU or LP for every QM loan. 

· Creditors to "records sufficient to evidence all compensation" it We also request confirmation that it does not require retaining 

pays to loan originators for three years. information showing how interest rate reductions for discount 

· Loan originator organizations to retain "records sufficient to I were determined. evidence all compensation" it receives, or that it pays to an 

individual loan originator, for three veal's. I 

Loan Originator Compensation and Qualification 

40. Employees who change Comment 36(1)(3)(i)-3 provides: We request confirmation that this exemption also applies for an 

jobs but not employers employee who ceases to be a loan originator but remains with t

"Section 1026.36(f)(3)(i) does not require the loan originator employer, then returns to a loan originator position still with th

organization to obtain the covered information for an individual I employer. 

whom the loan originator organization hired as a loan originator on I or before January 10, 2014, and screened under applicable statutory 

or regulatory background standards in elfect at the time of hire. ! However, if the individual subsequently ceases to be employed as a 

loan originator by that loan originator organization, and later 

resumes employment as a loan originator by that loan originator 

organization (or any other loan originator organization), the loan 

originator organization is subject to the requirements of 

§ 1026.36(1)(3)0)·" 

26 

81767.208

LOWER PRIORITY 

TOPIC ... . PROv .. RECOMMENDATION 

Points and Fees 

4 L Hazard and credit Section 32(b)(I )(i) includes in points and fees certain finance charge We request that the comment explicitly exclude from points and 

property insurance items. The finance charge definition excludes "any charge of a type homeowner's insurance premiums paid at or before closing. Th

I payable in a comparable transaction." § 4(a). Hazard is a type of insurance covers the dwelling attached to real property, includi

charge payable in a cash purchase, and should not be in points and fees. condominium or cooperative unit, and insures the borrower's in

subject to the mortgage. Comment 32(b)(1 )(iv) addresses these 

Section 32(b)(l)(iv) includes in points and fees (emphasis added); insurance premiums only indirectly. Consumers purchase hom

insurance in a comparable cash transaction so the premiums are 

"Premiums or other charges payable at or before consummation for excluded by § 4(a), yet are included in points and fees under co

any credit life, credit disability, credit unemployment, or credit 32(b)(1)(iv). 

property insurance, or any other life, accident. health. or loss-ofincome insurance for which the creditor is a beneficiary, or any Comment 32(b)( 1 lOy) states that credit property insurance diffe

payments directly or indirectly for any debt cancellation or homeowner's insurance, but docs not make the distinction clear

suspension agreement or contract[.]" distinction that credit property insurance insures only the credit

security interest, while hazard insurance insures the consumer, 

Comment 32(b)( I )Ov) explains that credit property insurance does not to the mortgage? If so, we request confirmation that the premiu

include homeowners' insurance because homeowners' insurance covers at or before closing for required hazard and flood insurance to a 

the consumer's property interest It also explains that accident nonaffiliate are not included in points and fees ifthe consumer 

insurance premiums arc included on points and fees only if the insured and there is a loss payable mortgagee clause. 

consumer is not a beneficiary: 

Is credit property insurance limited to insurance on personal pr

"2. Credit property insurance. Credit property insurance includes such that any insurance on a real property dwelling is hazard in

insurance against loss of or damage to personal property, such as a and therefore not included in points and fees as long as it is exc

houseboat or manufactured home. Credit propelty insurance covers from the finance charge? 

the creditor's security interest in the propcrty. Credit property 

insmance does not include homeowners' insurance, which, unlike Is credit property insurance in §§ 32(b)(l)(iv) and 32(b)(2)(iv) 

81767.209

LOWER PRIORITY 

TOPIC PROVISION RECOMMENDA nON 

credit property insurance, typically covers not only the dwelling but the same way as in § 36(i)(2)(i) (which prohibits financing sing

its contents and protects the consumer's interest in the property, premium credit insurance)? 

3, Life, accident, health, or foss-o}income insurance, Premiums or 

other charges i(lr these types of insurance are included in points and It is not always clear under state law whether a cooperative is r

fees only if the creditor is a beneficiary, If the consumer or another personal property, Is insurance required on a cooperative credi

person designated by the consumer is the sale beneficiary, then the property insurance or hazard insurance? 

premiums or other charges are not included in points and fees." 

Is llood insurance erecJit propertv insurance or insuranc

Ability to Repay 

42. Underwriting standards Comment 43(e)(I)-l.i is intended to permit creditors to select and Underwriting is in part a matter of judgment. There is a large b

based on empirical amend their underwriting requirements: underwriting studies. the extent to which they are empirical is 

information (U1e1 they often conlliet. This comment could result in litigation 

"Section 1026.43(e) and the accompanying commentary describe which empirical information a creditor should have used. whic

certain requirements for making this detennination, be just as subjective as having no "empirical" standard at all. W

but do not provide comprehensive underwriting standards to which suggest removing the phrase "empirical information and" 6'0111 

creditors must adhere. For example, the rule and commentary do not sentence quoted. 

specify how much income is needed to suppurt a particular level of 

debt or how credit history should be weighed against other factors, 

So long as creditors consider the factors set {()rth in § 1026.43(c)(2) 

according to the requirements of § 1026.43(c), creditors arc 

permitted to develop their own underwriting standards and make 

changes to those standards over time in response to empirical 

information and changing economic and other conditions," 

43. Comparatively low Comment 43(c)(1 )-l.ii.A.2 provides that evidence that a creditor's We request a definition of the term ", ,mno",,';vcly Iow[.]" Th

rates of delinquency and ability-to-repay determination was reasonable and in good faith comparison will vary greatly depending on which types of loan

default includes: compared, so additional guidance is needed on how to make th

comparison. 

"The creditor used underwriting standards that have historically 

resulted in comparatively low rates of delinquency and default All delinquencies are defaults, hut not all defaults arc delinque

28 

81767.210

LOWER PRIORITY 

TOPIC PROVISION RECOMMENDA.TION 

during adverse economic conditionsrT Nonpayment defaults are irrelevant to ability to repay. The reg

should not apply to, or consider, defaults other than delinquenc

same clarification is needed in comment 43(c)(I)-l.iLB.l. 

44. Reliance on consumer Comment 43(c)(I)-l.i provides: I We request clarification that a statement by a consumer that th

statements I information in a loan application or in another specified docum

"A consumer's statement or attestation that the consumer has the complete, accurate, and not misleading demonstrates the inform

ability to repay the loan is not indicative of whether the creditor's about whicb the creditor was aware at closing, unless the consu

determination was reasonable and in good faith." provides credible contrary evidence. 

45. Evidence that an Comment 43(c)(1)-1.ii.B.1 provides that evidence that a creditor's A showing of inability to repay should require prooflhat, based 

ability-to-repay ability-to-repay determination was not reasonable or in good faith may infllflnation on which the creditor reasonably relied, including 

determination was not include: information the consumer provided to the creditor, the creditor

reasonable or in good faith determination was faulty. We recommend the (ollowing clarif

"The consumer defaulted on the loan a short time after 

consummation Of, for an or negative: . If a payment default was reasonably unforeseeable at or be

amortization mortgage, a short time after recast[.]" consummation, that payment default should be per se irrele

. If a consumer directly or indirectly provided inaccurate inf

to a creditor who reasonably relied on it, the fact that it was 

inaccurate should be per se irrelevant to the question wheth

creditor's ability-to-repay determination was proper. 

46. Length nf timely Comment 43(e)(I)(ii)-1 provides: This will encourage consumers of OM loans outside the safe h

payments as an indicator of strategically make at least one late payment early afler consum

ability to repay "In addition, the longer the period of time that the consumer has preserve the ability to rebut the presumption. 

demonstrated actual ability to repay the loan by making timely 

payments, without modifieatinn nr accommodation, after This comment appears to assume that the payment increases af

consummation or, for an adjustable-rate mortgage, after recast, the and that the payments bc10re recast arc irrelevant. Some ARM 

less likely the consumcr will be able to rebut the presumption based with a long introductory period have an initial rate that is highe

on insufficient residual income and prove that, at the time the loan lolly-indexed rate. 

waS made, the creditor failed to make a reasonable aod good taith 

determination that the consumer had the reasonable ability to repav We recommend clarification that rebutting the presumt'tion reg

29 

81767.211

LOWER PRIORITY 

TOP[(; PROVISION RECOMMENDATION 

the loan: showing inabiliry to repay, and that mere nonpayment should b

irrekvant. We recommend clarification that a strategic default 

irrelevant, 

We recommend that timely payments on an ARM loan before r

should be evidence of ability to repay, even if the payment will 

after recasc That the payment will increase at recast is relevan

I are a payment decrease after recast, and a pattern of making tim

payments, 

147, Verification of property Comment 43(c)(3)-5 provides: We request clarification that the phrase "provided by a governm

taxes with organization" means directly or indirectly provided by a govern

provided inlarmation "With respect to the verilication of mortgagc-related obligations that organization, such as in the title rcpol1 example, but also in oth

arc property taxes required to be considered under such as wben a service provider obtains the information and pr

§ 1026A3(c)(2)(v), a record is reasonably reliable if the information to a creditoe 

in the record was prov"ided by a govcrnmental organization, such as 

a taxing authority or local government The creditor complies with 

§ 1026A3(c)(2)(v) by relying on property taxes referenced in the 

title report if the source of the property tax information was a local 

taxing authoritv," 

48, Debt or liability Comment 43(c)(2)(\)-3 provides: We request clarilication of the term "any debt or liability speci

specified in appendix Q appendix Q:' Appendix Q uses the terms liabilities, recurring 

"Section 1026A3(e)(2)(\)(B) requires creditors to consider and obligations, other continuing obligations, and contingent liabili

verify the consumer's current debt obligations, alimony, and child each ofthese a "current debt obligation" within the meaning of 

support, For purposes ofthis requirement the creditor must § 43(e)(2)(1')-3? Or arc these appendix Q terms limited to curr

consider and verify, at a minimum, any debt or liability spccilied in obligations? 

appendix Q, A creditor may also consider and verify other debt in 

accordance with § I026A3(c)(2)(vi) and (c)(3); however, such debt 

would not be included in the total monthly debt-to-income ratio 

determination required by § lO26A3(e)(2)(vi)," 

30 

81767.212

LOWER PRIORITY 

TOPIC PROVISION 

49. OTI calculation in I Under § 43(e)(2)(vil, QM loans must have a OTI not exceeding 43 

§ 43(e)(2)(vi) and appendix percent. Section 43(e)(2)(vi) provides: 

Q 

50. Contingent liabilities 

''For purposes 0l'thi5 paragraph (eJ(2)(vi). the ratio of the 

consumer's total monthly debt to total monthly income is 

determined: 

CA) Except as provided in paragraph (e)(2)(vi)(I3) of this section, in 

accordance with the standards in appendix Q; 

(13) Using (he consumer's monthly payment on: 

(/; The covered transaction, including the monthly payment il,y 

mortgage-related obligations, in accordance with paragraph 

(e)(2)(iv) of this section; and 

(2) Any simultaneous loan that the creditor knows or has reason to 

know will be made, in accordance with paragraphs (c)(2)(iv) and 

(c)(6) of this section." 

Comment 43 (e)(2)(vi) provides: 

"As provided in appendix Q, for purposes of § 1026.43(e)(2)(vi), 

creditors must include in the definition of 'debt' a consumer's 

monthly housing expense. This includes, for example, the 

consumer's monthly payment on the covered transaction (including 

mortgage-related obligations) and on simultaneous loans. Accordingly, § 1026.43(e)(2)(vi)(I3) provides the method by which a 

creditor calculates the consumer's monthly payment on the covered 

transaction and on any simultaneous loan that the creditor knows or 

has reason to know will be made." 

Comment 43(c)(2)(vi)-2 provides: 

31 

We request clarification of the specific provisions within appen

which § 43(e)(2)(vi)(A) refers. 

We request clarification that the comment language means: 

"As pre, ieee ia appeadiJ( Q, !For purposes of § 1 026.43(e)(2)( 

creditors must include in the definition of 'debt' a consumer's 

housing expense. This housing expense includes, fer ellSa'plo

consumer's monthly payment on the covered transaction (inclu

mortgage-related obligations) and on simultaneous loans." 

We request cl.a ...r. i.fication of whether th .. e potentialliabilit .. y .. o. .. fan 

applicant for-" non-QM Joan as a surety or 

81767.213

51. Verification of 

simultaneous loan by 

promissory note 

LOWER PRIORITY 

"If one consumer lofmultiple applicants] is merely a surety or I loan should be included in the applicant's debt obligations. 

guarantor, § I 026.43(c)(2)(vi) does not require a creditor to consider 

the debt obligations of such surety or guarantor." 

Comment 43(c)(2)(viii)-2 provides: 

"When two or more consumers apply for an extension of credit as 

joint obligors with primary liability on an obligation, 

§ I026,43(c)(2)(viii) requires a creditor to consider the credit history 

of all such joint applicants. If a consumer is merely a surety or 

guarantor, § 1 026,43( c)(2)(viii) does not require a creditor to 

consider the credit of such surety or,guarantor." 

Comment 43(c)(3)-4 provides: 

"If the creditor knows or has reason to know that there will be a 

simultaneous loan extended at or before consummation, the creditor 

may yerify the simultaneous loan by obtaining third-pany 

verification from the third-pany creditor of the simultaneous loan. 

For example, the creditor may obtain a copy ofthe promissory note 

or other written verification from the third-pany creditor. For fUl1her 

guidance, see comments 43(c)(3)-1 and-2 discussing verification 

using third-party records." 

The referenced comments do not relate to simultaneous loans. The 

relevant portions provide: 

"Records a creditor uses for verification under § 1026.43(c)(3) and 

(4) must be specific to the individual consumer. , . , A creditor also 

may obtain third-party records directly from the consumer, likewise 

32 

The suggestion that a creditor verify a loan that has not closed 

obtaining the promissory note is unclear because the note will n

The creditor of an intended simultaneous loan may not provide 

veritication for any reason, including that the existence and term

loan arc not yet certain. We request clarification that when a th

creditor of a simultaneous loan does not provide verification, th

creditor may rely instead on a borrower's statement about the t

and the terms ot; any simultaneous loan. If available from the 

consumer, the creditor should be able to rely on a copy of the 

application for the simultaneous loan. 

81767.214

LOWER PRIORITY 

TOPIC YKUVI,'SlUN " .. RECOMMENDATION 

as long as the records are reasonably reliable and specine to the 

individual consumer." 

52. Water bills should be Comment 43(b)(8)-2 includes property taxes, denned broadly, in Certain services, such as water, sewer or trash services may be 

excluded from m0l1gage- mortgage-related obligations: by either a private company or a government. Where a govern

related obligations imposes charges for such services, the charges should be explic

"Section I026,43(b)(8) includes obligations that arc equivalent to excluded from mortgage-related obligations because they have 

property taxes, even if such obligations are not denominated as relation to the mortgage loan. 

'taxes.' For example, governments may establish or allow 

independent districts with the authority to impose levies on 

properties within the district to fund a special purpose, such as a 

local development bond district, water district, or other public 

purpose. These levies may be refen-ed to as taxes, assessments. 

surcharges, or by some other name. For purposes of § I026.43(b)(8), 

these are property taxes and are included in the determination of 

mortgage-related obligations." 

53. Roommate or boarder As it would be amended by the CFPB's April 19,2013 proposed We recommend defining the terms roommate and boarder sO th

rulmaking, appendix Q § II.D.3 would read: differenceS between the terms are known. 

"a. Income from roommates in a single family propcl1y occupied as 

the consumer's primary residence is not acceptable. Rental income 

hom boarders however, is acceptable. 

b. The rental income may be considered effective, if shown Oil the 

consumer's tax retum. If not on the tax return, rental income paid by 

the boarder may not be used in qualifving." 

Refinance of Nonstandard Loan 

54. Use of proceeds of Section 43(d)(l)(ii)(E) provides that proceeds ofa standard mortgage We suggest the proceeds also be able to be used to pay for a pa

standard mortgage may be used only to payoff the nonstandard loan and to pay closing statement and a lien release on the nonstandard loan, and, telf a 

costs required to be disclosed under RESPA. Comment 43(d)(l)(ii)(E)- appreciation nonstandard loan, an to determine the 

I provides: ! amount These would be consistent ;'ith the intent of the reQu

33 

81767.215

LOWER PRIORITY 

TOPIC PROVISION RECOMMENDATION 

comment. 

"If the proceeds of a covered transaction are used for other purposes, 

such as to payoff other liens or to provide additional cash to the 

consumer lor discretionary spending, the transaction docs not meet 

the definition a fa 'standard mortgage, ", 

55. Thirty days as Under § 43(d)(5)(i)(A), in calculating the payment on a nonstandard We recommend removing the word "generally" because it crea

"gencrally" a reasonable mortgage, creditors may use the fully-indexed rate as of a reasonable of substantial ullceltainty lor no apparent reason. If the word rem

amount of time time before or allcr the creditor receives the application. Comment request clarification of all circumstances under which thirty da

43(d)(5)(i)-2 provides: not be a reasonable amount of time. When thirty days is not a 

reasonable amount o{'time, we request clarification of how the 

"Thirty days is generally considered 'areasonable period of time'" is to know what is reasonable. 

(emphasis added). 

Refinancing nonstandard loans that the borrowers can anord in

standard loans with materially lower payments are a clear borr

benefit and do not raise ability-to-repay concerns. There shoul

few restrictions on this Consumer benetit as is reasonablY possi

56. Payment calculation for In calculating the payment on a nonstandard loan under § 43(d)(5)(i), it We request clarification ofthc calculation for a nonstandard lo

nonstandard loan- is not clear whether the creditor must take into account any actual which the consumer has made optional prepayments belore rec

relevance 0 factual prepayments on the nonstandard loan. For 10 loans, § 43(d)(5)(i)(C)(2) 

prepayments directs the creditor to base the calculation o[the payment on a 

nonstandard loan on: 

"[T]he outstanding principal balance as orthe date of the recast, 

assuming all schedukd payments have been made up to the recast 

date and the payment due on the recast date is made and credited as 

of that dater· I" 

Comment 43(d)(5)(i)-6 provides: 

-------------

34 

81767.216

LOWER PRIORITY 

TOPIC PROVISION .. / <DATION 

"First, the payment must be based on the outstanding principal 

balance as of the date ofthe recast, assuming all scheduled payments 

are made under the terms of the legal obligation in effect before thc 

mortgage is recast. por a loan on which only interest and no 

principal has been paid, the outstanding principal balance at the time 

of recast will be the loan amount, as defmed in § 1026.43(b)(5), 

assuming all scheduled payments are made under the terms of the 

legal obligation in effect before the mortgage is recast. For example, 

assume that a mortgage has a 30-year loan term, and provides that 

the tirst 24 months of payments are interest-only. If the 24th 

payment is due on September 1,2015, the creditor must calculate the 

outstanding principal balance as of September 1,2015, assuming 

that all 24 payments under the interest-only payment terms have 

been made and credited timely and that no payments of principal 

have been made." 

, Even if all scheduled payments are made, it is possible that the borrower 

made some optional prepayments. The example in this comment 

assumes the consumer has made no principal payments, and the 

example in comment 43(d)(5)(i)-7 also assumes the consumer has made 

no principal payments. The explanation of the issue concerns an lO 

loan, but the same question arises for actual prepayments on a 

nonstandard ARM loan. 

I For negative amOltization loan, comment 43(d)(5)(i)-S.i provides: 

I "If the consumer makes payments above the minimum periodic 

payments for the maximum possible time, the creditor must calculate 

the maximum loan amount based on the outstandino principal 

35 

81767.217

LOWER PRIORITY 

TOPIC PROVISION RECOMMENI>A nON 

balance." 

It is unclear why this ex'mple is limited to a consumer who makes 

payments above the minimum requirement "for the maximum possible 

time" as opposed to a shorler period. Is this the only circumstance in 

which the creditor must consider the actual outstanding principal 

balance? 

Loan Originator Compensation and Qualification 

57. Revising compensation Comment 36(d)(l)-6 (in the loan originator compensation rule) How often can compensation change, and can it change in resp

plans provides: loan production? 

"Section 1026.36 does not limit a creditor or other person from 

periodically revising the compensation it agrees to pay a loan 

originator. However. the reyised compensation arrangement must I 

result in payments to the loan originator that are not based on the I terms of a credit transaction. A creditor or other person might I 

periodically review [actors such as loan performance, transaction 

volume, as well as current market conditions for originator 

compensation, and prospectively revise the compensation it agrees 

to pay to a loan originator." 

58. Long term loan Commen136(d)(I)-2.i.B permits compensation based on the long-tenn What is the definition of long-term performance? If a loan orig

performance performance of an originator's loans. will receive a payment each month after origination that the lo

delinquent, would all such payments be considered payments f

term loan pertormance? 

Appendix Q 

59. Applicability Appendix Q is entitled Appendix Q 10 Part We request confirmation that appendix Q applies only to § 43(

Determining Afontilly Debt and Income. and (vi), and that it does not apply to debt and income determi

under § 43(c). 

36 

81767.218

LOWER PRIORITY 

TOPIC PROVISION R'" ,n .m4TION 

6(), Verification of part- ! Appendix Q § LA.3.a.iv provides that creditors must examine the We request clarification that if an application lists part-time em

time employment ' "employer's confirmation of continued employment.'· Section 1.B.4.a and if the verification of employment has no evidence that emp

provides: is not going to continue, that the creditor has adequately docum

that the income will continue. 

and seasonal income can be used to qualify the consumer 

irthe creditor documents that the consumer has worked the part-time 

job uninterrupted [or the past two years, and plans to continue. Many 

low and moderate income families rely on part-time and seasonal 

income for day to day needs. and creditors should not restrict 

consideration ofsuch income \vhen qualifying these consumers:' 

61. Conclusive evidence of Appendix Q § IV.2 provides: We request contirmation that copies of cancelled checks that th

no debt collection holder cashed are surticient, even if they are not obtained from 

"The contingent liability policies described in tbis topic apply unless holder, 

the consumer can provide conclusive evidence from the debt holder 

that there is no possibility tbat the debt holder will pursue debt 

collection against him/her should the other party default." 

62. Income reasonably The CFPB proposes to remove language from § l.B.l.a about income We request clarification of how far into the future creditors mu

expected to continue reasonably expected to continue "through at least the first three years of ' reasonably expect income to continue. 

the mortgage loan." 

63. Cost of tax transcripts The CFPB has proposed to remove two statements. in §§ l.B.7 note iii We request clarification that that this change docs not prohibit 

and I.C, that the cost oUhe transcript may be charged to the consumer, creditor from charging the consumer for the transcript if otherw

permitted bv law. 

Other 

64. Detlnition of "of [or" Section 43(g)(3) provides: When a loan is offered is not clear. We suggest clarilication th

for alternative offer creditor may comply by documenting that the creditor made th

";\ creditor must not 0 ffer a consumer a covered transaction with a consumer aware of the alternative covered transaction. 

prepayment penalty unless the creditor also oners the conSllmer an 

alternative covered transaction without a prepayment penalty . . , 

65. Fully-indexed rate lor Comment 43(c)(5)(i)-5.iii describes a "fully-indexed ratc" for a step-rate We recommend clarification that step-rate loans do not have a 

37 

81767.219

LOWER PRIORITY 

TOPIC PROVISION tATION 

step-rate loans loan: indexed rate, and that their payment calculation under § 43(c)(5

the maximum rate that may apply during the loan term. Otherw

"A loan in an amount of $200,000 has a 30-year loan term. The loan § 43(c)(5)(i)(A) would appear to usc the introductory rate on a 

agrcement pro\'ides that the interest rate will bc 6.5 percent for the loan. which was not the intent. 

first two years orthe loan, 7 percent for the next three years of the 

loan, and 7.5 percent thereafter. Accordingly. the scheduled payment 

amounts are $1 ,264 for the first two years, $1.328 for the next three 

years, and $1,388 thereafter fi)!' the remainder of the term. For 

purposes of § 1 026.43(e)(2)(iii), the creditor must determine the 

consumer's ability to repay the loan based on a payment 01'$1,398. 

which is the substantially cqual, monthly, fully amortizing payment 

that would repay $200,000 over 30 years using the fully indexed rate 

of7.5 percent." 

Section 43(b)(3) defines a fully-indexed rate as a rate that applies after 

recast, and recast is not ddincd for step-rate loans. 

66. Nonjudicial foreclosure Section 36(h) provides: We request confirmation that this docs not prohibit nonjudicial 

, loreclosure in the event of any default. 

"A contract or other agreement for a consumer credit transaction I secured by a dwelling (including a home equity line of credit 

secured by the consumer's principal dwelling) may not include I 

terms that require arbitration or any other non-judicial procedure to 

resolve any controversy or settle any claims arising out of the 

transaction. " 

67. FHA or Regulation Z Section 32(b)(I)(i)(C)(2) includes upfront PMl premiums in points and When calculating what portion of a non-FilA uptront MIP is in

definition of loan amount fees only if the premiums exceed an FHA premium amount: points and fees in Regulation Z, wc request clarification and ex

of how to calculate the loan amount, and whether it varies base

"Ifthe premium or other charge is payable at or before whether the borrower finances the up front MIl'. 

consummation, Ipoints and fees exclude] the portion of any such 

38 

81767.220

LOWER PRIORITY 

TOPIC PROVISION RRf:OMMENDATION 

premium or other charge that is not in excess of the amount payable The borrower may not decide whether to finance an MIP or pay 

under policies in effect at the time of origination under section closing until late in the origination process. Creditors need to k

203(e)(2)(A) of the National Housing Act (12 U.S.C. amount of points and fees as early as possible. For this reason. 

1709(e)(2)(A)), provided that the premium or charge is required to recommend that the amount included in points and fees may be 

be refi.mdable on a pro rata basis and the refund is automatically calculated as if the consumer will finance the amount, even if t

issued upon notification of the satisfaction orthe Llllderlying consumer later decides not to do so. 

mortgage loan[.]" 

FHA upfront premiums are calculated as a percentage o[the "base loan [We have reached out to the mortgage insurance industry [or a 

amount" without the premium even if the borrower tinances it. FHA recommendation on how to resolve this question. We will upd

Mortgagee Letter 2,(1.12-4 provides: document when we receive feedback.] 

"FHA will continue to permit financing orthis [uptront MIPj charge 

into the mortgage and will continue to calculate actoal premium 

charges against the base loan amount before adding any financed 

UFMIP." 

Section 32(b)(4)(i) defines the total loan amount as: 

"The total loan amount for a closed-end credit transaction is 

calculated by taking the amount financed, as determined according 

to § 1 026.18(b), and deducting any cost listed in § 1 026.32(b)( 1 )(iiiJ 

[4(c)(7) fces]. (iv) [credit insurance. etcl or (vi) [prepayment 

penaltics J that is both included as points and fees under 

§ 1 026.32(b)( 1) and nnanced by the creditor." 

The refercnced § 18(b) defines "amount financed" to include the 

principal loan amount: 

39 

81767.221

LOWER PRIORITY 

TOPIC PROVISION u .nON 

"'The amount financed is calculated by: 

(I) Determining the principal loan amount or the cash price 

(subtracting any downpayment); 

(2) Adding any other amounts that are tinanced by the creditor and 

arc not pan of the finance charge; find 

(3) Subtracting any prepaid tinance charge." 

This definition deducts amounts financed only if they are not part ofthe 

finance charge. MIPs arc part orthe finance charge. § 4(b)(5), meaning 

that. under § 32(b)(4)(i), MIPs are included in the amount Ilnanced if 

the borrower tinanees them. 

Section 43(b)(5) delines loan amount as: 

"Loan amount means the principal amount the consumer will 

horrow as rcHected in the promissory note or loan contract." 

If a borrower finances a finance charge item. such as an up[ront MIf', it 

mayor may not be included in the promissory note. See comment 

18(b)(3). 

68. Typographical error Comment 43(c)(5)(i)-5.iii gives an example of the same payment 

amount on a loan, once as 51388 and once as $1398. Both should be 

$1398. I 

40 
265 


81767.222

June 18. 20]3 

Qualified Mortgage Rule Will 

Jeopardize Access to Credit 

On behalfofthe 7.000 community banks represented by the Independent Community Bankers of 

America (ICSA).thank you for convening today's hearing titled: "Examining llow the DoddFrank Act Hampers Home Ownership." We appreciate the opportunity to submit this statement 

for the record. 

Ref,)fm of the Consumer Financial Protection Bureau's qualilied mortgage/ability-to-repay 

("QM") rule is a key plank of ICBA's Plan for Prosperity: A Regulatory Relief Agenda to 

Empower Local Communities. ICBA Chairman William A. Loving. Jr. detailed our concerns 

with the QM rule in his testimony at your April 16 hearing on community bank regulatory 

burden. Since that hearing. on May 29. the CFPll issued amendments to QM rule which make 

accommodations for community banks. While ICBA supports these amendments. they do not go 

far enough to preserve access to credit Ii" community bank customers. The Plan for Prosperity 

calls for legislation that would provide safe harbor QM status for community bank loans held in 

portfolio. including balloon loans in rural and non-rural areas and without regard to their pricing. 

This legislative proposal is discussed in more detail later in this statement. 

Balloon lv[ortgages Pia), Esen!ial Role il7 Rural Communities 

Community hanks are responsible mortgage lenders that did not participate in the abuses that 

contributed to the financial crisis. Community banks help borrowers in rural communities where 

non~traditjonalloans slich as balloon mortgages are prevalent due to the unique nature ofmral 

properties. These loans are not eligible to be sold into the secondary market and are kept in 

portfolio. which gives community banks a vested interest in the quality of these loans and allows 

them to work out a solution directly with the borrower if repayment problems arise. 

QM Rule Does Not Adequately Protect Community Dank Balloon Mortgoges 

While the CFPB's QM rule allows balloon loans made by small creditors that operate 

predominantly in rural or underserved areas to be qualit1ed mortgages, the Bureau's det1nition of 

'''rural'' is too narrow and assumes an entire county is either rural or non-rural. which is 

inherently inaccurate. As a result, too many communities arc denied rural status and 

unnecessarily cut off from access to credit. When a balloon loan does not receive Qi'.-1 safe 

harbor protection. the lender is exposed to undue litigation risk. Many community banks arc not 

willing to assume that risk and will exit the mortgage lending business. The CFPB's recent 

amendment to the QM rule provides a two-year transition period during which balloon loans 

made by "non-rural" lenders can obtain QM status. 

Attached to this statement is a state-by-state map ofmral county designations. Members of this 

committee may be surprised at the rural county designations within their own states and 

concerned that many areas of the state arc not covered. Also attached is ICBA's recent 

Community Bank Qualified Mortgage Survey. which underscores the signit1cancc of balloon 

1615 L Street NW, Suite 900. Washington, DC 20036 • 202·659·8111 • Fax 202-659-9216 • www.iebu.org 
266 


81767.223

loans to community bank customers and the failure of the CFPWs definition of "rural" to protect 

these loans, 

A Clean Fix is iVeeded 

As an alternative to the CFrD's QM rule, ICBA is pressing for a clean solution that avoids 

complex and unbalanced rural designations, Our preferred solution relics on the natural incentive 

of lenders to ensure that loans held in portfolio arc alfordable to the borrower and to work with 

the borrower should they encounter difficulty in repayment 

ICBA's Plan for Prosperity solution to this new regulatory threat is simple, straighltorward, and 

will preserve the community bank lending model: Safe harbor QM status for community bank 

loans held in portfolio, including balloon loans in rural and non-rural areas and without regard to 

their pricing, When a community bank holds a loan in portfolio it holds 100 percent oflhe credit 

risk and has every incentive to ensure it understands the borrower's financial condition and to 

work with the borrower to structure the loan properly and make sure it is affordable, Withholding 

safe harbor status for loans held in portfolio, and exposing the lender to litigation risk, will not 

make the loans safer, nor will it make underwriting morc conservative, it will merely deter 

community banks from making such loans in the many counties that do not meet the definition of 

rural. 

The CLEAR RelielAct 

ICBA thanks Representative Blaine Luetkemeyer, a former community banker, for including a 

provision in the CLEAR Relief Act (H,R, 1750) that would accord QM status to mortgages 

originated and hcld in portfolio for at least three years by a lender with less than $ J 0 billion in 

assets, ICBA strongly SUPpOlts the CLEAR Relief' Act because it contains this provision in 

addition to other key mortgage and non-mortgage provisions of the Plan for Prosperity~ and we 

encourage this committee to consider it. 

Thank you again f'l!' the opportunity to suhmit this statemcnt for the record, ICBA looks forward 

to working with this committee to reform the QM rule to properly recognize the importance to 

our rural economies and housing market of balloon loans originated hy community banks and 

held in portfolio, 

Attachments 

State-By-State Rural County Designation Maps (bluc counties arc rural; yellow arc 

non-rural) 

Community Bank Qualified Mortgage Survey 

1615 L Street NW, Suite 900, Washington, DC 20036 • 202·659·8111 • Fax 202·659·9216 • www,icna,org 
267 


81767.224

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INO[PENDfNT COMMUNITY 

B!-\NKERS cf AlvHRICA<f/, 

Community Banl{ Qualified Mortgage Survey: Summary of Findings 

leBA conducted a survey to gather data on the impact of the accommodations for community 

banks in the CFPB's Qualified Mortgage/Ability to Repay rule. leBA requested information on 

community banks' residential first-lien mortgage lending activities for 20 12. 

ICBA distributed the survey to its membership between February 7 and Fcbruary 14,2013 and 

requested that the survey be directed to the member of bank staff best prepared to answer 

questions on the topic. ICBA received 380 responses, a response rate of approximately 8%. 

For the purposes of our analysis, respondent community banks were selected for peer groups 

based on their responses to qucstions on their asset size and the geographic areas served. 

Key 

Among the 75% of respondent commnnity banks that currently make balloon 

mortgages, less than half(46%) wonld qualify for the balloou mortgage exception to 

the Qualified Mortgage/Ability to Repay rule, 

For respondent community banks that consider themselves to be rul'al banks, 44%. 

do not qualify as "rural" under the rule's definition. 

Among the community banks that do not qualify for the halloon exception, most are 

disqualified primarily on the basis of the definition of "rural" (43% overall) or 

limited by a combination of the 500 loan annual originations cap and the definition 

of "rural" (9% overall), 

Among respondent community banks, an overall average of 64% of originated 

residential mortgage loans are held in the bank's portfolio for the life of the loan. 

The lIlajority of respondent banks (52%) hold at least 80% or more of the loans 

originated for the life of the loall. 

Only 33% of the respondents originate and hold ARMs in portfolio. Smaller 

community banks are less likely than average to originate and hold ARMs in 

portfolio. 

Most respondents (64%) indicate they make higher-priced mortgage loans and 

provide escrow accounts for them (as required by federal regulation). 

May 9. 2013 
321 


81767.278

Mortgage Originations 

Most of the responding banks (90%) originated fewer than 500 mortgage loans in 2012. Almost 

all responding banks with less than $100 million in assets did so (98%). Most banks with $1 01-

$250 million in assets originated fewer than 500 mortgages (95%). 

While the balloon exception is for banks with up to $2 billion in assets. larger community banks 

find it more difficult to qualify for the exception based on the number of mortgages originated. 

Nearly one-fourth (24%) of respondent banks with $25 J -500 million in assets will be unable to 

use the balloon exception because they originate more than 500 mortgages. Only 55% of banks 

with more than $500 million in assets originate fewer than 500 loans, so 45% of banks in this 

category will be unable to qualify for the balloon exception based on the number of originations 

(Figure I). 

Figure t: Ho,,, many r.csidenliai f1rst-Hcn mortgage imms did your hank origin;'ltC' during thl' 

calcndar year l012? 

Iii Under $100 million il!I $101-$250 million liS $251-$500 million $501 million or More 

Less than 500 

500-1000 

More than 1000 

Loans Held in Portfolio 

Among respondent community banks an overall average of 64% of residential mortgage loans 

are held in the bank's portfolio for the life of the loan. The majority ofrcspondent banks (52%) 

hold at least 80% or more of the loans originated for the life of the loan (Figure 2). 

Larger community banks hold a smaller percentage of loans in portfolio for the life of the loan. 

Among respondent banks with more than $250 million in assets, 46% of originated loans are 

May 9, 2013 
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81767.279

~A INO[PfNDENT COMMUNny 

BANKERS ofAMER1CA<& 

held in portfolio for the life of the loan. compared to 65% for banks with $101-250 million and 

72% [or banks with less than $100 million in assets. Also. rural banks hold a higher percentage 

of originated loans in pOlifolio (68%) compared to suburban (53%) or urban (43%) banks 

(Figure 2). When we examine the data as the percentage of respondents that fall within 

percentage ranges, the same trends are apparent (Figure 3 & 4). 

Figure 2: \Yhat perc('otagt' of th~ loans 

for life of the ~!call 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

2012 arc to be in II", ha!lk'~ portfolio 

Figure 3: ,\ill,,! p('rcen!ag" of ihe loans originated in 2012 arc to he retained in Ihe hank's portfolio 

for the life ofthe IOlln'? Percen!" itllin Ranges hy Asset Size 

iii Under $100 million iii $101-$250 million ill $251-$500 million III $501 million or more 

0-20% 

20-40% 

40-60% 

60-80% 

80-100% 

May 9, 2013 
323 


81767.280

1IfI3A INDEPEND~NT COMMUNI1Y 

BANKERS (1/ AMERfC:A® 

Figure..t: "/hat pcrccntag'c of the loaus originalt'd in 20i2 are he rebiincd in the hani(s portfolio 

for the life ofthe toan? Percellt "ilhin Ran!.',es lJ~" Geognlphy 

iii Urban iii Suburban li1 Rural 

0-20% 

20-40% 

40-60% 

60-80% 

80-100% 

Adjustable Rate Mortgages 

Asset size makes little difference to the percentage of adjustable rate mortgages (ARMs) with all 

peer groups close to the overall average of 36%. However, banks that report serving urban 

markets made fewer ARMs as a percentage of overall loans than other banks (29%, Figure 5). 

Figure 5: '~Vhat percentage of your bank's residential first-Ht,o mortgagl'ioans held in portfolio 

han atijustablr rales (AHMs)? 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

May9.2013 
324 


81767.281

UIIC-llll.'U (33%) of respondent banks indicate they have no ARMs in their portfolio and 

institutions with less than $250 millioll in assets arc even less likely to have ARMS in their 

portfolio (Figure 6 & 7). 

Figure 6: What pen'clllagr or you)' bunk's residential IIrst-licn lI1ortgag,' 

have adjustable rat"s (AR'\ls)? Perc"Il!" itlli" Hanges by Assri Size 

held portfolio 

iii Under $100 million !II $101-$250 million iii $251-$500 million iii $501 million or more 

0% 

1-20% 

20-40% 

40-60% 

60-80% 

80-100% 

0% 10% 20% 30% 40% 50% 

Figure 7: '''hal percentage of your bank's residen!!:.1 first-liellll1ortgagc toans heW in portfolio 

han adjustable raN's (ARMs)? Percent within nanges hy Ge()graphy 

iii Urban III Suburban iii Rural 

0% 

1-20% 

20-40% 

40-60% 

60-80% 

80-100% 

May9.2013 
325 


81767.282

JI1.BA INDEPENDENT COMMUNITY 

BANKERS o,f AMERICA' 

Higher-priced Loans 

Bank asset size has a more substantial impact on loan pricing. For respondent banks with less 

than $100 million in assets. mosl loans (74%) have an APR that exceeds the APOR by more than 

1.5 percentage points. For banks serving rural areas. 62% of loans exceed the APOR hy 1.5 

percentage points and 22.5% exceed the APOR hy more than 3.5 percentage points (Figure 8). 

This reflects the higher cost of funds and operations for smaller banks and rural banks. 

Figure 8: "/bat pcn:enhlg(' resiueut{}ll first-lieu mortgag(~ loans originated your hank fHrn' 

Annnall'crccntage Hate (APR) that exceeds the A.ycnl~e Prime Offer Rale (Al'OR) for Illortgage 

by liu: foHoy,"ing amounts? 

iii Under $100 million III $101-$250 million iii $251-$500 million 

1.5 - 3.4 percentage points 

greater than the APOR 

3.5 percentage points or more 

greater than the APOR 

$501 million or More 

Most respondents (64%) indicate they make higher-priced mortgage loans and provide escrow 

accounts for them (as required by federal regulation. Figure 9). Fewer banks with less than $100 

million in assets provide escrow accounts, with one-third (33%) indicating they do not provide 

higher-priced loans because they cannot or choose not to satisfy the escrow requirements. 

May 9, 2013 
326 


81767.283

Figure 9: Does ~{)ur hank currently provide ('5cro,,\· accounts for loans decHlNi to he higher-priced 

m.ortgage loans'! 

III Under $100 million III $101-$250 million Iii $251-$500 million iii $501 million or more 

YES, we provide escrow accounts for these 

loans and maintain the accounts in-house. 

YES, we provide escrow accounts for these 

loans but outsource the servicing for the 

escrow accounts. 

NO, we don't provide higher-priced loans 

because we cannot or choose not to satisfy 

the escrow requirements. 

NO, we don't provide higher-priced loans 

regardless of the escrow requirements. 

0% 10% 20c;{, 30% 40% 50% 60% 70% 809<6 90% 

Most respondents (62%) have had a borrower request an escrow account, with institutions with 

more than $250 million in assets being more likely to have had slich a request (more than 80%). 

The majority of respondents (55%) provided at least one escrow account at the borrower's 

request during 2012, but most often less than five (24%). 

May 9, 2013 
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81767.284

I N[)(PENDtNT COMMUNITY 

BANKERS of AMER1CA<F 

Balloon Mortgages 

Most respondents (73%), including a majority of banks in all peer groups, currently make 

balloon mortgages. Many that do not currently make balloon loans may do so in the future (5%). 

Smaller banks are more likely to currently make balloon mortgages (Figure 10). 

Figure 10: Does your hank currcnH) offer hannon nwrtgagcs? 

iii Make balloon mortgages III May in future 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or More 

Urban 

Suburban 

Rural 

Among survey respondents that currently make balloon mortgages less than half (46%) of 

community banks would qualify for the balloon mortgage exception. Approximately half of 

community banks with less than $100 million in assets, between $101-$250 million in assets and 

indicating that they serve rural areas would qualify (Figure II). Few larger community banks 

would qualify, including only one-in-three (33%) of community banks with $251-$500 million 

in assets and one-in-twelve (8%) community banks with more than $50 I million in assets would 

qualify. 

May 9, 2013 
328 


81767.285

Figure 1 i: I't:rcentagc of Communitj' Banks Qualif.~ ing for B}lUOOn :Vlortgage Exc(:ption hy Peer 

Grollp 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

Community banks that do not qualify for the exception arc disqualified primarily on the basis of 

the definition of "rural" (43% overall) or a combination ofthe number of originations and the 

delinition orrural (9% overall), Only I % of banks are disqualified based solely on the number of 

originations. 

tvlost banks with less than $250 million in assets that currently make balloon mortgages but 

would be unable to qualify for the exception arc disqualified by the definition of rural. Larger 

banks with more than $250 million in assets are likely to be disqualified by both the number of 

originations and the definition of rural (Figure 12). Given the impact of these factors the $2 

billion asset clIt-offhas little meaning. and few community banks with $50 I million - $2 billion 

in assets will qualify for the balloon exception. 

May 9. 2013 
329 


81767.286

INOFPfNDfNT COMMUNIlY 

BANKERS ofAMERfCA't, 

Fig"", 12: Pen'cntagc of Community Banks l)i5'l"alil1cd I,"' Balloon Mortgage Exception by 

Qualif'ying Factor 

ill! Originations only III Rural definition only iii Both originations and "rural" definition 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

Qualifying under the Rural Definition 

Most small and rural banks originate loans in only one or a handful of counties, with 92% of 

banks with less than $100 million in assets serving 5 or fewer counties and 98% of banks in this 

size category serving 10 or fewer counties. For rural banks, 72% serve 5 or fewer counties and 

90.5% serve 10 or fewer counties. 

Overall, fewer than half of respondent banks (47%) indicate they make more than 50% of 

mortgage originations in qualifying counties in neither a metropolitan statistical area (MSA) nor 

an adjacent micropolitan statistical area under the definition of rural ill the Ability-toRepay/Qualified Mortgage ru Ie. 

Significantly, among banks that indicate they serve rural areas, 56% make more than 50% of 

their mortgage loans in qualifying counties - that means 44% ofrespondent rural banks will not 

meet the standard of "rural" in the QM rule. Only 5% of respondent banks with more than $500 

million in assets indicate that they will meet this requirement (Figure 13). 
330 


81767.287

Figun· 13: Does your hank proyid(' O'H.'f SOl;;;) .of its rrsidenii:1i first-Ikn mortgage loans in counties 

thai arc lI<,hllt'r ill a m;;tmpoli!all statistic"l arca (MSA) !lor ill a micropolit'lll statistical area 

ad,iacellI to all MSA'! - Y cs Responses 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

[flhe definition ofmral were expanded to include all counties outside MSAs. more banks would 

qualify as rural. including 21 % of banks with more than $500 million in assets. However. banks 

serving urban and suburban markets in addition to rural markets will continue to find it difficult 

to qualify for the exemption. i And 36% of banks that characterize themselves as rural still 

would not meet the QM detinition of rural (Figure 14). 

Figure 14: Does your bank provide on.T 5W}'1\ of its n:~idrntial first-Jit'n mortgage loans in counties 

that arc outside an :VISA (en'i1 if some arc ill mirropolitall cOl1Il!ks)? - Yes Respollses 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

I Among banks serving rural areas, 11 % indicate they also serve urban areas and 19% indicate they also serve 

suburban areas, This degree of overlap is slightly higher than previous ICBA surveys. including the 2012 lCBA 

Community Bank Overdraft Study (7% and 18% respectively) and the 2011 Community Bank Payments Survey 

May 9. 2013 
331 


81767.288

BANK[RS (~rAML.RICA~ 

The ml~ority of banks of all asset size groups except (hose with less than $100 million in assets 

have most of (he branches located inside an MSA (Figure 15). 

Figlln, 15; Pcn'('ntagc of HnmdH's Located l\1SA 

III Less than $100 million 

iii $501 million-$l billion 

Q" " 

0-25% 

25-50% 

13 50-75% 

" '" u 

~ 0. 

75-100% 

iii $101-$250 million 

01 $1.1-$2 billion 

FDIC Su!llIlUn'~' of ()cPOS!!S 2011 

III $251-$500 million 

May 9, 2013 
332 


81767.289

Detailed Data on Mortgage Lending in Rural Areas 

Banks with under $1 00 million and $101-250 million in assets originate an average of half of 

their mortgage loans in qualifying counties that are in neither an MSA nor an adjacent 

Micropolitan Statistical Area (52% and 50% respectively, Figure 16). 

Figure 16: \Vhat pcrcl.'ntagc orIhe residential tlrst-Hrn mortgage ioans originated 2012 lrere 

Inea(·d ill meeting tilt' following description? "idtl!,,[ in l\lSA 1101" in Adiacent 

Micropolita" ,"icall 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

0% 10% 20% 30% 40% 50% 60% 

Banks with less thall $500 million in assets originate an average of more than 50% of their 

mortgage loans outside of MSAs (Figure (7). 

Figure 17: What 1>e1"C('ntage of the residenliall1rsl-liell 

located in counties ml't~ting thc following drsc-ription? ;\ot in 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

loans originated in 2012 "HC 

~ l\'lean 

0% 10% 20% 30% 40% 50% 60% 70% 80% 

However, 47% of banks with less than $100 million in assets and 48% of those with $101-250 

million in assets originate fewer Ihan40% of their loans in qualifying cOllnties. For banks with 

$251-500 million in assets, 60% originate less than 40% of mortgage loans in qualifying counties 

May 9, 2013 
333 


81767.290

(Figure 18). This means most banks larger than $250 million in assets will not qualify under the 

structure of the current definition. evcn if the threshold is shirted significantly. 

Figure 18: What prrcclltagc oftlw IIrsl-lien mOl"!!.:"!!C loans originated in 2012 were 

lncated in coullties meeting the following description"! ;>.;eithcr MSA in adjacent micropoii!all 

- Per(;('nt \, ithin ranges 

!iii Under $100 million l1li $101-$250 million III $251-$500 million liil $501 million or more 

0-20% 

20-40% 

40-50% 

50-60% 

60-100% 

0% 10% 20% 30% 40% 50% 60% 70% 80% 

Few community banks with more tban $500 million in assets will meet the 50% standard, with 

only 5% making morc than 50% of mortgage loans in qualifying counties. An additional 14% of 

banks with more than $500 million in assets make between 40-50% of their mortgage loans in 

qualifying counties. 

Including Micropolitan Statistical Arcas adjacent to MSAs in the definition of rural might be 

expected to increase the number of banks that qualify for the exception; however, the impact is 

limited. While the average percentage of mortgages originated outside MSAs is below 50% for 

all assets size peer groups under $500 million in assets, when respondents arc grouped into 

ranges. few banks fall near the threshold (Figure 19). 

May 9, 2013 
334 


81767.291

Figure 19: "\hat pcrcentagt' of the residential iirst-licn mortgage loans orig.inated in 2012 'H:!"C 

IO(,;:lted in t'onnties uH.'cting tilt, foHo\Ying tit'scription? f\;ot in )'ISA - Percent \'dthin Hangcs 

liii Under $100 million 1\1 $101-$250 million iii $251-$500 million iii $501 million or more 

0-20% 

20-40% 

40-50% 

50-60% 

60-80% 

80-100% 

Balloon Lending Alternatives 

Some banks would consider providing ARMs as an alternative to balloon loans (36%) or 

increasing ARM lending (29%). However 19% of respondents indicate they would greatly limit 

mortgage lending or exit the business altogether if restrictions on balloon lending become too 

burdensome, with the impact greatest among banks with less than $100 million in assets (34%) 

and those serving rural areas (21 %. Figure 20-21). 

May 9, 2013 
335 


81767.292

Figure 20: Iffrd(:ral resirit'tions on haBoon m{)rtgagi.~ loans hCt'arne too hurc!('U:-10HU' ,,\ould your 

ballk ever consider providing AnMs llll alterlllltivc7 B)' Asset Sin' 

.. Under $100 million II $101-$250 million !iii $251-$500 million I:! $501 million or more 

YES, our bank would consider providing ARM 

loans 

NO, our bank would not offer ARM loans 

YES, our bank would increase ARM loans 

NO, our bank would not increase ARM loans 

NO, we will greatly limit or exit the mortgage 

business 

figure 21: If federal restrictions on halloon 

bank ever consider providing ARi\ls as an 

0% 

III Urban iii Suburban 

YES, our bank would consider providing ARM 

loans 

NO, our bank would not offer ARM loans 

YES, our bank would increase ARM loans 

NO, our bank would not increase ARM loans 

NO, we will greatly limit or exit the mortgage 

business 

10% 20% 30% 40% 50% 

lOll liS beeall'" too bu .. dcllSonJt, wOllld yonI' 

By Geography 

iii Rural 

0% 10% 2.0% 30% 409'i) 50% 

May 9, 2013 
336 


81767.293
337 


81767.294

The balloon loans that we arc making are to consumers who otherwise would not be eligible for 

mortgage credit for various reasons. We are taking additional risk by making these loans and we provide 

a valuable service to our customers by doing so. I know that we are considered to be in an MSA but we 

are very rural and I don't think we should be subjected to the new rules. 

Sometimes the current appraisal underwriting guidelines create a lot of problems for borrowers because 

of the lack of sales of similar type properties because we are so rural. We end up having to find other 

alternatives to Freddie and Fannie. That includes booking loans on our books instead of selling them. 

May 9, 2013 
338 


81767.295

Our bank will nol make a loan that would be classified as a higher-priced mortgage due to the additional 

regulatory burden required by these mortgages including escrow requirements. Requests that would 

result in a Higher-priced Mortgage arc either modified or we simply relilse to make the loan. 

We are located in rural southern Carlton County, MN which is included in the Duluth MSA which makes 

no ,ense. 1.5% over the APOR & 3.5% for 2nd REMs. How are we supposed (0 make payroll, maintain 

capital and get any ROE? Where do theses APOR's come framo FANNIE & FREDDIE? Is that really 

fair considering their source of funding & ours? If they need to cover losses they fire up the printing 

press. Our regulators would just padlock our door being we're not "too big to fail". Sorry I had to vent a 

little. Thanks j(lr doing this survey. I hope the Feds will turn up their hearing aids and get a grip on 

reality. 

May 9, 2013 
339 


81767.296

We are a small community bank located in Houston County. Minnesota with the City of LaCrosse. WI 

located across the river (the real MSA). We are totally NOT a metropolitan area. We have an ag 

concentration with approximately 80% of our loan portfolio in ag relatcd loans. We do in-house balloon 

loans for borrowers who do no! quality for a secondary market loan due to a ding in their underwriting 

(approximately 10% of our portfolio). None of the balloon loans are over 30 days delinquent. We will 

discontinue offering in-house loans if we cannot offer balloon loans. We arc considering discontinuing 

loans not qualifying for the secondary market already, due to required escrow accounts, which we do not 

offer. Rates on this type ofloan do not retlect risk. due to limiting the interest rate by not offering escrow 

accounts. 

Our bank has 2 offices located in the eastern, rural portion ofPottawattamie County, IA (which is part of 

the OmahaiCB MSA). so, even though we are certainly in a "rural" farming area, and the population of 

our 2 communities is less than J ,400 people, we are explicitly excluded from the "rural" exemption due 

to a large city located in our county, approx 20 Illi away. Our bank has 10 employees covering 2 offices. 

We have 3 loan officers, one of which is our only mortgage loan officer - in other words, we have a 

mortgage department of" I". Due to staggering regulatory burden placed on community banks during the 

recent mortgage reform, our bank has had to stop olTering consumer owner-occupied loans. Recent 

mortgage revisions and prohibitions have made mortgage lending not only impractical, but impossibJe 

for a small community bank such as ours. 

May 9, 2013 
340 


81767.297

'DEPENDL:NT COMMUNITY 

BANKFRS of AMfRfCA>!t 

We currently do not fall in the exception because only 43% of our loan originated fall within the 

definition ofrurallunderserved. Many of these counties are located adjacent to a metro area; however. 

clearly should be considered ruml or underserved. J think the rural underserved classification should be 

re-examined. 

Most loans are HPML and balloon. We offer no ARM's now and only started escrow to try to service the 

mortgage need in our community for those loans not qualifying for the secondary market because of 

appraisal issues. acreages. sole proprietorship needing income verification, time injob. etc. We want to 

make mortgage loans to our customer base, but it is becoming extremely difficult and expensive to be 

compliant. We have a strong history and virtually no delinquencies but are being overpowered by 

compliance regulation. 

May 9, 2013 
341 


81767.298

NAFCU 

I 

3138 10th Street North 

Arlington, VA 22201-2149 

703521A770 1800,336-4644 

1 f~~~~·r~;~f~;~rg National Association of Federal Credit Unions I www,nafcu.org 

June 17,2013 

The Honorable Shelley Moore Capiio 

Chairman 

Subcommittee on Financial Institutions 

and Consumer Credit 

House Financial Services Committee 

United States House of Rep resenta lives 

Washington, D,C, 20515 

The Honorable Gregory Meeks 

Ranking Member 

Subcommittee on Financial Institutions 

and Consumer Credit 

House Financial Services Committee 

United States House of Representatives 

Washington, D.C. 20515 

He: Credit Union concerns with the CFPD's Qualified Mortgage ("QM") Hule 

Dear Chairman Capito and Ranking Member Me# ar~ t::;;,:/. 

Fred R, Becker, Jr_ 

President/CEO 

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade 

association that exclusively represents the intcrcsts of OUt' nation's fcderal credit unions, I write 

today in conjunction with tomorrow's hearing, "Examining How the Dodd-Frank Act Hampers 

Home Ownership," NAFCU member credit unions and their 95 million member-owners 

appreciate the subcommittee's continued focus on the complex Qualified Mortgage ("QM") final 

rule scheduled to take effect in January 0[2014. 

As members of the subcommittee are aware, a host of mortgage related rules are eUl1'ently being 

promulgated. These rules, taken individually or in their cumulative effect, will undoubtedly alter 

the mortgage market in unintended ways, The ability-to-pay rule is of particular concern moving 

fOl'ward a, the stringent requirements contained in the final rule will greatly affect credit unions' 

mDltgage lending policies as wel! as their mortgage operations, Accordingly, in a recent survey 

ofNAFCU member credit unions, nearly 44% of respondents said they will cease originations of 

non-qualified mortgages (QM). Another 44% indicated they wi!! reduce originations that fall 

outside ofthe QM guidelines, 

NAFCU has taken advantage of every 0ppOltunity available to educate and weigh in with the 

Consumer Financial Protection Bureau (CFI'B) on "'peets of the ability-to-repay rule that are 

likely to be problematic for credit unions and their members. While credit unions lmderstand the 

intention of the rule and importance of hindering unscrupulous mortgage lenders from entering 

the marketplace, we cannot support the ability-to-repay rule in its current form. A major issue, 

for example, is the underwriting criteria that dictates a consumer IUlve a total dcbt~to-incotne 

(DT1) ratio that is less than or equal to 43 percent in order for that loan to be considered a QM. 

NAFCU believes thi, arbitraty threshold wil! prevent otherwise healthy borrowers from 

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obtaining mortgage loans and will have u particularly serious impact in rural and undcrservcd 

areas where consumers have n limited number of options. Tn addition~ as the subcommittee is 

aware, the rule excludes from the definition of QM those mortgage loans with terms exceeding 

30 years. By definition this punishes credit unions and their members if a longer-term product is 

the best choice under a particular set of certain circumstances. 

Simply put, the DTlrequircment is too restrictive and would effectively exclude many otherwise 

creditworthy consumcrs from the mortgage market. The requirement also does not take into 

aeemmt a number of factors that arc relevant in determining a consumer's ability to repay, 

including debt that will be paid within a short period of time 01' likely increases to income, such 

as through inheritance. We believe that the CFPB should either remove or increase the DTJ 

requirement on qualified mortgages. 

Additionally, before the ability-to-repay rule goes into effect, we also urge the subcommittee to 

review ilnd address the definition of "points and fees" contained in the rule. As currently 

delined, "points and fees" wi!! include, among other charges, fees paid to affiliated title 

eompanies, amounts of insurance and taxes held in escrow, loan level price adjustments, and 

payments by lenders to cOlTcspondent banks, credit unions and mOltgagc brokers in wholesale 

transactions. As a result ofthis troublesome definition, many affiliated loans, particularly those 

made to low- and moderate-income borrowers, would not qualify as QMs and would lIDlikely be 

made or would only be available at higher rales. NAFCU supports Rep. Huizenga's bipartisan 

legislation- the Consumer Mortgage Choice Act (H.R. 1077) that would satisfactorily address 

this importmlt aspect of the ability-la-repay rule. We would urge the subcommittee to support 

this important legislation. 

Thank you for holding this impOltant hearing and for providing us with the opportunity to 

eommen! on the ability-to-repay rule on behalf of OUI' member credit unions. If you have any 

questions or would like further information about any of these issues, please do not hesitate to 

contact me or NAFCU's Vice President of Legislative Affairs Brad Thaler by telephone at (703) 

842-2204 01' bye-mail at pthalcr@nafcu,org. 

Sincerely, 

.... ~ ~ 

~ (I R.BeckerJl"~ / 

President & CEO 

ee: Members of the Subcommittee on Financial Institutions and Consumer Credit 

o