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S. HRG. 114–49

REGULATORY BURDENS TO OBTAINING

MORTGAGE CREDIT

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

ON

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

BURDEN

APRIL 16, 2015

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

(

Available at: http://www.fdsys.gov/


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director

DANA WADE, Deputy Staff Director 

JELENA MCWILLIAMS, Chief Counsel 

CHAD DAVIS, Professional Staff Member

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel 

ERIN BARRY, Democratic Professional Staff Member

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

(II)


BANKI-41578DSA with DISTILLER
CONTENTS

THURSDAY, APRIL 16, 2015

Page

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

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2

Senator Cotton .................................................................................................. 4

WITNESSES 

Tom Woods, President, Woods Custom Homes, on behalf of the National 

Association of Home Builders ............................................................................. 4

Prepared statement .......................................................................................... 41

Responses to written questions of: 

Senator Heller ........................................................................................... 91

Senator Heitkamp ..................................................................................... 91

Chris Polychron, 2015 President, National Association of REALTORS® ........... 6

Prepared statement .......................................................................................... 49

J. David Motley, President of Banking and Mortgage Operations, Colonial 

Savings, F.A., on behalf of the Mortgage Bankers Association ........................ 7

Prepared statement .......................................................................................... 56

Responses to written questions of: 

Chairman Shelby ....................................................................................... 93

Senator Vitter ............................................................................................ 94

Senator Heller ........................................................................................... 95

Senator Heitkamp ..................................................................................... 95

Julia Gordon, Senior Director of Housing and Consumer Finance, Center 

for American Progress ......................................................................................... 9

Prepared statement .......................................................................................... 69

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Prepared statement of the American Land Title Association .............................. 97

Prepared statement of Mark A. Calabria, Ph.D., Director, Financial Regulation Studies, Cato Institute ................................................................................. 109

Prepared statement of Paulina McGrath, the Community Mortgage Lenders 

of America ............................................................................................................. 114

Prepared statement of the Conference of State Bank Supervisors ..................... 121

Letter to Committee from Habitat for Humanity ................................................. 128

Prepared statement of the Housing Policy Council .............................................. 131

Prepared statement of the Independent Community Bankers of America ......... 138

Prepared statement of Nathan Smith, Chairman, Manufactured Housing Institute .................................................................................................................... 149

Prepared statement of Gary Acosta, Co-founder and CEO, NAHREP ................ 154

Letter to Committee from Carrie R. Hunt, Senior Vice President of Government Affairs and General Counsel, NAFCU ...................................................... 156

Prepared statement of the National Association of Mortgage Brokers ............... 160

Prepared statement of the American Financial Services Association ................. 165

Prepared statement of John Taylor, President and CEO, the National Community Reinvestment Coalition .......................................................................... 167

Prepared statement of the Credit Union National Association ........................... 174

(III)


BANKI-41578DSA with DISTILLER

BANKI-41578DSA with DISTILLER
(1)

REGULATORY BURDENS TO OBTAINING 

MORTGAGE CREDIT 

THURSDAY, APRIL 16, 2015

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:01 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Richard Shelby, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The hearing will come to order. 

Months ago, this Committee began an examination of the regulatory landscape facing consumers, lenders, and other financial 

market participants. Our goal has been to identify existing laws 

and regulations that create unnecessary barriers to economic 

growth. Some of these may also inadvertently restrict the availability of consumer credit or increase its cost. 

Today, we turn our attention to mortgages. Our witnesses are involved in each stage of the home buying process, from the construction of the home to its selection in financing. We have asked them 

to discuss the state of housing markets across the country, including which lending laws and regulations are working and which can 

be improved. 

Five years after a sweeping new regulatory framework altered 

the mortgage market in unprecedented ways, I believe it is time to 

reexamine its effectiveness and its consequences. Dodd-Frank’s 

stated intent is to protect consumers, but some of the regulations 

promulgated in response to the law have gone so far, they may actually prevent qualified consumers from owning a home. And, borrowers who are able to qualify for mortgages today may face an increased cost of credit due to these rules. 

I would hope that we can agree that laws and regulations that 

reduce mortgage availability or increase the cost of credit for those 

who do qualify are harming, not helping, consumers. While record 

low mortgage rates in recent years may have balanced out an increased cost of mortgage credit due to new regulatory requirements, this trend will not continue indefinitely. When interest 

rates rise, I believe that the impact of these new rules and regulations on home ownership will then be clear. 

Today, we will consider ways to refine current law so that it protects consumers while encouraging responsible home ownership. 

This should be an achievable bipartisan goal, because Members of 


BANKI-41578DSA with DISTILLER
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this Committee on both sides of the aisle have introduced and supported legislation in this area. 

I encourage others to consider ways in which we can work together to make the new regulatory framework true to its legislative 

intent of protecting consumers while increasing responsible access 

to credit. This goal can be accomplished without returning to the 

pre-crisis standards of lax underwriting and access to mortgage 

loans for those who cannot afford to repay them. 

In other words, any changes to the law should not erode consumer protection or encourage irresponsible lending practices. They 

should address the issue of creditworthy customers being denied 

loans or charged more for them because of existing laws and regulations. If done properly, such changes could make our financial 

system safer by allowing regulators to direct their limited resources 

toward more efficient regulation and ensuring better management 

of risk. 

I look forward to hearing from our witnesses and hope that their 

perspectives will help this Committee identify specific issues that 

consumers face every day in purchasing homes and qualifying for 

credit. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. Thanks to the witnesses, the four of you, for joining us today. 

We know the mortgage market is vast, it is complex, and it is 

interconnected. Its impact extends from the finances of individual 

families in Alabama and Ohio to the stability of the global financial 

system. 

Go back to 2008 and the years before. Predatory, irresponsible 

lenders made dangerous subprime loans and often ignored a borrower’s ability to repay. When the real estate bubble burst less 

than a decade ago, families had their wealth and their equity 

stripped from their homes, starting a chain of events that resulted 

in the financial crisis and subsequent economic devastation of the 

Great Recession. 

Dodd-Frank provided a common sense fix to the bad practices in 

mortgage lending that had been staring us in the face for years. 

Now, 5 years later, some are suggesting that we weaken some of 

these standards and we head back to there, where we started. 

In 2008, our country learned a painful lesson, that not all mortgage lending is created equal. Unscrupulous lenders offered loans 

that required no documentation, loans with teaser interest rates 

that later spiked and undermined a borrower’s ability to repay, and 

loans where borrowers never paid down their principal. These practices had devastating results for families, for communities, for our 

economy. Borrowers with these higher-cost loans were foreclosed on 

at almost triple the rate of borrowers with conforming 30-year 

fixed-rate mortgages. Again, almost triple the rate of borrowers 

with conforming 30-year fixed-rate mortgages. 

The crisis revealed a host of other harmful practices: Steering 

borrowers to affiliated companies, kickbacks for business referrals, 

inflated appraisals, loan officer compensation based on the loan 

product. These practices offered little benefit to the borrower. Even 


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more troubling, as borrowers’ cost increased, so did loan officers’ 

compensation. Members of the organizations testifying before us 

today felt the impact of these practices firsthand. 

After the housing crash revealed the extent of the deterioration 

in mortgage lending standards, Congress stepped in to do what the 

market and regulators had refused to do. Dodd-Frank established 

a common sense rule that requires mortgage lenders to ensure that 

borrowers have the ability to repay their loans. This means that 

lenders can no longer make a loan based on the home’s value instead of the borrower’s ability to pay back the loan. 

It should be noted that many lenders did not follow this basic 

principle during the housing boom. At its peak, 27 percent of loans 

in this country that were made were subprime products. 

At the risk of making matters even more complicated, we may 

be in danger of overlooking other factors that have tightened credit 

beyond what Dodd-Frank envisioned. In reaction to the housing crisis and their own financial positions, the GSEs and FHA each 

tightened lending standards and increased fees that are charged to 

borrowers. They announced small steps in the FHA’s HAWK program, the GSEs’ return to 3 percent downpayments to expand credit just this winter, but their loan profiles continue to represent 

higher FICA scores and downpayments than historical levels. 

Lender overlays, higher eligibility criteria than the GSEs or 

FHA, have also made mortgage credit difficult to obtain. While the 

Ability to Repay standard was intended to be the base standard, 

we heard in earlier hearings that lenders only want to make QM 

loans because they provide liability protection, an additional lender 

overlay. However, if we expand QM eligibility in order to protect 

lenders, we also limit the protections for a family buying a home. 

A mortgage is the largest financial transaction most people will 

make in their lifetime. As we have learned across a number of consumer financial products and services, ensuring that the mortgage 

process, servicers, and fees are transparent and understandable to 

borrowers is essential if they are to be successful home buyers and 

homeowners. 

Reviewing regulation for their impact on the market and possible 

duplication is important. But, if we do not address the other challenges that restrict credit, eliminating important home buyer protections under the cloak of access turns the clock back to a dangerous 2008. 

I look forward to having a conversation about all of the challenges today, all of the challenges that the housing market faces 

and the possible solutions. There is not a single answer to fix these 

complicated problems. But, we cannot return to the days—we cannot return to the days when unscrupulous lenders could make 

loans that undermined a borrower’s ability to repay while charging 

excessive fees and, thus, putting our entire economy at risk again. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you, Senator Brown. 

Without objection, I would like to enter at this time into the 

record statements from the Conference of State Bank Supervisors, 

the Housing Policy Council, Independent Community Bankers of 

America, National Association of Federal Credit Unions, the Credit 

Union National Association, Manufactured Housing Institute, the 


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Community Mortgage Lenders of America, American Land Title 

Association, the National Association of Mortgage Brokers, and 

Habitat for Humanity. 

Chairman SHELBY. Today, first, we will hear the testimony of 

Mr. Tom Woods, Chairman of the National Association of Home 

Builders. Mr. Woods is currently President of Woods Custom 

Homes. 

Senator Cotton, you are with us today and you have a friend. 

Would you like to introduce him? 

STATEMENT OF SENATOR TOM COTTON 

Senator COTTON. Yes. Thank you, Senator Shelby. 

Today, we have Chris Polychron, the President of the National 

Association of REALTORS®. Chris is a REALTOR® in Hot 

Springs. He has been in Hot Springs for 27 years as a leading REALTOR® there, and while we all know him here in this room as 

President of the National Association, he has also been a leading 

REALTOR® throughout Arkansas, serving on the Board of Directors for the Arkansas Realtors Association, President of the Arkansas Realtors Association, and President of the Hot Springs Realtors 

Association. Also, he has been a leader in the Hot Springs community and the local Chamber of Commerce, been President of his 

local church for almost 20 years, and Chris and I have known each 

other for almost 4 years, since our good friend, Smokey Campbell, 

introduced us. 

Chris, it is great to see you here in Washington, DC, although 

I know we both look forward to seeing each other in Hot Springs 

sometime soon. 

Chairman SHELBY. Thank you, Senator Cotton. 

Then, we will hear from Mr. J. David Motley, President of Colonial Savings, who is here on behalf of the Mortgage Bankers Association. 

And, finally, we will hear from Ms. Julia Gordon, Senior Director 

of Housing and Consumer Finance at the Center for American 

Progress. 

Your written testimony, all of it, will be made part of the record. 

We are going to start voting in the Senate around 11, so you proceed as fast as you can with your statements. 

We will start with you, Mr. Woods. 

STATEMENT OF TOM WOODS, PRESIDENT, WOODS CUSTOM 

HOMES, ON BEHALF OF THE NATIONAL ASSOCIATION OF 

HOME BUILDERS 

Mr. WOODS. Thank you. The Nation’s economic growth depends 

on an efficient housing finance system to provide adequate and reliable credit to home buyers and home builders, at reasonable rates, 

and in all business conditions. Home buyers and builders continue 

to confront challenging credit conditions triggered by a zealous regulatory response to the Great Recession. 

In response to the crisis, Dodd-Frank mandated significant mortgage finance reforms and created the CFPB to implement and supervise many of the new requirements. FHFA, the Federal banking 

agencies, and FHA all have taken steps to ensure that the Nation 

will never again be at the vulnerability to risky mortgage lending. 


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The collective regulatory actions, along with the increased compliance costs, has severely restricted the availability of mortgage 

credit to many creditworthy borrowers. NAHB is concerned about 

the effect of regulatory constraints on originating loans, particularly for small communities, first-time home buyers, and other underserved market segments. 

Smaller banks and independent mortgage bankers are leaving 

the residential mortgage business or merging their banks as the 

burden of compliance has made it harder and more expensive to do 

business. This exodus will reduce competition and limit consumer 

choice. Congress must act now to eliminate some of the barriers to 

credit availability and support a stronger, more robust recovery of 

the housing and mortgage markets. 

As the mortgage industry deals with the ongoing issues associated with the implementation of the CFPB’s Ability to Repay 

standard, we urge Congress to pass the Mortgage Choice Act. This 

common sense legislation would clarify the qualifying mortgage 

rules’ definition of points and fees and ensure that consumers can 

choose the lender and title provider best suited to their needs. 

We also urge Congress to pass the Portfolio Lending and Mortgage Access Act. This legislation is intended to ease the ability to 

repay requirements for community lenders who may fear regulatory and legal consequences of originating a non-QM loan and, 

therefore, may limit access to credit for some home buyers. 

NAHB believes the Federal agencies can and should take actions 

to alleviate burdensome regulatory requirements to consumer access to mortgage credit. One issue that NAHB is watching closely 

is the implementation of the CFPB’s new mortgage disclosure 

forms. The new forms are intended to help consumers make informed decisions and avoid costly surprises. NAHB is concerned 

that any confusion related to the new rules, compounded by the 

fear of aggressive enforcement actions, will negatively impact a 

buyer’s ability to close on a house in a timely manner. 

In addition, lender overlays in the mortgage credit process have 

been a major factor in the difficulty that home buyers are having 

to obtain financing. Lenders are currently imposing credit understanding standards that are more restrictive than FHA, VA, and 

the housing GSEs require. NAHB encourages further efforts to increase certainty for mortgage lenders on the criteria for acceptable 

mortgage underwriting. 

Likewise, fees for Government-backed mortgages continue to be 

too high, given that the credit quality of the underlying loans has 

increased. 

NAHB urges action on two additional fronts that specifically impact the homebuilding industry, appraisals on new home construction and access to housing production credit. Improper appraisal 

practices, a shortage of experienced appraisers, and inadequate 

oversight of the appraisal system continues to restrict the flow of 

mortgage credit and impede the housing recovery. Despite signs of 

improvement in recent months, many homebuilders continue to 

deal with a significant adverse shift in terms and availability of 

loans for ground acquisition, land development, and home construction. Lenders are reluctant to extend new AD&C credit, citing regVerDate 0ct 09 2002 16:40 Jul 29, 2016 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\04-16R~1\HEARING\95735.TXT SHERYL

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ulatory requirements or examiner pressure on banks to shrink 

their AD&C portfolios. 

Finally, while regulatory barriers can be alleviated by the various regulators as well as by legislative reform, NAHB continues to 

support comprehensive housing finance reform. Comprehensive legislation would ensure that components of reform are not at crosspurposes. 

Thank you for your opportunity today. 

Chairman SHELBY. Chris, go ahead. 

STATEMENT OF CHRIS POLYCHRON, 2015 PRESIDENT, 

NATIONAL ASSOCIATION OF REALTORS®

Mr. POLYCHRON. Yes, sir. Chairman Shelby, Ranking Member 

Brown, and Members of the Committee, thank you for the opportunity to testify. My name is Chris Polychron. I am the 2015 President of the National Association of REALTORS®, as Senator Cotton said, from Hot Springs National Park, Arkansas. I am speaking 

to you today, however, on behalf of over one million members of 

NAR. 

In communities across the United States, REALTORS® help citizens from every walk of life achieve the dream of home ownership. 

However, millions of home buyers are still on the outside looking 

in. The Nation’s home ownership rate has fallen close to levels last 

seen in 1990, and the number of first-time home buyers entering 

the market is at its lowest point since 1987, despite historically low 

mortgage rates. 

Since 2008, we have seen good intentioned but over-corrected 

policies severely hamper the ability of millions of qualified buyers 

to purchase a home. We have yet to strike the right balance between regulation and opportunity. We see the need for reform in 

four areas, and I will briefly discuss each now. 

The first area relates to Consumer Financial Protection Bureau. 

The 3 percent cap on points and fees needs to be fixed. This cap 

leads to reduced choices for consumers and prevents lenders from 

making qualified, or QM, loans. We also believe that underwriting 

standards should not be so restrictive that they prevent smaller 

community banks from lending to their customers. 

The second area is specialty markets. Twenty percent of the 

home buyers live in rural areas or small towns. We strongly urge 

Congress to provide the Rural Housing Service with direct endorsement authority to accelerate loan processing for borrowers, and 

manufactured housing should be encouraged as an affordable housing opportunity. And, Senator Cotton and others here, thank you 

for S. 682. 

The third area is short sales and foreclosures. Streamlining the 

short sale process will reduce the time it takes to sell a property 

and reduce the number of foreclosures. We also urge Congress to 

extend the income tax exemption on mortgage debt forgiveness. On 

both counts, we would be protecting our communities from foreclosures, which ultimately result in seeing a lot of homes that are 

boarded up. 

And, the fourth area is lending policies. Condos are often the 

most affordable option for first-time home buyers, including minority and the elderly. However, both the Federal Housing AdminisVerDate 0ct 09 2002 16:40 Jul 29, 2016 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\04-16R~1\HEARING\95735.TXT SHERYL

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tration and the Government-Sponsored Enterprises need to address 

overly restrictive policies. In addition, high guaranteed fees, or Gfees, are dragging down the first-time home buyers. Prices should 

basically be in line with risk. 

In closing, let me leave you with this. The Urban Institute recently estimated that we prevented home loans to four million 

qualified buyers between 2009 and 2013. This would not have happened had we had credit standards similar to the ones we had in 

2001, long before the housing bubble. Instead, four million families 

missed out on buying a home because we are taking protection to 

an unnecessary extreme. Mr. Chairman, that is the equivalent of 

80 percent of the population of your home State of Alabama. 

No one wants to see the return to the unscrupulous predatory 

lending practices that caused the Great Recession. But, what we 

can do is balance the common sense regulations with increasing access to credit. 

Thank you for your time. I look forward to answering questions 

later. 

Chairman SHELBY. Thank you, sir. 

Mr. Motley. 

STATEMENT OF J. DAVID MOTLEY, PRESIDENT OF BANKING 

AND MORTGAGE OPERATIONS, COLONIAL SAVINGS, F.A., ON 

BEHALF OF THE MORTGAGE BANKERS ASSOCIATION 

Mr. MOTLEY. Thank you, sir. Chairman Shelby, Ranking Member 

Brown, and Members of the Committee, I appreciate the opportunity to testify today. I am currently President of Colonial Savings, a community bank headquartered in Fort Worth, Texas. I am 

a past member of MBA’s Board of Directors and I currently serve 

on the Community Bank Advisory Council for the Consumer Financial Protection Bureau. 

As a four-decade veteran of the mortgage banking industry, I can 

tell you from experience that recently enacted laws have created 

commendable consumer protections and have made the market 

safer. However, new regulatory demands imposed under these laws 

have negatively affected the availability and the affordability of 

safe, sustainable mortgage credit. Qualified borrowers, including 

many first-time potential home buyers, continue to have difficulty 

accessing credit. 

MBA has consistently supported reasonable requirements to prevent the repetition of past excesses. However, MBA’s data show 

that mortgage credit availability remains far below the levels seen 

in normal times prior to the mortgage crisis, and much of this constraint can be attributed to new regulatory demands on mortgage 

lenders. 

Although the CFPB did good work in developing the Ability to 

Repay rule and the qualified mortgage definition, MBA believes it 

is time to consider changes to the QM definition. This will mitigate 

the adverse impact that initial rule has had on access to credit for 

some qualified borrowers. Additional adjustments to the rule can 

expand access to sustainable mortgage credit and ensure that lenders can fully utilize all four corners of the QM credit box. 

MBA believes that changes to the QM should be made holistically and not based solely on charter type or business model. ExVerDate 0ct 09 2002 16:40 Jul 29, 2016 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\04-16R~1\HEARING\95735.TXT SHERYL

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panded product choices under the QM should not be limited to certain providers, and the burden should not be on the consumer to 

determine which institutions offer particular types of loans. This 

will only cause unnecessary consumer confusion and reduce competition. 

To this end, we support several changes to the QM definition, including expanding the safe harbor, increasing the small loan definition, replacing the current patch for Government-backed loans, and 

expanding the QM to include certain loans held in portfolio. 

With regard to a portfolio exemption, we believe that any such 

expansion should apply both to banks and to nonbank lenders who 

originate loans for sale to banks or private institutions that plan 

to hold them in portfolio. However, in order to protect against the 

reemergence of loans with particularly risky features, such as pay 

option ARMs, or stated income loans, or NINJA loans, we believe 

some of the parameters of the standard QM definition should be retained for portfolio QM loans. 

We also strongly support legislation that would exclude title insurance fees paid to lender affiliate companies from the calculation 

of points and fees under QM. 

Beyond these changes to QM, there are several other areas that 

could be addressed to facilitate increased access to credit for qualified borrowers. First, we strongly believe that the CFPB should 

offer authoritative written guidance to accompany its rules. The absence of timely written guidance from the CFPB has resulted in 

confusion and slowed the implementation process of several important regulations. This is particularly important in light of the forthcoming TILA–RESPA integrated disclosure rule that will take effect in August. 

Second, the cost to service mortgage loans has increased dramatically. This is due to new CFPB rules as well as the punishing 

treatment of mortgage servicing rights under the Basel III framework. Under that rule, banks are required to hold extraordinary 

amounts of capital to support the MSR asset, making it less likely 

for banks like mine to retain mortgage servicing. These increased 

costs directly impact consumer access to credit and make new 

mortgage production less attractive to lenders. To address this situation, MBA supports Congressional efforts to mandate a study into 

the effect of Basel III on mortgage servicing rights. 

Third, MBA believes that FHFA should direct the GSEs to adopt 

the latest validated credit scoring models on an expedited basis. 

The newer models help score borrowers with limited credit experience, including first-time home buyers. Using updated models, 

lenders will be able to extend loans to a greater number of qualified borrowers. 

Finally, in addition to addressing many of the regulatory hurdles 

currently facing the mortgage market, MBA believes that Congress 

should continue its work from last year to address comprehensive 

housing reform. 

Again, I am grateful for the opportunity to testify before you 

today. MBA commends your efforts to examine the regulatory hurdles preventing qualified consumers from accessing credit and we 

are eager to work with the Committee to improve the availability 


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of sound mortgage credit for American consumers. I will take your 

questions whenever you are ready. 

Chairman SHELBY. Thank you. 

Ms. Gordon. 

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

PROGRESS 

Ms. GORDON. Good morning, Chairman Shelby, Ranking Member 

Brown, and Members of the Committee. I direct the Housing and 

Consumer Finance Team at the Center for American Progress, a 

nonpartisan think tank dedicated to improving the lives of Americans through progressive ideas and action. 

The other witnesses have ably sketched a picture of today’s mortgage market, so I thought I would spend a moment revisiting yesterday’s, when toxic, risk-layered mortgage products proliferated. 

These were aggressively pushed on consumers who could have 

qualified for more stable and affordable products and perversely 

incentivized brokers and lenders to strip home equity through excessive and deceptive fees. 

In the capital markets, investors poured money into the private 

label securitization machine in search of yield, while financial innovations aimed at managing risk actually spread that risk to every 

corner of the system. 

When the bubble burst, millions of Americans lost their homes, 

many unnecessarily due to a thoroughly broken mortgage servicing 

system. And, tens of millions more lost jobs, retirement savings, 

and, maybe worst of all, trust in the financial system. 

In the wake of the crisis, Congress and the American public supported comprehensive financial reform legislation to realign incentives and strengthen oversight. Yet, now, less than a decade later, 

the mortgage industry tells us if only Congress will roll back some 

of these crucial reforms, they will lend more. 

Yet, more lending without the core Dodd-Frank protections in 

place is exactly the wrong medicine for today’s ailing market. If 

these important guard rails are improved, the likelihood of seeing 

a return to predatory and unsustainable lending is high and any 

gains in home ownership would be temporary and possibly dangerous. There will be no true recovery until public confidence is restored, and a Congressional about-face on reform will set that effort 

back years. 

Now, make no mistake. The CLEAR Relief Act, for example, is 

no simple tweak to adjust a lending standard. It is an evisceration 

of Dodd-Frank’s core principle, which says that a lender should not 

make a loan unless it has reasonably determined that the borrower 

can afford to pay the entire loan back. 

Note that the qualified mortgage definition, or QM definition, 

that this legislation seeks to extend is not actually an underwriting 

standard like Ability to Repay is. It is a liability standard. It designates a category of mortgages so inherently super-safe that lenders need not fear any legal accountability if the loan goes bad. It 

excludes riskier products, such as negatively amortizing or balloon 

mortgages. It requires underwriting to the maximum possible payment in the first 5 years of an adjustable-rate loan. It limits excesVerDate 0ct 09 2002 16:40 Jul 29, 2016 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\04-16R~1\HEARING\95735.TXT SHERYL

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sive points and fees. And, it excludes borrowers whose total debtto-income ratios exceed a certain threshold. 

The legislation would confer this same absolute legal immunity 

on loans with virtually any terms and features as long as they are 

held in portfolio for 3 years by a bank with less than $10 billion 

in assets. And, just note, that definition covers all but the largest 

110 depository institutions in America and well over half of all 

mortgage loan originations. 

Proponents of this bill argue that because loans are held in portfolio, lenders have an incentive to ensure a borrower will succeed, 

and in the case of small community banks, that has often been 

true, which is why those banks have a whole list of significant exemptions from Dodd-Frank that I have detailed in my written testimony. 

But, larger institutions have a much more checkered past and far 

less of an ability to ensure quality underwriting from all their 

originators. You will recall that Washington Mutual was a portfolio 

lender and its collapse was due entirely to loans that could not 

have met current QM status. 

What is more, by only requiring 3 years in portfolio, this product 

could entice—this could entice lenders to create loans whose price 

or other features dramatically increase after the 3-year deadline, 

just like the ones that brought down the system before. 

Some of these other roll-back efforts are equally misguided and 

I discuss them further in my written testimony. 

Instead of gutting Dodd-Frank, let us get to work together on 

finding more effective and less dangerous ways to increase access 

to safe, high-quality mortgage credit. Congress should complete 

comprehensive housing finance reform, extend the Mortgage Forgiveness Debt Relief Act, convert the mortgage interest deduction 

to a credit, and allow agencies to support housing counseling. 

FHFA and FHA should continue to provide better demarcation of 

responsibility, fix the broken servicer compensation system, and 

pilot more effective ways to reach underserved markets. 

As memories of the crisis fade, let us not open the doors to a new 

round of predatory unsustainable lending. Instead, let us work together to create a healthier and more equitable housing market 

that drives economic growth and promotes opportunity for America’s families. 

Thank you. 

Chairman SHELBY. I thank all of you. Thank you, Ms. Gordon. 

I am going to ask each of you to briefly respond to this question. 

What are the two top—two or three, I should say—two or three 

regulatory barriers that you have identified as constricting mortgage credit and how should they be fixed, just briefly? We will start 

with you again, Mr. Woods. 

Mr. WOODS. The first, I would say, is it needs to address the 

points and the overall cost of the loan, depending—there is a bill 

that you have today that is out there to do that, and I think that 

would be helpful. It is having a tremendous effect. 

Chairman SHELBY. Uh-huh. 

Mr. WOODS. The second thing is I believe that the guidelines 

should always be in writing. We have a real problem today that 

many times, and particularly with the auditors and whatever, 


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there are verbal instructions given as to how they are to treat a 

loan, but it is not in writing, so it leaves it to somewhat——

Chairman SHELBY. Is it ambiguous? I mean——

Mr. WOODS. It is somewhat ambiguous, and the real problem becomes, and I am going to speak to this more as a community banker, you are scared to death about your little bank. You really do 

not want to be written up. And, so, you are going to step back even 

farther from the line, and when you do that, that is going to limit 

the fact of your doing business or if you will do business. 

Chairman SHELBY. Basically, you are talking about certainty, are 

you not? 

Mr. WOODS. I am talking about certainty. You are exactly right. 

Just tell me what the rules are. I can play by the rules. But, I cannot play the game if I do not know what the rules are. 

And, then, just the cost of the compliance. And, again, I am talking mostly smaller community bankers. Certainly, in the big banks, 

they have less ability to spread that cost. 

Chairman SHELBY. That is right. 

Mr. WOODS. So, if you have to add personnel to a small community bank, they are not making billions of dollars. They are making 

thousands of dollars——

Chairman SHELBY. And they are not making loans——

Mr. WOODS.——and that one person makes them unprofitable. 

Chairman SHELBY. And they are not making loans if they are 

not——

Mr. WOODS. They are not making loans. 

Chairman SHELBY. Chris. 

Mr. POLYCHRON. Chairman Shelby, I would say one area, and especially, like, in my market in Hot Springs National Park, Arkansas, FHA has made the restrictions on condo loans to where very 

few of our developments qualify for those loans. They are an excellent opportunity for first-time home buyers, elderly, minorities, as 

well——

Chairman SHELBY. Tell me why. Are they cheaper, basically, 

than a single detached home? 

Mr. POLYCHRON. Yes, sir, they are cheaper, A, and they are—a 

lot of our young people are wanting to move to the downtown 

areas——

Chairman SHELBY. And what is the barrier, refusal to make the 

loan, or what is it? 

Mr. POLYCHRON. Well, basically, the restrictions require 100 percent or a high percent of the whole development before it can be 

done. They are usually run by private boards and those people are 

not qualified, and as a result, they just do not finish the process. 

We have been working with FHA to try to alleviate that and, hopefully, something will happen soon. 

I agree with Mr. Woods, second, that—take GE Finance. They recently announced they are going out of business because the cost 

to do business——

Chairman SHELBY. No, they are not going out of business. They 

are selling to somebody. 

Mr. POLYCHRON. Well, they are selling their——

Chairman SHELBY. Yes. 


BANKI-41578DSA with DISTILLER
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Mr. POLYCHRON. They are going out of the finance business for 

us——

Chairman SHELBY. Right. Right. Right. 

Mr. POLYCHRON.——and, you know, they listed compliance, regulations, cost of doing business. 

Chairman SHELBY. Mr. Motley, one or two, your top ones. 

Mr. MOTLEY. I think that one of my top points is the restrictive 

nature and the very prescriptive nature of the QM rules themselves, for instance, the 43 percent DTI ratio, and I will give you 

an example. Just last week, we had a self-employed borrower that 

was making an application with our company. It was a jumbo loan, 

so we could not avail ourselves of the GSE patch. So, this was a 

jumbo loan. Our investor required that the loan be QM. 

In this particular case, this borrower had been self-employed not 

quite 24 months, which is required under Appendix Q of the QM 

rule. So, even though we had great income history, we had a record 

of good credit, we had good downpayment, all of that, it did not 

meet the QM standard because he had—we could not justify or 

could not show that he had been self-employed at that level of income for 24 months, only 23. So, we could not make that loan. 

It did not matter that it was an 80 percent loan. It was not a 

high level, high LTV loan. But, that is the kind of one-size-fits-all 

in Dodd-Frank that just does not work. We need some ability to exercise prudent judgment. We are not talking about going back to 

NINJA loans. We just want to have the ability to make prudent 

loans——

Chairman SHELBY. So, you think that is a literal interpretation 

of the 24-month deal——

Mr. MOTLEY. I do. 

Chairman SHELBY.——rather than a little bit of flexibility, just 

a little. And, you thought that was a good loan, did you not? 

Mr. MOTLEY. Yes, sir. 

Chairman SHELBY. OK. Ms. Gordon. 

Ms. GORDON. I do agree regarding the uncertainty in a variety 

of areas, but I will mention a couple of other things. One is pricing 

and downpayment, and that is because we are suffering from a 

problem with income and wealth inequality in this country, especially for communities of color who represent the majority of home 

buyers of the future. I would strongly suggest that we do more risk 

pooling, particularly Fannie and Freddie, rather than really excessively tiering the pricing, but we——

Chairman SHELBY. Explain what you mean exactly. You are talking about——

Ms. GORDON. So, Fannie and Freddie had historically—they created this national mortgage market so we were not that dependent 

on what happened in particular regions of the country, you know, 

if one region had a downturn, and they made mortgages really a 

commodity. So, there was basically a price most people in the country kind of knew what their mortgages would be. 

Because of the crisis, when Fannie and Freddie went into conservatorship, the conservator created this very steep grid of, you 

know, you pay a lot more for a mortgage, for example, if you are 

only able to afford a smaller downpayment——

Chairman SHELBY. OK. 


BANKI-41578DSA with DISTILLER
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Ms. GORDON.——even though you still have to have Private 

Mortgage Insurance to cover that, and that has been a real problem, particularly for the folks who were hardest hit by the crisis 

and who may have less family wealth. 

I also hope that the whole mortgage industry can work together 

on the problems of wage stagnation and income inequality because 

that is just a big part of the market problem today, is affording a 

home. 

Chairman SHELBY. Sure. 

I will address this to you, Chris. In your testimony, you express 

support for legislation allowing communities to appeal to the CFPB 

for consideration as a rural community. You know, the small towns 

and the rural areas of America make up a lot of America, as you 

testified. Would you elaborate on what could be at stake if otherwise rural communities are not technically recognized by the CFPB 

as rural and so forth? Go ahead. 

Mr. POLYCHRON. I can even give you a personal example in my 

own State. 

Chairman SHELBY. OK. 

Mr. POLYCHRON. We recently had a State director make a ruling 

that one of our areas was no longer rural. We had no recourse but 

to go to her, and we ultimately convinced her——

Chairman SHELBY. But, you were not urban, though, were you? 

Mr. POLYCHRON. No. 

Chairman SHELBY. OK. 

[Laughter.] 

Mr. POLYCHRON. And, we finally convinced her that it was rural. 

If we had not had the ability to bring that back up, those people 

would not have been afforded the opportunity to do a 502 through 

Rural Housing. So, I would tell you that other reasons—there are 

areas like, take Fayetteville, Arkansas, where the University of Arkansas is. A lot of that population is counted in the Census and 

it would make it look like that area is urban when it really is not. 

Chairman SHELBY. It is a distortion, is it not? 

Mr. POLYCHRON. It can be a distortion, yes, sir. 

Chairman SHELBY. OK. I have a number of other questions I will 

submit for the record. We are into time constraints. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Ms. Gordon, I will start with you, and then I have a question for 

Mr. Motley. Working families trying to buy a home, as you pointed 

out, seem to have the deck stacked against them. Stagnant, slow 

wage growth, increasing student loan debt burdens, combined with 

the recent increase in home values can reduce a family’s ability to 

save for a downpayment or reduce their other debts to qualify for 

a loan. What impact are these—we have heard about Government 

regulations as the major reason, or almost the only reason from 

other panelists. What impact are these economic factors having on 

the housing market? 

Ms. GORDON. So far, we have not actually seen any evidence that 

the problem in the housing market is the financial reforms. We 

have seen quite a lot of evidence that downpayment requirements 

and general tightness of the credit box are a problem, particularly 

since some of the biggest actors in the system still use old credit 


BANKI-41578DSA with DISTILLER
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models that do not take new developments into account. And, we 

also have seen how a lot of the uncertainty, the uncertainty about 

the system generally, with Fannie and Freddie still in conservatorship, as well as uncertainty about repurchases, about default servicing costs and the like, that is really holding the market back. 

We really have seen no evidence so far, and there have been 

some studies and surveys on this, that QM is really making much 

of a difference, and particularly for smaller institutions who have 

a number of exemptions. By and large, community banks are lending the same way they always did. 

Senator BROWN. Thank you. 

Mr. Motley, the title of today’s hearing is about helping borrowers get access to mortgage credit. So far, we have heard a lot 

from the panel about what Congress could do to help lenders. 

Thank you for that insight and those thoughts. 

According to Bankrate.com, the interest rate on a 30-year mortgage averages around 3.8 percent, even with a 660 credit score and 

paying 5 percent down. That sounds like a pretty good deal by any 

historical standard. 

If the issue, therefore, is not the cost of a mortgage, what prevents you from making this kind of loan, and how does a proposal 

like allowing lenders to charge higher fees give homeowners—give 

potential homeowners, give borrowers more access to affordable 

credit? 

Mr. MOTLEY. Let me answer your last question—I will answer 

your last question first. Low- to moderate-income borrowers typically are going to have smaller loans, smaller purchases. So, fees, 

closing costs, are often reflected in fixed amounts rather than a 

percentage of the loan. So, a smaller balance loan is going to hit 

that 3 percent points and fees cap sooner. So, if I cannot premium 

price the loan, raise the interest rate, to cover some of those fees 

through premium, then I am not going to be able to make that loan 

and stay within the 3 percent points and fees cap and, therefore, 

a QM. 

Now, there is another regulator——

Senator BROWN. But, you could make the loan. You just could 

not get QM protection, correct? 

Mr. MOTLEY. Right. That is correct. So, I have got to weigh the 

option of going with a rebuttable presumption risk as opposed to 

a safe harbor. 

Now, I can only raise the rate so far because there is another 

Governor on this protection for consumers. Currently, in order to 

stay in a QM state, I cannot go above 150 basis points above the 

average prime offer rate. Now, the average prime offer rate is a 

lookback. It is an index that was published, let us say, last week. 

So, in a rising rate environment, I am automatically squeezed 

when I look at that calculation. So, I need to have that APOR margin, the margin over APOR, increase so that I can counteract the 

effect of potentially rising interest rates. 

And you know that interest rates are historically low. They have 

been low for a long time. We all think, eventually, they are going 

to go up. They have not yet, but that would help, if we could have 

a 200 basis point spread over APOR and still retain QM status, as 


BANKI-41578DSA with DISTILLER
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well as we could handle more small balance borrowers if we could 

increase the points and fees cap. 

Senator BROWN. Well, I think it is—thank you for that response. 

I think it is important to remember these mortgage rules provide 

legal liability protection. Nothing prohibits you from making these 

loans if you think they are good quality loans and the chances of 

repayment are high. They really shift the burden to the borrower 

to show that a lender knew they could not pay back the loan. 

Obviously, that is the story of QM, understanding that lenders 

can go ahead. They can make that loan. They just do not have the 

legal liability protection afforded by QM. I think it is very important to make that point. The Government is not telling anyone they 

cannot make these loans. They just do not get the legal protection 

afforded by QM, so I think it is important to note that the lender 

here is making a business decision. Is this loan likely to be paid 

back? 

Let me ask one more question with Ms. Gordon. The CFPB released updated small and rural lender definitions earlier this year 

in response to concerns about the previous definition, as you know. 

How does the new proposal change the small and rural lenders 

that qualify for exemptions? Are there other exemptions that they 

already qualify for? 

Ms. GORDON. Well, like I said, in my written testimony, I actually provide a whole list of exemptions that smaller lenders already 

have, and the new proposals, I think, will also be helpful and, to 

me, really demonstrate how the CFPB is really trying to take into 

account the concerns of the mortgage industry. 

I should note on your previous question that there is also an exception from the 3 percent points and fees cap for loans under 

$100,000, which covers quite a lot of the loans that go to low- and 

moderate-income people around different parts of the country, 

though maybe not right here in Washington, DC. 

Another compromise that the CFPB created was as passed by 

Congress, there actually was no safe harbor. There was just something called a rebuttable presumption, which is lawyer talk for who 

has the burden of proving what. And, the industry went into CFPB 

and said, we really feel like we need this real legal immunity and 

they were given that extra that was above and beyond what the 

statute had said. 

So, there have been quite a lot of compromises with CFPB. I 

think in a number of them, consumer groups have worked with 

business groups very productively and, I think, will continue to do 

so at the CFPB. And, at this point, this is why I do not think on 

most of these things we really need Congressional rollbacks of the 

actual statute. 

Senator BROWN. I think the point you make, and then I will 

yield, Mr. Chairman, about the cost of homes, you said the 

$100,000 figure. The median list price in the Midwest region, according to the National Association of REALTORS®, for home sales 

is $152,000. And in the Cleveland area, 9,000 homes—so, it is not 

a small sample—it is $128,000. In Akron, it is $108,000. Across the 

border in Indiana, it is around that same price. So, that is a lot 

of homes, that is the median price. 

Thank you, Mr. Chairman. 


BANKI-41578DSA with DISTILLER
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Chairman SHELBY. Senator Cotton. 

Senator COTTON. Thank you. 

I would like to discuss legislation I cosponsor with Senator Donnelly that Mr. Polychron mentioned earlier, S. 682, the Preserving 

Access to Manufactured Housing Act. Ms. Gordon, I would like to 

start my questions with you. Were mortgage loans a prime driver 

of the financial crisis in 2007, mortgage loans to manufactured 

housing owners? 

Ms. GORDON. So, actually, mortgage loans to manufactured housing owners have been a problem far longer than the financial crisis. 

You know, there are two different ways that those loans can be titled. They can be titled as real estate or as chattel, and the chattel 

loans have long had far fewer consumer protections, and those 

loans have always been a lot more expensive than loans for sitebuilt homes. 

And, so, the many households who rely on manufactured housing, which is a really important, as you know—I mean, in your 

State—actually, I am looking around the room, in all of your 

States, manufactured housing plays a really important role in some 

communities. You know, that was in particular need of consumer 

protection even before some of the excesses that were associated 

with the Wall Street private label securities, because you are right, 

the manufactured housing did not really have that intersection. 

I think it is really important to help increase safe and affordable 

credit for manufactured housing and, in fact, have been urging the 

Federal Housing Finance Agency to include—to incentivize more 

and better manufactured housing loans through their Duty to 

Serve rulemaking by actually including chattel loans as well as 

real estate titled loans, and I think that is going to be a really important effort, and I have also been working with some business 

groups on that. 

I do not think the right way to go about solving the very real 

problem of credit for those loans is by removing consumer protections that attach to higher-cost credit. 

Senator COTTON. So, I infer the answer to my question is no, 

mortgage loans to manufactured housing owners were not a prime 

driver of the 2007 and 2008 financial crisis. 

Ms. GORDON. Well, they were not a prime driver of what happened on Wall Street, but they were very much a part of the lost 

wealth and foreclosures of families. 

Senator COTTON. Were those loans a primary part of 

collateralized debt obligations or credit default swaps that caused 

the problems that led to the financial crisis? 

Ms. GORDON. Absolutely not. 

Senator COTTON. You state in your written testimony that if our 

legislation passed, the Preserving Access to Manufactured Housing 

Act, quote, ‘‘a lender could charge nearly 10 percentage points higher than a prime mortgage rate,’’ end quote. I infer that you think 

that that is a bad thing. 

Ms. GORDON. So, higher-cost loans are sometimes—I mean, there 

are a lot of reasons, a lot of good business reasons to charge higher 

rates under certain circumstances. But, studies have repeatedly 

shown that higher rates are actually in and of themselves an additional risk factor. So, if you are in a situation where those higher 


BANKI-41578DSA with DISTILLER
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rates are important and necessary, giving consumers some extra 

protections against other predatory features is really important. 

Senator COTTON. Section 1431 of the Dodd-Frank Act empowers 

the Consumer Financial Protection Bureau to allow points and fees 

up to 10 percent on high-cost mortgages. Do you think that section 

of the Dodd-Frank Act is not sufficiently protective of consumers? 

Ms. GORDON. Well, one of—what Dodd-Frank did was they actually revisited the thresholds that had previously existed for 

HOEPA loans, which are the high-cost loans, and those thresholds 

had been established at a time where, generally, rates were really, 

really high for all mortgages, and they adjusted them downward to 

reflect the new rate environment. 

And, I should note that the CFPB actually has extremely broad 

exception authority to virtually everything in the statute, and 

working with the CFPB continues to make sense, and they have 

continued to balance interests pretty well. But, I do not think there 

is any reason to revisit the statute, no. 

Senator COTTON. So, I would note that our legislation simply acknowledges the economic fact that mortgage loans for manufactured housing are often a quarter of the cost of homes for site-built, 

or site-built homes, and the origination costs, though, do not always fall that low and, therefore, these fees can be somewhat higher. 

Mr. Polychron, would you like to describe the importance of manufactured housing in places like Hot Springs National Park, Garland County, in Arkansas? 

Mr. POLYCHRON. Yes. Manufactured housing is a big part of it, 

especially for minorities, for people that cannot afford the higherpriced homes. I would submit that even if the cost was, say, ten 

basis points higher, a lot of times, that manufactured home buyer 

can still purchase a home and have payments less than he would 

with a higher-priced home, and I think that individual would like 

that option. 

Senator COTTON. Would it be fair to say that, sometimes, that 

can even be lower than what they might be paying for rent in 

places like Arkansas? 

Mr. POLYCHRON. It would be by far. Rents have gone sky high 

in our State, mainly because the difficulty to get credit. I foresee 

renters at some point, hopefully soon, converting to home ownership again. 

Senator COTTON. Thank you. 

Chairman SHELBY. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Chairman, I think about this topic and I go back to the time 

we were here, where mortgage lending was at the heart of the financial crisis and borrowers of modest means received risky 

subprime loans they could not afford as financial companies chased 

profits and left taxpayers on the hook for the downside. And, we 

know the damage that the crisis caused. Families lost their homes, 

their jobs, their savings. Businesses had to close their doors and 

communities were devastated by foreclosures. 

So, the crisis reminded us how important a healthy mortgage 

market is to our economy, not just to financial stability, but to families’ ability to build wealth and strong communities. And, as our 


BANKI-41578DSA with DISTILLER
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economy continues to recover, the pathway to home ownership, I 

believe, must remain open and affordable. 

Now, I understand no legislation is perfect, and in areas where 

regulations are an obstacle, we should look to improve them. At the 

same time, it can be tempting to blame regulation for broader market challenges or to use unrelated problems as a pretext for rolling 

back consumer or financial stability protections. So, I look forward 

to working with my colleagues on the Committee to find ways to 

improve access to credit, but to consider all the elements of that. 

In that context, Mr. Woods, in your testimony, you discussed the 

recent moves by Fannie and Freddie to back well underwritten 

loans with downpayments as low as 3 percent in cases where borrowers can demonstrate their ability to repay and other compensating factors. As, I think, almost everyone here knows, saving for 

a downpayment can be a significant obstacle for a family to purchase a home. Would you say that this decision by Fannie and 

Freddie represents a positive step by giving a greater number of 

creditworthy borrowers an opportunity to responsibly and 

affordably purchase a home? 

Mr. WOODS. I think it is a very responsible—I am sorry. I would 

say it is a very positive step. There is one indicator out there that 

for years stands out when we talk about the 3 percent, or 2, or 

wherever you are at. VA loans perform quite well, and they are 

zero down loans, and they have always performed, but they have 

some other guidelines within them that help that process. Plus, 

that individual has some training in responsibility. 

Senator MENENDEZ. Mm-hmm. Do our other witnesses agree? 

Ms. GORDON. Absolutely. I think that the ability to get a home 

with a lower downpayment is absolutely critical for today’s home 

buyers. And, I want to note that what is really important when you 

are thinking about lower downpayments is making sure you are 

not layering other risks in there. It was not low downpayment 

products that caused the crisis. It was the risk layering. And, so, 

that is why, especially when it is so important right now to have 

these low downpayment products, because families really do not 

have that much wealth, that is why it is absolutely not the time 

to ease up on the other protections. 

Mr. MOTLEY. Senator, I agree with Ms. Gordon completely. As 

long as the 97 percent loan is prudently underwritten, we are not 

layering risks, I think it is a good step toward reviving the housing 

market. 

Senator MENENDEZ. Mm-hmm. 

Mr. POLYCHRON. And, Senator, I would concur. I would also add 

that the lowering of the FHA fees from 1.35 to 0.85, you know, on 

a $200,000 house made a difference of $90 a month, and it certainly brought more first-time home buyers into the market. 

Senator MENENDEZ. Good. Now, let me ask you another question. 

Almost all of you discussed in your testimony how updated credit 

score models can improve loan underwriting and expand access to 

a broader population of potential buyers, particularly in underserved communities. The developers estimate these new models can 

provide scores for anywhere between 15 and 40 million previously 

unscored consumers. 


BANKI-41578DSA with DISTILLER
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Can any of you share with me what are the biggest obstacles to 

widespread adoption of the newer, better models? Is it implementations by the GSEs or is it other factors? 

Mr. MOTLEY. In my opinion, it is implementation by the GSEs. 

They just have not gotten around to technologically utilizing those 

models. 

Ms. GORDON. Well, there are some other obstacles, as well, which 

is that particularly rent reporting, which is a big part of the newer 

experiments with scoring more people, you are relying on a lot of 

private landlords, often mom-and-pop landlords, to do that reporting, and I think that is going to be a challenge to make sure it is 

done right. But, I think it is really important and will allow many 

more people to be scored. 

On scoring utilities, I think there are some special problems 

there that you have to really make sure you have consumer protection. Many folks benefit from utility subsidy programs, particularly 

in the colder States, and utility companies are well known for a lot 

of billing problems. So, this has to be done carefully, but I think 

both FICO in updating their models and VantageScore have been 

really working on this quite carefully and it is very important that 

Fannie and Freddie get contemporary with this. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. MOTLEY. And, I would just follow up with that, is that for 

years, we have used alternative credit like you are talking about 

with utilities, with a rent bill, something that is not reported to the 

credit bureau. But, being able to have this put into a system and 

actually graded will assist us in evaluating borrowers who have 

thin credit. 

Chairman SHELBY. Thank you. 

Senator Sasse. 

Senator SASSE. Thank you, Mr. Chairman. 

Ms. Gordon, not to keep you in the crosshairs the whole time, but 

I appreciated some of your comments about PMI and mortgage insurance. I think that many of the comments that you have made, 

though, about the possibility of exemptions from Dodd-Frank, I 

wish we could have the time to take you to a small town in Nebraska and you could sit with some community bankers. And, so, 

I wonder if we could do that as a thought experiment. 

Many of these folks do not have any sense that they were a contributing factor to the fall of 2008. It is not entirely clear to me if 

you think they are guilty. They think that they are guilty in the 

eyes of Washington and lots of regulations that they cannot navigate. I will not bore you with all the technical archana, but in a 

lot of towns in Nebraska, the average mortgage is well under 

$100,000, and I have sat with these community bankers and it does 

not make economic sense for most of them to be writing mortgages 

at all. They do it as a community service, but it is not an economically viable business. 

Could you explain, in small town Nebraska, where a lot of mortgages are less than $100,000, do you think they did something 

wrong in the run-up to 2008, and if so, what? 

Ms. GORDON. I do not see small community banks as the root of 

the problem in 2008. I would love to work with you on a positive 

agenda for helping smaller institutions be competitive. I think it is 


BANKI-41578DSA with DISTILLER
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important to note that smaller institutions have been declining for 

decades, long before the crisis, and a lot of that is because the economics of the business right now tend to, you know, push toward 

larger institutions where you can spread the fixed costs better. 

I think there is quite a lot that can be done in the area of technology to help bring down the costs of compliance, because, I mean, 

we could get rid of all of Dodd-Frank tomorrow, but there would 

still be myriad other regulations that banks would have to comply 

with and a lot of that is susceptible to technology. Some of the larger institutions have the resources to do that. 

And, I think it is really important, and that regulators should be 

involved in this, too, in trying to make sure we are developing the 

infrastructure of sort of off-the-shelf, cloud-based resources that 

can be used. 

I have talked to a lot of small lenders. I know when they think 

about replacing their technology systems, that sounds almost insurmountable to them, and this is true in the small nonprofit sector, 

as well. Unfortunately, it just has to be done to keep current, and 

I would love to work on a positive agenda to help do that for that 

sector. I think that sector is very important. 

Mr. MOTLEY. And, if I could follow up on that just a little bit——

Senator SASSE. Please. 

Mr. MOTLEY.——talking about the infrastructure necessary to incorporate and to build these regulatory requirements into our systems. You know, 2 years ago, we had three people in our compliance area. We had two workers and an administrative person. We 

now have 12 people in our compliance area. 

And, when you think about TRID, a 1,700-page document, well, 

my goodness, we had to hire all those people so they could read it, 

so they could figure out how to implement it and figure out how 

to—what does this mean to the business process every day. And, 

then we have to go train on it, and we have to make sure that our 

loan officers know how to do it. 

And, specifically with TRID, you have got this new waiting period between the time that you issue a closing disclosure and the 

time that you can actually close on the mortgage or consummate 

the mortgage. That means that real estate agents, builders, title 

people all have to be trained. So, this is a tremendously difficult 

task that we have in front of us to try to implement TRID. 

So, it is just to say what Ms. Gordon is saying, is that the training burden of implementing these regulations is really quite great. 

And, I would follow with that and say that we are hopeful that we 

can get the CFPB to delay via rule implementation of enforcement 

on this TRID rule, because we have really been inundated over the 

last 24 months with myriad new rules and we are up to here. We 

are choking. We are about to drown. 

Senator SASSE. That is helpful. 

I have got less than a minute left, so Ms. Gordon, could we go 

back to you just for a minute. So, then, go upstream one step. Give 

the 45-second—I think that is all the Chairman is going to let me 

have—give the 45-second answer to what was the contributing factor of the housing bubble for lower-income and middle-income families in rural places where housing is cheap. What regulatory probVerDate 0ct 09 2002 16:40 Jul 29, 2016 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\04-16R~1\HEARING\95735.TXT SHERYL

BANKI-41578DSA with DISTILLER
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lem was not being addressed that they contributed to that required 

any new regulation in 2008. 

Ms. GORDON. Well, here is what happened, and this is what is 

so important now, is those small community banks did not cause 

the crisis, but their larger brethren, in fact, did, and what we have 

seen during the lobbying before Dodd-Frank was passed, during 

Dodd-Frank, and after Dodd-Frank is, actually, you see a lot of institutions that are not the kind of banks that you are talking about 

kind of hiding behind the skirts of those banks and using them as 

an excuse to get out of the regulations that are really important 

for the institutions that were, in fact, involved in the shenanigans 

that ultimately led to the crisis. 

Senator SASSE. So, just to interrupt for a second, though, but, I 

think, in earlier questioning, you said there are potentials for exemptions from Dodd-Frank and from other regulatory regimes that 

could be applied to these people. Let us not talk about whether or 

not big banks did some—were bad actors and they are hiding behind the small banks. I am asking you, why was there new regulation necessary on mortgage products for $50,000 and $75,000, period? These exemptions could be used, but they are not being used. 

So, what was the problem that required these new rules to be applied to lower-income and middle-income people in places where 

housing markets are cheap? 

Ms. GORDON. So, lower-income and middle-income people were 

the victims of this crisis and what we had to do was regulate the 

products. You know, the page six——

Senator SASSE. And, so, those products are evaporating——

Ms. GORDON. Page six has a list of the exemptions which were 

put in there because we know a lot of those community banks have 

a model where they make the 3- or 5-year balloons, right. They 

do—you know, they may service fewer than 5,000 loans. They have 

a lot of exemptions here, but the fact is, when you regulate an industry, you have to regulate for the vast middle of the industry and 

this is—I think these exceptions are a very appropriate way, and 

if there is a reason that they are not using those exceptions or taking advantage of them, I think that is a training and education and 

regulatory issue we should work on. 

Senator SASSE. Yes. I do not think that is accurate. I think there 

were mortgage products that were available with 15 to 20 pages of 

paperwork that are now hundreds of pages, and I think your answer is, regardless of whether or not there is a problem, let us empower bureaucrats, and then later you can come and supplicate before the bureaucrats and see whether or not you can get a carveout. That is not what is happening, though. The access to mortgages is being reduced and eliminated in rural communities, and 

the argument is, you could go and ask for regulators to later give 

you the freedom to offer products that were not a part of the problem. 

Ms. GORDON. So, if you look at who is originating mortgages 

right now, actually, small institutions are originating more than 

ever and their profits on mortgages are increasing faster than the 

profits for any other sector of banks making mortgages. So, you 

know, I hear that there is an issue. Many of these exemptions were 

baked into Dodd-Frank. These were not just regulatory decisions. 


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Others were regulatory decisions made after they heard from representatives of these small banks. But, I do not see why an exemption is different than not having the rule. The fact is, you do not 

have to do the rule if you have an exemption. 

Senator SASSE. I wish we had more time. Thank you. 

Chairman SHELBY. Mr. Motley, let me pick up on something you 

said, then whatever you want to add, and then I will recognize 

Senator Warren. You said a minute ago, as I understood it, that 

you had to go from 2 people to 12 people on compliance, is that correct? 

Mr. MOTLEY. Yes, sir. 

Chairman SHELBY. That is six times the cost of personnel. 

Mr. MOTLEY. Yes, sir. 

Chairman SHELBY. Somebody has to pass that on or you go out 

of business, right? It is added to the cost of doing business. 

Mr. MOTLEY. Yes, sir. It is added to the cost of doing business. 

I am not doing any more loans, but I have more compliance——

Chairman SHELBY. Is there not some way, picking up Senator 

Sasse’s comments, to streamline these regulations and put them in 

plain, unambiguous English where people will know what is certain there and what is not? Could it be——

Mr. MOTLEY. Yes, sir——

Chairman SHELBY. It looks to me like——

Mr. MOTLEY.——I believe it is, and we support holistic fixes, not 

carve-outs for individual things. 

Chairman SHELBY. No, no——

Mr. MOTLEY. We want some holistic fixes that allow lenders to 

have underwriting guidelines that are prudent. 

Chairman SHELBY. When you say fixes, you mean certainty and 

guidelines? 

Mr. MOTLEY. Yes, sir. 

Chairman SHELBY. OK. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

You know, I agree with a lot of what has been said here today. 

Access to mortgages is painfully tight, especially for people who are 

not well to do, and we should find responsible ways to increase access to credit. I am there. 

But, once again, there are a lot of proposals that are being 

pitched as improving access to credit that are really about letting 

the mortgage industry dig deeper into consumers’ pockets, and I 

think a good example of this is the Mortgage Choice Act. After the 

crisis, Congress decided that a lender could get the protection of 

the Qualified Mortgage Rule only if the points and fees on a mortgage were less than 3 percent of the loan amount. Now, if the lender is affiliated with the title company, the cost of title insurance 

through that affiliate counts toward the 3 percent cap, which 

makes sense because most of the cost of title insurance is commissions, and most of that revenue is going to find its way back into 

the lender’s pocket. 

You know, the 3 percent cap is an important step toward fixing 

the broken noncompetitive market for title insurance. For other 

forms of insurance, not title insurance, where there is a competitive 

market, between 50 and 80 cents of every premium dollar goes to 


BANKI-41578DSA with DISTILLER
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paying out claims. But, for title insurance, according to the GAO, 

it is five cents, one nickel out of every dollar that is collected. 

The GAO also reports that more than 70 cents on every dollar 

is pure commission for the title agents. Subjecting affiliated title 

insurance costs to the 3 percent cap should help bring some competition and lower these artificially inflated prices. 

Now, Mr. Motley, as you know, the Mortgage Choice Act would 

blow up the 3 percent cap by exempting the affiliated title fee. It 

says that you can separate it and get money from two different 

sources. In your testimony, you claim that applying the cap to affiliated title insurance fees has made, quote, ‘‘low-balance loans 

serving low- and moderate-income borrowers much costlier to originate and, consequently, less available to consumers.’’ In other 

words, the cap—that is the part this part of your testimony is 

about—is making it harder for people to get low-dollar loans. 

Now, I care a lot about the question about access to low-dollar 

loans, so I have looked closely at the data since the 3 percent cap 

went into effect last year and I just cannot find any data to support 

that claim. I have also asked companies to give me some data to 

back up the claim, but so far, nobody has done that. 

So, I notice that you do not cite any data in your testimony and 

I would like to know what data you are looking at to support your 

claim. 

Mr. MOTLEY. Senator, I am actually considering the combination 

of the affiliated title insurance—we had an affiliated title insurance 

company. With the new rule, as you have stated, we were required 

to include the title insurance premium, and I would disagree with 

you in the sense that the title insurance premium in Texas, anyway, is the vast majority of the total fees charged to a consumer. 

It is not a minority. It is the majority of those costs. 

Senator WARREN. Well, all I can do is look at the Government 

Accountability Office report on this——

Mr. MOTLEY. OK. 

Senator WARREN.——and that is that for title insurance, the 

amount that is paid out is a nickel for every dollar brought in. If 

you have got better data than the GAO, then please bring them in. 

Mr. MOTLEY. OK. I will get back to you with that. But, with regard to the——

Senator WARREN. I would like you to. 

Mr. MOTLEY. With regard to the affiliated title insurance question, I had a title insurance—we had an affiliated title insurance 

company for about 6 or 8 years. One of the reasons that we had 

that title insurance affiliated company is because we felt like we 

could provide better service to our mortgage customers, particularly 

in a refinance scenario, where I could actually meet or beat the 

costs of a competitor by using my affiliated title——

Senator WARREN. Mr. Motley, since we have very limited time, 

let me just stop you right there. I have no doubt that you can get 

revenue from your title insurance company and you can get revenue from your mortgage lending business. The question I am asking is what data you have to support your claim in your testimony 

in which you said specifically, low-balance loans serving low- and 

moderate-income borrowers are much costlier to originate and, consequently, less available to consumers because of the 3 percent cap. 


BANKI-41578DSA with DISTILLER
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I cannot find any data to support that and I just want to know 

what you are using. 

Mr. MOTLEY. Thank you. Let me say that what happens is, with 

an affiliated title company, I have got to include those affiliated 

title charges in my loan origination cost, so that becomes part of 

my costs and fees. So, at a certain level, I go over those caps. 

Senator WARREN. I understand that, that you are not going to 

get as much money. The question is, why does that stop you or 

raise the cost? Do you have any data to support——

Mr. MOTLEY. Well, it is not just that I may not make as much 

money. It is also a competitive issue, because when I look at my 

affiliated company and my disclosure to the borrower on my good 

faith estimate, my costs are going to be higher than if I used a nonaffiliated company, or if someone else was comparing my disclosure 

to a non-affiliated company. 

Senator WARREN. I am going to take that as you have no data, 

other than how you describe your business model on how you make 

money. Maybe I should just ask this——

Mr. MOTLEY. I will try to get—I will get back to you with some 

data. 

Senator WARREN. I would be delighted to see that. 

Let me ask this another way. Data from both Fannie and Freddie 

Mac and the mortgage industry show that the average mortgage 

origination fees are under 1 percent of the loan amount. So, that 

means for a $100,000 loan, a lender can typically charge more than 

$2,000 for title insurance and still be under the cap. Since claims 

are only eating up about five cents of every premium dollar, that 

leaves about $1,900 in commissions before you hit the cap. Is that 

not enough? 

Mr. MOTLEY. Senator, you are asking me about the commission 

structure with title insurance companies and I am not involved in 

that business anymore. 

Senator WARREN. Well—thank you. I just want to say, the Mortgage Choice Act should not fool anyone. The CFPB has already exempted the vast majority of smaller lenders from the QM rule, including the points and fees cap, for any loan they hold on portfolio. 

So, this is really about bigger lenders. This is about trying to get 

bigger fees from consumers. It is about preserving a cash cow for 

the mortgage industry and not about access to credit and I urge my 

colleagues to oppose this bill. 

Chairman SHELBY. Senator Corker. 

Senator CORKER. Thank you. This is an interesting hearing. 

Mr. Motley, a large group of us on this Committee wrote a letter 

to FHFA about the Common Securitization Platform they are developing, asking to make sure we had enough outside advising, if 

you will, to make sure that it was not just crafted only for Fannie 

and Freddie’s use. Do you think it would be appropriate for somebody from the mortgage industry to actually participate in that 

panel? 

Mr. MOTLEY. Yes, sir, I do. 

Senator CORKER. OK, and just for the record, I hope that is 

something that we will pursue. 

I want to follow up on Senator Warren’s comments. What I see 

happening here is people, generally speaking, on my side of the 


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aisle are trying to develop legislation to change the rules of DoddFrank to create better access to mortgages, if you will. What I see 

happening on the other side of the aisle is that Senators, instead 

of pursuing it that way, they are trying to create better access to 

mortgages by trying to get FHA and Fannie and Freddie and others to loosen up on the Government side. So, it is an interesting 

thing. Republicans are trying to write legislation to fix it, but what 

is happening is my friends on the left are trying to push the federally owned entities from getting them to do the same exact thing. 

So, both of us, if you look at it, really, both of us are trying to create access to credit. We are just doing it in different ways. 

And, I would just like to ask the question, would it not make 

more sense, instead of maybe us pursuing this route and then pursuing that route, would it make more sense for us just to go ahead 

and do comprehensive housing finance reform and create certainty 

and solve the problem once and for all? I would just like for the 

witnesses to potentially respond to that. 

Mr. MOTLEY. It absolutely would. 

Mr. WOODS. It would. 

Mr. POLYCHRON. [Inaudible.] 

Ms. GORDON. I support comprehensive housing reform, as you 

know, but we would also still need the regulatory protections of 

Dodd-Frank. 

Senator CORKER. Yes. Well, that was not the question, so——

[Laughter.] 

Senator CORKER. So, I think—really, as I hear this, really, it is 

pretty fascinating. I mean, I do not think my friends on the left 

would disagree that they are constantly urging Mel Watt and urging Fannie and Freddie and FHA to make access to credit more 

available by not using legislation. This side of the aisle is pursuing 

it the other way. 

And, I do not know. You know, we have heard this, it is often 

quoted—it is too often quoted—we seem to finally do the right 

thing after pursuing every other route. I just think we are kind of 

spinning our wheels and trying to avoid the essence of what needs 

to be done here, and that is housing finance reform done that creates certainty for all of you, right? I mean, this would sort of be 

over and done, and I hope that once we get through playing 

around, if you will, with the issue, dealing with the fringes, we can 

get to that, and with that, I have no other comments, unless you 

want to make one, Mr. Polychron. 

Mr. POLYCHRON. I would, if I could, Senator Corker. 

Chairman SHELBY. Go ahead. 

Mr. POLYCHRON. The only thing as a practitioner that I would be 

caution—I would be fearful of tax reform is—and I know in your 

bill——

Senator CORKER. I did not say anything about tax reform. 

[Laughter.] 

Mr. POLYCHRON. Well, house reform. 

Senator CORKER. Well, housing and tax reform are very different. 

Mr. POLYCHRON. I understand. 

Senator CORKER. OK. 


BANKI-41578DSA with DISTILLER
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Mr. POLYCHRON. But, at the same time, anything that would impair a practitioner from a 30-year mortgage is a no-no. I mean, it 

is just going to hurt our business. 

Senator CORKER. Well, I do not think anybody that I know of on 

this panel has seriously proposed any legislation that would do 

away with a 30-year mortgage. 

Mr. POLYCHRON. Yet. 

Senator CORKER. Has anybody up here done that? 

Mr. POLYCHRON. Not yet. No, sir. 

Senator CORKER. All right. Thanks a lot. I appreciate it. 

[Laughter.] 

Chairman SHELBY. Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman, and thank 

you to the panelists for your testimony. I apologize. There was a 

simultaneous hearing in the Armed Services Committee and I had 

to be there. 

Ms. Gordon, Dodd-Frank established numerous protections for 

borrowers, particularly middle-class borrowers, and the changes 

that are being proposed, if enacted, how would they affect sort of 

the middle-class borrower, in your view? 

Ms. GORDON. Well, a number of the changes we have talked 

about today would make mortgages both more expensive and more 

risky. I mean, just to go back to the Mortgage Choice Act for a second, or the so-called Mortgage Choice Act, affiliates were a big part 

of what was going on in the run-up to the crisis. There were kickbacks and upselling rampant throughout the system, which ends 

up making a mortgage more expensive than it has to be, and it is 

very anti-competitive. It is always interesting to me that that is not 

seen on all sides of this room. 

And, Dodd-Frank could have made the choice to simply ban these 

affiliate arrangements. It did not do that. It just said, if you want 

to be in that super safe category of QM mortgages, you cannot go 

above this points and fees cap, which seems to me to be a fairly 

minimal and very reasonable way of enabling affiliate relationships 

to continue, even though they could have gone another way. 

Particularly this question of all portfolio loans being QM, I think 

that is especially dangerous, just because with a QM loan, there is 

nothing anybody can do about it if it goes bad, and you do not want 

to kind of blow open this whole exception where any kind of loan, 

no matter how dangerous or risky it is, suddenly gets this special 

legal immunity. And, I think that is especially important for folks 

who are not going to have the money to hire a big fancy lawyer and 

for whom, really, every dollar out of their budget matters. We want 

to get them as fairly priced credit as we can. 

Senator REED. Thank you. 

Let me just, to Mr. Polychron and Mr. Motley, ask a question, 

because we are all looking at, on both sides, access to credit for borrowers that are capable of sustaining the credit. And, one of the 

factors that I am hearing in Rhode Island, particularly for firsttime young home buyers, is this extraordinary student debt. So, 

when they walk in to see you, they could have a job. They could 

be decent and hard working and we could have all these QM regulations, but you are just going to say, sorry, you owe $180,000. How 


BANKI-41578DSA with DISTILLER
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much is student debt really squeezing the mortgage market or denying people a mortgage loan? Are you seeing it? Mr. Motley. 

Mr. MOTLEY. Yes, sir, we are, and statistics, I think, from your 

organization, the REALTORS® Association, show that the percentage of first-time home buyers in today’s purchase money market is 

about 29 percent, whereas, typically, that is above 40 percent. So, 

we are certainly seeing a smaller piece of the market being comprised of first-time home buyers. We are required—if there is a repayment on that student debt, we have got to include it. 

Senator REED. Right. 

Mr. MOTLEY. And, so, we are seeing it affect credit. 

Senator REED. And Mr. Polychron. 

Mr. POLYCHRON. And I would agree with that. In fact, it was into 

the 50s. It was 56 percent first-time home buyers at one time, and 

it has definitely affected it, as you would expect. 

Senator REED. And, I would presume—you know, this goes to the 

access to credit. Legitimately, you cannot give loans to these young 

people, typically young people, although nowadays maybe not so 

young, because they just are carrying so much debt. 

So, one of the consequences in terms of your business, but also 

in terms of the opportunity to own a home, is not related directly 

to QM or anything else. It is this huge, staggering student loan 

debt, which Senator Warren and Senator—I am looking down on 

my colleagues on both sides are trying to deal with—and I think 

that is important to note. 

Again, I think we want to look carefully and listen to the issues 

that are arising, but I think we want to tread very carefully in 

terms of making changes that would disrupt the market. 

And, the other thing, too, is that, I hope, that over the last few 

years, despite all of these factors, my impression is that we are seeing fairly substantial profitability in the industry. Is that the case, 

Mr. Woods, with community banks, or——

Mr. WOODS. I think that community banks are struggling. I 

think they are doing better today than they were 4 years ago or 

5, but I do not know that they are doing better. But, if you look 

at a long historical line, that is true. 

I wanted to point out two other things with your question on the 

entry-level buyers and the credit. 

Senator REED. Yes, sir. 

Mr. WOODS. I want to point out to you how important that is. 

The truth of the matter is, if the entry-level piece of the market 

is not working, the rest of the market will not work, because the 

entry-level buyer, while he may buy my new house, he more likely 

will buy a used house——

Senator REED. Right. 

Mr. WOODS.——and the owner of that used house will move up 

to another and another. Many times, we have transactions that 

have three and four transactions behind them. So, you cannot overlook how important that segment of the market is. 

I would like to point out one other thing that I think exacerbates 

the situation, and at least in the crash, if you want to call it that, 

was a big part of it. Back to community banks. In many cases, the 

regulators came in and simply told the community bank that they 

had to cut their portfolio of construction loans, whether they are 


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model homes or spec homes or whatever. In many communities, 

that is the only loan that bank is making that makes any money. 

Their community is growing and they are trying to help that. 

You go in and all of a sudden you tell the builder, you have got 

to get rid of your specs. We will not renew the loan on the specs. 

You just dumped a bunch of things on the market and now our 

competition is going to drive down the prices of all the other 

houses. 

Second, when you take away the models, you have just put that 

builder out of business. That may have been one of the largest employment bases in that community, and the real problem is for the 

banker, when he tries to force that customer, he can only force his 

best customer out of the bank. It is the only one that might stand 

a chance of going and getting a loan at another bank. However, in 

this situation, that rule was for everybody. So, immediately, that 

whole access was cutoff, and I do not want that to go unnoticed. 

And, what I have seen as a homebuilder, and if you look at our 

testimony, the real problem is we cannot get loans today. So, we 

cannot start that engine back up. 

Senator REED. My time has expired, but I want to thank you, 

Mr. Woods, for making that very important point. It is not just the 

fact that the young 25-year-old college graduate cannot get the loan 

to buy the first house. It is that that first house is stuck and they 

cannot move to the second bigger house and the third house, et 

cetera.

Ironically, maybe the solution to this problem is not messing 

around with these rules but is making sure that people are not 

coming out of college with $180,000—or graduate school with 

$180,000 worth of debt. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Heller. 

Senator HELLER. Mr. Chairman, thank you, and to you, the 

Ranking Member, and also to our expert panel that we have with 

us today. Thank you for taking time and being here with us. 

I want to comment, if I may, just a little bit on what Senator 

Corker said earlier, and emphasize that he has worked very hard 

on trying to get some comprehensive reform in the housing industry and it is something that I supported. I worked with him, with 

both sides, Warner, Tester, others seeing the necessity of this. 

And, I think that the key to all this happening and happening 

right is one thing that you said, Chris, and that is to ensure that 

every American, especially young families, have access to a 30-year 

mortgage. I think we all agreed on that. But, we also agreed that 

there needs to be a secondary market for a backstop. I think the 

committee, that group that was working together, also recognized 

the importance of a secondary market, making sure that these securities could be traded, but with the rules and regulations necessary to assure that we do not have 2008 all over again. No State 

was hurt harder in that recession than the State of Nevada, and 

I think that you are well aware of that. 

I want to go back to something that the Chairman and the Ranking Member discussed earlier in this, and I am just taking a look 

at the CFPB’s rural and urban designation map. The CFPB has 

been trying, and, frankly, unsuccessfully, to define what rural and 


BANKI-41578DSA with DISTILLER
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what urban is. In fact, at one point, CFPB even said that Yucca 

Mountain was in an urban area. Now, I will support that designation if that keeps nuclear waste out of the State of Nevada——

[Laughter.] 

Senator HELLER.——but I think they did reverse that particular 

decision. 

I am looking at this map and I am seeing communities like 

Pahrump, Mesquite, Moapa Valley, Fallon, I mean, these are very 

small, very small communities. Fernley, Yerington, Minden, you 

can go on and on, Dayton, they are all listed. 

Senator McConnell and I have introduced legislation similar to 

what the House did. In fact, the House passed legislation that 

would allow rural constituents to make an appeal and present information to the CFPB and challenge their rural and urban designation. That passed the House, I think with a 401 to 1 vote. 

I would like to get from you, one, do you think there ought to 

be an appeals process, and number two, starting with you, Mr. 

Woods, whether or not you would support this legislation. 

Mr. WOODS. I would, and I do believe there should be a process 

for appeal. There has to be. Mistakes are sometimes made and they 

need to be pointed out and a way to correct them. 

Senator HELLER. Thank you. 

Chris. 

Mr. POLYCHRON. And, I addressed this a little earlier in that I 

agree with you 100 percent. We actually had an incident in Arkansas that precipitated that. You know, the appeal does not mean 

that they are going to hear eight million appeals. I think the facts 

are going to speak for themselves, whether they qualify or do not 

qualify, and in many cases a decision will be able to be made quickly. So, I strongly believe in the appeal process. 

Senator HELLER. I listed eight of them, so——

[Laughter.] 

Senator HELLER. Mr. Motley. 

Mr. MOTLEY. I agree with the appeals process, and I would also 

urge you to emphasize that consumers will reap the most benefit 

from this Act if the types of loans identified by CFPB as being critical for meeting the credit needs in rural areas, including loans 

that do not meet the 43 percent debt-to-income ratio, are considered qualified mortgages if either they are held in portfolio or sold 

to a creditor that holds them in portfolio. 

Senator HELLER. Thank you. 

Ms. Gordon, I would love to get your support. 

Ms. GORDON. Well, so we have not taken a position on that legislation. The whole issue of rural designation is, of course, one of 

those things that is rife with complexity among a variety of agencies administering a variety of programs that go well beyond just 

housing-related programs. 

I will note we have been very engaged with FHFA on their Duty 

to Serve rulemaking, where strengthening credit to rural communities is a really important part of what Congress asked them to 

do there. They are, in the process of that rulemaking, also looking 

at the question of rural designation, and I think that is a really important place to intervene, as well. 

Senator HELLER. Thank you. Thank you. 


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I know I am a broken record here, but about 25 percent of the 

homes—more than 25 percent of the homes still in Nevada are underwater. We have lost probably half of our community banks in 

the State, probably half of our credit unions, also, so you can imagine—in fact, I would say that I think the statistics show that about 

8 percent of the homes sold in the State are short sells. 

Mr. Polychron, you are well aware of the Mortgage Debt Relief 

Act and the attempts of that. I call it ghost income, where the IRS 

is trying to tax individuals for income they have never seen. What 

would be the impact to the housing industry if the Mortgage Debt 

Relief Act were to expire at the end of the year? 

Mr. POLYCHRON. It would be big, and I thank you for sponsoring 

that. You know, the thing I have never understood about that is 

that someone that has a home that he sells for a profit, or she sells 

for a profit, is not taxed, yet the individual that is underwater, that 

takes a loss on that home, does get taxed. I mean, where is the 

fairness in that? I have never understood that. But, it is there, and 

without it, those people are going to be renters again. So, I support 

your bill. 

Senator HELLER. Mr. Polychron, thank you for your comment. 

Mr. Chairman, my time is up, but again, I want to thank the 

witnesses and for holding this hearing. Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you. 

Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thank 

you all for your insights from your various professions and organizations. 

I do think that there is common cause on this Mortgage Debt Relief Act and the concern about short sale streamlining that was 

mentioned earlier. 

One issue that has not really been explored too much here today 

is the Preserving Access to Manufactured Housing Act. I gather a 

version of it passed in the House, so we may have more discussion 

here. 

In Oregon, we had, long before the 2008 crisis, a real challenge 

in our manufactured housing park industry, and the way it worked 

is people would buy a home, a new home, to be placed into a park. 

They would buy a park package. But, what they did not realize is 

the rent could be raised at any time and there was fairly much a 

shortage of supply in this park world, plus a lot of the parks would 

only allow a new home to be placed in their park. 

And, so, after someone had moved in, then the park would raise 

the rent or, alternatively, raise the utilities. And, for every $100 of 

rent or utilities per month that were raised, it diminished the 

value of the house by $20,000. You can imagine how quickly your 

new house was worth very little. 

So, therefore, the lenders who might lend for these particular 

homes were very nervous about it, so they wanted to do short-term 

loans. They wanted to do very high interest rate loans, which made 

a lot of sense because there was enormous risk embedded in this. 

People did not own the land and they did not control the rent and 

they did not control utilities. 

And, we looked at a number of ways to try to avoid this. What 

we heard time and time again from owners in these parks was, if 


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I had understood how this works 6 months ago, I would never have 

bought this house. And, so, we had different proposals to—how 

could owners understand the deal they are getting into, the fact 

that the rent is not controlled, the utilities are not controlled, the 

fact that you cannot move your house to another park, the fact that 

moving your house, if you can find another park that would take 

it, would be extraordinarily expensive, because it is really operated 

as a predatory operation. 

And, then when a person had to sell their home because the rent 

had raised sufficiently, the only person who would buy it would be 

the park owner. The park owner would then lower the rents and 

sell the house to a new family. 

So, this is the type of predatory operations that do not serve lowincome families well, and I can certainly understand why lenders 

would be very reluctant to enter into that world, or only at extraordinarily high terms, but then were charging much more. As the expression goes, it is expensive to be poor. You are paying far more 

in interest than an ordinary person. 

Should we be addressing any of these factors, and how does this 

affect this conversation about changing the terms of the loan parameters for lending on manufactured housing that is placed into 

a situation where you do not own the land or control the utility or 

rent costs? Would anyone like to comment on that? 

Mr. POLYCHRON. Do you think some of these could be an exception, I mean, just maybe to Oregon? I am not singling out Oregon, 

but, I mean, you know, I have not experienced that in my own 

State, and I do not know if you all have experienced that, either. 

Mr. WOODS. I do not have any experience in it, so I am afraid 

I am not a very good——

Senator MERKLEY. OK. Very good. 

Ms. GORDON. I mean, I will be happy to speak to this. I do not 

think it is unique to Oregon that the folks in investor-owned communities have problems with security of land tenure and with rising costs and all sorts of other rules, like if you want to sell your 

unit, you cannot put up a sign, or, you know, there are all kinds 

of rules that are very difficult. 

I think that is why you have seen a movement toward residentowned communities, where the decisions are made with the best interest of the owner residents in mind, and that is—it is particularly 

important now as FHFA writes this Duty to Serve rule that they 

use their market power, because Fannie and Freddie both do lend 

in this area and should be probably doing, or finance in this area, 

and should be doing more of that. It is important to use that power 

to make sure that there are better rules of the road for investorowned communities and for chattel lending, as well, to make it 

much safer. 

It is very predatory. There was a discussion earlier about whether manufactured housing caused the 2008 financial crisis. But, 

manufactured housing has its own crises. You know, there was a 

statistic in a recent article that in the year 2000, 75,000 manufactured homes were repossessed and that is something of an epidemic. We would not stand for that in site-built housing. 

So, this is especially not the time to be removing more protections in that area. We should be thinking about what additional 


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protections we can provide, because this is an important source of 

potentially affordable housing when it is done fairly. 

Senator MERKLEY. Yes. That is what I want to emphasize—is 

this really is an option for so many folks who are looking for a lessexpensive house, but when that dream of owning your house turns 

into a nightmare, and particularly many seniors located into this 

situation and then discover, well, your rent is going to go up $200 

this year. Well, there went $40,000 of equity, now you cannot sell 

the house, et cetera, it becomes—then it does become a nightmare 

that really does not serve low-income Americans well. So, I just 

wanted to draw attention to that as we consider how we might 

modify the financial strategies related to this. 

Mr. MOTLEY. Senator, we at the MBA think it is a very important State issue and we would like to review it and review your 

concerns earlier. 

Senator MERKLEY. Thank you, and I look forward to working 

with you all. I think we all want the mortgages to be affordable but 

not predatory, so they become a form of wealth construction or addition in America, really part of the American dream, but not predatory wealth-stripping strategy. 

Thank you. 

Chairman SHELBY. Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. 

Mr. Polychron, one of my experiences as a small business owner 

for a couple decades, it seems, maybe even a little longer in my lifetime, it appears the time with my gray hair that I had to cutoff——

[Laughter.] 

Senator SCOTT. It is just not that funny, though. Anyway——

[Laughter.] 

Senator SCOTT.——just a quick question for you, sir. As an insurance guy working in business, one of the things that I experienced 

with my couple thousand customers is most wanted customization. 

They wanted the ability to have a serious conversation about their 

set of needs and then to have a product designed for it. It appears 

to me that we are really heading in the exact opposite direction, 

where one size fits all. A case in point, the debt-to-income ratios 

of the 43 percent rule. 

From my perspective, it just appears that, while well intended, 

the fact of the matter is that perhaps we are going to carve out a 

major segment of the population that would be creditworthy if they 

were able to consider more factors. The classic example from my 

life was when I started my business, I had to have a relationship 

loan from my lender, who took a chance. It appears to me, while 

that was a business loan experience, that allowed me or afforded 

me the opportunity to get a mortgage. 

The fact is that we are, through this trying to synchronize and 

harmonize and standardize everything, we are going to eliminate 

those very opportunities for worthy individuals who may not fit 

into the cookie cutter box that we think we are building on their 

behalf to actually have access to loans. Has that been your experience in the field? 

Mr. POLYCHRON. Well, what you did not know about me is that 

I was a bank president in another life, and, you know, a lot—I do 

not think this has been discussed enough today. We had Mr. 


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Cordray at a meeting with NAR earlier last year and one of the 

things that I kept hearing was underwriting, and I will tell you 

that when I was a banker, Underwriting 101 was basically the ability to repay. And, I do not think what we are doing enough of is 

good underwriting, and I still think that was the primary cause of 

the bubble. It was not necessarily some of the rules and regulations 

that have come forward, but truly the fact that, you are right, we 

need more opportunity for the millennials, et cetera, who are the 

primary borrowers, or buyers of homes right now. We have to open 

that up, and I think good underwriting would take care of a lot of 

it. 

Senator SCOTT. Mr. Motley, I see you shaking your head. 

Mr. MOTLEY. Senator Scott, I would like to just follow up on that, 

and I gave an example earlier about the restrictive one-size-fits-all 

nature of the 43 percent back-end ratio. It does not fit for everybody and we should not rely on it as the only source of underwriting. Instead, we need to be able to make holistic changes to the 

QM rule that will allow us to exercise prudent judgment in making 

good, sound underwriting decisions. That does not mean that we go 

back to the days of stated income, stated asset type loans at all. 

It just means that we have a little bit more flexibility to evaluate 

the very situation that you discussed earlier. 

Senator SCOTT. It appears our rush toward the one-size-fits-all 

for a State like South Carolina, which so much of my State being 

rural areas, where manufactured homes in the rural areas, or 

throughout, frankly, the State of South Carolina are consistent, 

and yet many of the rules that we are seeing promulgated would 

restrict access to capital. And, when you look at the challenge of 

growing wealth in this Nation, there is a great disparity, primarily 

because of the value of the home and the value of that home ends 

up on a calculation on your net worth. So, from my perspective, the 

rural communities are being impacted negatively by the direction 

that we are heading. 

One final question before we get to the other witnesses. It seems 

to me that the impact on minorities and their ability to be a part 

of the qualified mortgage conversation is very strong. It is as if we 

prevent minorities from getting mortgages because of Dodd-Frank. 

Then the Government comes in to bankers and says, why are you 

not doing more lending? And then you get penalized for that, and 

then the Government creates another set of rules forcing you to do 

something that seems to be in great contradiction to the very DoddFrank standards that we are setting. 

Mr. Woods. 

Mr. WOODS. I think your comment is right on, and I think that 

is one of the cases where we look at the fact that the rules or the 

regulations are not in—in misalignment, if you will, the fact that 

there are a lot of unintended consequences. The rule itself was for 

a good reason——

Senator SCOTT. Yes. 

Mr. WOODS.——but nobody looked beyond that to start to say, 

yes, but it will not work in these kind of communities, or it will 

not work under these kinds of loans. 

You know, back to the community banker, and I have a great respect for them, one of the things that the community banker has 


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as an advantage, if he is a true community banker—be careful, 

there are a lot of people calling themselves community bankers 

that are not, OK—the true community banker knows his community. He is involved in the school board and the Chamber and he 

has a reason to have his bank be successful and the community be 

successful, because it is going to make his bank more successful. 

And there is no—and there is nothing in all of these that allows 

for that insight. You cannot put that insight on a loan form, where 

he knows the individual. 

Senator SCOTT. Exactly. 

Mr. WOODS. He made that relationship loan. 

Senator SCOTT. Hence the relationship lending experience that I 

have had. 

I know my time is up, Mr. Chairman. 

Chairman SHELBY. Thank you, Senator Scott. That is a good 

point. 

Senator Donnelly, you have been very, very patient. 

Senator DONNELLY. Thank you, Mr. Chairman. In this seat, you 

have to be. 

[Laughter.] 

Chairman SHELBY. I have been in that seat. 

[Laughter.] 

Senator DONNELLY. Before he leaves, I want to mention, Mr. 

Scott has real world experience working in small business and trying to make markets go. 

I used to serve, Mr. Woods, on a school board, which can occasionally be a challenging endeavor, as they say. But, for the State 

I am from, Indiana, manufactured housing is really important. It 

is important in a number of ways, for the people who want to live 

there, and then we have over the years traditionally had a great 

history of being one of the producers of the product. I have toured 

the plants. I have been with the workers, spent time with them. 

And, the goal is, how do we provide affordable housing to families 

who, you know, they are not going to be building the McMansions 

on the Potomac River. These are our families who work hard every 

day and have the same American dreams, though, that everybody 

else has. And, so, access to credit in a responsible way is obviously 

a key. 

I have been a sponsor of a bill, Preserving Access to Manufactured Housing, and so the question is, how do we do this in the 

most responsible way, that nobody wants to open up a can of 

worms again. I voted for Dodd-Frank, but I voted for it to provide 

safety and stability, not to make it impossible for certain markets 

to have loans. 

You know, what we have seen, or what I have seen and what I 

have heard from folks, they are small—you know, the companies 

that I deal with in my home State are usually small, family-owned 

enterprises that are building these homes. There has been a dryup of small dollar loans on these kind of things. 

And, so, as we look at this, Mr. Polychron, I want to ask you, 

could you tell us why it is important to ensure consumers have 

more affordable access to manufactured housing, if you would? 

Mr. POLYCHRON. And I would even suggest a way maybe we get 

there, if that is OK. 


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Senator DONNELLY. That would be terrific. We have no magic answers here. We are looking for——

Mr. POLYCHRON. Arkansas, too, is a lot like Indiana, and a large 

percentage, especially in our rural areas, depend on manufactured 

housing. I think Ms. Gordon mentioned earlier, we had a symposium on credit access recently at the National Association of REALTORS®, and one of the subjects we have touched on a little bit 

today were different credit scoring systems, such as FICO 09, 

VantageScore, which take into account rents paid, utilities paid, 

and can actually raise a person’s credit score to where they could 

qualify for these type loans. I think it is an area we certainly need 

to research more and explore. 

Senator DONNELLY. Because the thing we do not want to do is 

we do not want to put folks in a box with a payment that cannot 

be made. That does not help——

Mr. POLYCHRON. Good underwriting, again. 

Senator DONNELLY. It does not help any families. It does not help 

the home companies. So, what we are trying to do is thread the 

needle of, in effect, how do we do this. And, I am not willing to say, 

and I know the Chairman is not, that small, you know, relatively 

small compared to some others, you know, loans of $30,000, 

$40,000, that they should not be made, because those people have 

the same hopes and dreams, and, then, so, how do we do this in 

an affordable way. 

Mr. Woods, do you believe Congress can have lending restrictions 

that make sense on this while still protecting consumers and the 

economy from the dangerous practices we ran into? 

Mr. WOODS. I think it is possible. I think—again, I do not know 

that much about that piece of it, but I can——

Senator DONNELLY. Well——

Mr. WOODS.——some of the comments before. The good rules can 

be made. They need to be made with common sense and they need 

a lot of input and we need to look at all the aspects. 

Senator DONNELLY. Mr. Polychron, to that same question. Do you 

feel this needle can be threaded so that we have regulations that 

make sense, that provide appropriate restrictions and also make a 

profit for the people who have to write the papers? 

Mr. POLYCHRON. My opening comments were about balance and 

finding that in the middle, and I think, with enough work, we can 

reach that balance. Yes, sir, I do. 

Mr. MOTLEY. Senator, we agree. MBA would welcome the opportunity to figure out a way to thread that needle. 

Senator DONNELLY. OK. And, Ms. Gordon, I know there are certain parts of the bill that you do not support, and I understand 

that from your written testimony. The FHFA, the Duty to Serve 

rule required by the Housing and Economic Recovery Act of 2008, 

can you talk a little bit about how the Duty to Serve will enhance 

accessibility and affordability of manufactured housing. 

Ms. GORDON. Well, what I hope it will do is make sure that both 

Fannie and Freddie have an obligation to ramp up their work in 

this area so that there are more ways to access safe and affordable 

financing for manufactured homes and for community owners that 

run responsible communities. 


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I think what is important and what FHFA can do is they can 

sort of set a best practices standard, if you will, to ensure that 

where they are putting their backstop, their guarantee, is on the 

type of lending that has the features that people need to be successful, you know, security of land tenure, adequate notice before 

rent increases, the ability to sell their unit if they need to move. 

You know, there is a whole variety, and I would be happy to work 

with your office on the list that we have provided to FHFA on this. 

You know, if I could wave my magic consumer protection wand, 

of course, I would make most of these loans titled as real estate. 

But, for some reason, not everybody seems to be planning to listen 

to me on that, and so I think it is extremely important that we not 

just completely write chattel loans out of this rule, but that we use 

the market power that Fannie and Freddie have to establish this 

safer standard of those loans so that people in this situation are 

able to access responsible credit. 

And the reason—the dispute I have with some of the provisions 

of the proposed legislation really just has to do with not wanting 

to strip consumer protections from people who may have very, very 

high rate loans, because those can be dangerous and can be abusive and can put families in a situation that they do not expect. 

But, I would be very happy to work with you and your other colleagues on ways that we can open up that credit in a responsible 

way. 

Senator DONNELLY. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you. 

Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. 

When I first purchased my home in Fort Pierre, South Dakota, 

it was just after I had left working as Governor for 8 years. We 

were told that in the area that I purchased my home, there were 

no comps. The bank would have to hold my loan on their books. 

As a result, I had to pay a higher interest rate. Now, I suspect it 

might also have not helped that I was now seen as not having a 

stable job history, having just left one job and picking up another 

job. 

[Laughter.] 

Senator ROUNDS. I have heard that same story, though, from 

other South Dakotans. If you live in a rural area and you do not 

have comps, odds are that if you can get a mortgage, you will face 

higher mortgage interest rates. 

Another South Dakotan told me that he is also facing a similar 

situation. Because his loan cannot be sold into the secondary market, he is also paying a 1 to 2 percent interest rate premium for 

a loan with a 6-year term and a balloon payment. This is essentially a tax on living in rural America and another example of the 

red tape that is making it harder for people to own homes. 

Another example—and I thank my colleague, Senator Heller, for 

his leadership on this particular issue—residents in rural communities like South Dakota that I have mentioned often use balloon 

payments to finance home purchases. CFPB says this type of loan 

is abusive, but they have made an exception for parts of the country that the CFPB defines as rural in nature. 


BANKI-41578DSA with DISTILLER
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The CFPB took two attempts, but even after their second try, the 

CFPB still does not define towns like Lead, South Dakota, population 3,109, or Sturgis, South Dakota, population 6,683—other 

than during the Sturgis Motorcycle Rally when it goes to 600,000 

for a period of 2 weeks—they consider both of those as not being 

rural. That is thousands of people who will have severe difficulties 

getting a loan. 

This rule makes no sense and the practical result is that if your 

bank has to hold a mortgage on its books and you need a balloon 

payment, you will not be able to get a mortgage in towns like Lead 

or in Sturgis. 

In South Dakota, the community bankers rely on relationships 

and knowing their customers. Another effect of these new rules is 

that it does not matter how well you know your customer. 

Another example is a constituent was looking to buy a home and 

went to a community bank where they had done business in the 

past. His father had passed away and he was due to inherit several 

thousand acres without a mortgage. Because at the moment he applied for the loan this individual’s debt-to-equity ratio was not acceptable, he could not get a loan and that community bank lost his 

business and he had to go looking elsewhere. 

We need to take a look at all of these rules, all of these regulations, and, well, and ask the question, do they make common 

sense? 

I want to thank all of our witnesses here today. I want to ask 

them, aside from the fact of if you really had the opportunity to 

start out by eliminating the CFPB and starting over again, which 

rules do you think are the most egregious and which rules do you 

think constrain access to mortgage credit the most? 

Mr. MOTLEY. I would be happy to start with that. I think that 

the QM rules are too prescriptive. They incorporate a one-size-fitsall debt-to-income ratio. They restrict points and fees to too great 

an extent and lenders need to have more flexibility to accommodate 

the kind of loans that you are talking about. 

Senator ROUNDS. Yes. 

Ms. GORDON. Well, this may not be the answer you are looking 

for, but I actually think that by turning the qualified mortgage definition, which was never meant to be the box that everybody had 

to fit in—when CFPB, at the mortgage industry’s request, turned 

that into a safe harbor, it had the unintended consequence of having all of these loans feel like they had to fit in that box. The purpose of the Ability to Repay rule was to provide exactly the kind 

of flexibility that you are talking about, to know your customer, 

and as long as you are documenting that what the customer, in 

fact, is saying to you is true, that you would be able to make loans 

that did not at all look like that QM definition. 

And, I know nobody here is asking to roll back that safe harbor. 

But, the answer is not to give everything a safe harbor, because 

then you will go back to irresponsible lending, and that might not 

happen in your community banks, but it will happen in other institutions that do not have those same community ties as yours do. 

So, that is really important. 

I will add, since I did not get an opportunity to say this before, 

I completely agree that just the 43 percent bright line is a problem 


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and that compensating factors are really important. And, I will 

note again, when CFPB was implementing—Congress did not put 

that 43 percent in the Dodd-Frank statute. That was something 

that CFPB did when it was implementing the rule at the request 

of industry groups that went in and said, bright lines. We need 

bright lines. We cannot do this unless we have bright lines. And 

then they got a bunch of bright lines——

Senator ROUNDS. For fear——

Ms. GORDON.——and now folks are saying, oh, well, you 

know——

Senator ROUNDS. For fear of litigation. 

Ms. GORDON. Well, for fear of litigation, which, by the way, I 

would be interested if anybody can show me any kind of onslaught 

of litigation under Dodd-Frank on the consumer side——

Senator ROUNDS. If I could——

Ms. GORDON.——because I have not seen that. 

Senator ROUNDS.——and I know my time has expired, but, sir, 

would you care to——

Mr. MOTLEY. I would just point out that the safe harbor allows 

more security and less potential for litigation, not a rebuttal of presumption. Lenders are subjected to a defense of foreclosure, private 

right of action, punitive actions. It is—a safe harbor loan is far 

safer and it is marketable. A rebuttable presumption—there is no 

market for a rebuttable presumption loan in today’s world. So, 

there is a reason that we want to have safe harbor protections, because it is a more marketable loan. It allows banks to sell that loan 

into the secondary market, which they cannot do right now. 

Chairman SHELBY. Go ahead, Senator. 

Senator ROUNDS. Thank you. I did not know whether anyone else 

wanted to comment on that or not, but I am over my time, but with 

your generous accommodation——

Chairman SHELBY. Go ahead. 

Mr. POLYCHRON. The only thing I would comment on, A, about 

your appraisal process earlier, I concur with you 100 percent. Appraisals still cause a huge problem in our State and we would like 

to see that process strengthened. 

I think I would still go back to credit scores. The average credit 

score, you know, in 2013 was over 750. Last year, it was over 740. 

I still think going back to using a different method of scoring, credit scores, could certainly help more than almost any other thing. 

Senator ROUNDS. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you, Senator Rounds. 

Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

A lot has been covered, obviously, and I have been listening to 

this discussion of rural, and we have been able to work this 

through with Consumer Finance, and so we now have our definition that works, so give them a call. Maybe they will, a Governor, 

maybe they will work it out with you. 

One of the things that I want to point out, because we have been 

talking a lot about manufactured housing, and we are talking 

about real estate versus chattel lending. The difference that is 

hugely important to the consumer is the nonrecourse nature of a 


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mortgage versus chattel lending. And, so, you could, in fact, if you 

overburden or put too much debt on a borrower who is financing 

a manufactured home, you could be indenturing them for a long 

time. They cannot simply walk away from that debt. In most 

States, they cannot. And, so, we just need to be really careful as 

we pursue the manufactured housing, understanding that it does 

not have the same kind of characterization that mortgage lending 

does. So, I just want to kind of put that down. 

I am concerned about creditworthiness, and manufactured housing plays into this, as you have said, Chris, about that—or, I think 

it might have been you, Tom—that we begin with that lower level 

and then work up. We are looking at twin homes, condos, you 

know, apartment buildings, small first-time homeowner kind of operations that then move up. That is true for manufactured housing. 

Some of my folks live there for 50 years, but many transition out 

to a regular mortgage and a regular home. 

Going back to credit scoring, one of the things that is happening 

now is in the world of big data looking at algorithms and looking 

at not whether you paid your bill or whether you have a bank account or, you know, what did you buy yesterday? Where do you 

shop? And, so, I want you to comment a little bit about this trend 

to try and analyze creditworthiness looking at big data and algorithms and different kinds of inputs and whether you have seen 

any movement in that direction or if this is a 10-year-out problem. 

And, Mr. Woods, maybe start with you. 

Mr. WOODS. I think it may be the 10-year-out problem. I am intrigued by that kind of data. I think it plays into, as I say, the community banker. You know, those relationship loans that were first 

made in many cases were made because that banker knows the 

granddad and the dad and the uncles and they are a hard-working 

family and they pay their bills and it is just built into their nature. 

But, that young person that walks in there certainly does not have 

the credit and all the other things that he would need to have a 

750 credit score. 

One of the other things I thought interesting that we passed 

over, they would allow loans at 660, but nobody is making them, 

you know. They are making them at 750 and above. I defend the 

fact that I came from some pretty humble beginnings. I would fight 

the fact that there are a lot of people in those lower scores that pay 

their bills. They pay them on time——

Senator HEITKAMP. Yes. 

Mr. WOODS.——and that is their genetic——

Senator HEITKAMP. And an independent community banker who 

has been in that community, who has a relationship that goes way 

back, knows which family. I say this all the time in North Dakota. 

You could have a banker, a client or customer comes in and you 

look at the financial statement. It checks all the boxes. There is no 

way you are going to give them a loan. The guy who owns the body 

shop down the street who you know has always paid his bills, because you know his community reputation, you want to give him 

the loan and you do not want to be dinged for it in an examination, 

or you want to be able to do what you have always done in your 

communities, and so I do not think anyone is more sympathetic, 


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coming from a town of 90 people, than I am about what that means 

for relationship banking. 

But, I am concerned about creditworthiness. We hear this over 

and over again, and it is not just student debt. It is depressed 

wages. It is the whole nine yards that challenged millennials and 

young people. 

And, then, it is a change in consumptive behaviors. Are they 

really looking for those loans? Are they looking to the shared economy? And, how do we reach out to those folks, because we know 

that is also a way that they can build equity, that they can build 

a future. And, this is a big part of solving our retirement problem, 

as well. 

And, so, we—I am going to associate myself with Senator Corker. 

I was on that effort last time and urge the Committee Chairman 

to give us another go at the great work that we did last Congress. 

I think it will help solve and analyze a lot of these problems. 

And, so, I want to thank you all. I am going to submit some 

questions for the record, with the Chairman’s appreciation and approval, and thank you for the work that you do in your communities and thank you for the work that you do on behalf of consumers. 

Chairman SHELBY. Senator Merkley, do you have any other questions? 

Senator MERKLEY. Mr. Chair, I think the points have been quite 

well explored and it is very important to American families, this 

challenge. Home ownership is just an incredibly important part of 

families moving into the middle class, and getting it right in a 

fashion which empowers families and does not prey on families is 

what this conversation is all about, and thank you for bringing 

your insights to bear. 

Chairman SHELBY. I want to, on behalf of the Committee, I want 

to thank all of you. We have had, I think, a very good hearing, a 

lot of participation. We appreciate your input and your willingness 

to come to share, and let us try to solve some of these problems 

that you pointed out here. 

The Committee is adjourned. 

[Whereupon, at 12:07 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 


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PREPARED STATEMENT OF TOM WOODS

PRESIDENT, WOODS CUSTOM HOMES

ON BEHALF OF THE NATIONAL ASSOCIATION OF HOME BUILDERS

APRIL 16, 2015

Introduction 

Chairman Shelby, Ranking Member Brown, and Members of the Committee, I am 

pleased to appear before you today on behalf of the National Association of Home 

Builders (NAHB) to share our views on regulatory burdens to obtaining mortgage 

credit. My name is Tom Woods, and I am a home builder from Blue Springs, Missouri and NAHB’s 2015 Chairman of the Board. We appreciate the invitation to appear before the Committee on this important issue. 

NAHB represents over 140,000 members who are involved in building single family and multifamily housing, remodeling, and other aspects of residential and light 

commercial construction. Each year, NAHB’s builder members construct approximately 80 percent of all new housing in America. 

The ability of the home building industry to meet the demand for housing, including addressing affordable housing needs, and contribute significantly to the Nation’s 

economic growth is dependent on an efficiently operating housing finance system 

that provides adequate and reliable credit to home buyers and home builders at reasonable interest rates through all business conditions. At present, home buyers and 

builders continue to confront challenging credit conditions weighed down by a zealous regulatory response to the Great Recession. In addition, the ongoing uncertainty 

over the future structure of the housing finance system has intensified these challenges. This statement will examine several cases where Government regulation and 

other developments have impeded the ability of the housing sector to recover from 

the historically steep downturn and meet the credit needs of home buyers and home 

builders. 

The housing finance system is governed by statutes and regulation overseen by 

a myriad of Federal agencies. In response to the recent financial crisis, the DoddFrank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) mandated significant mortgage finance reforms and created the Consumer Financial 

Protection Bureau (CFPB) to supervise and monitor many of the new requirements. 

Additionally, the Federal Housing Finance Agency (FHFA), the Federal Housing Administration (FHA) and the Federal banking regulators all have taken steps to ensure the U.S. economy will never again be as vulnerable to ‘‘risky’’ mortgage lending. The collective force of the actions taken by these agencies, along with the lingering doubts and uncertainty of market participants, has resulted in an undue restriction on the availability of mortgage credit to many creditworthy borrowers. 

While there have been some actions taken by the individual agencies to mitigate 

the overly tight lending conditions, the housing sector is still struggling to return 

to normal. NAHB believes there are additional steps that can be taken to eliminate 

some of the barriers to credit availability and support a stronger, more robust recovery of the housing and mortgage markets while still employing balanced reforms to 

protect the housing market from another crisis. 

Factors Constraining Availability of Mortgage Credit 

While mortgage rates remain near historically low levels, access to mortgage credit is limited to home buyers and homeowners with pristine credit histories who can 

qualify for Government-backed programs. Presently, FHA, the Department of Veteran’s Affairs (VA), Fannie Mae and Freddie Mac (the Enterprises) account for an 

overwhelming majority of mortgage originations. 

Today’s tight lending conditions are keeping more buyers on the sidelines even 

as the housing market strengthens. As discussed below, significant new regulations, 

lender credit overlays, high fees and other factors continue to impact the availability 

of mortgage credit. At a time when housing affordability has been at record favorable levels, more buyers should be entering the housing market. However, many 

creditworthy borrowers are not able to take advantage of these opportunities. As 

more new rules are implemented, consideration should be given to how the cumulative impact of this imposing regulatory environment will adversely affect the 

availability of mortgage credit and housing market and economic activity. 

Regulatory Constraints 

The regulatory environment for mortgage lending is undergoing significant 

changes as regulators implement new rules mandated by Dodd-Frank. Uncertainty 

about the eventual impact of these regulations and the cost of compliance are key 

factors in tightened access to mortgage credit. 


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Total loan production costs continue to escalate and NAHB is concerned about the 

effect of the additional regulatory cost to originate loans in today’s environment, 

particularly for smaller banks and independent mortgage bankers. Many of these 

smaller originators serve rural communities, first-time home buyers and other underserved market segments. NAHB members are hearing that many smaller banks 

and independent mortgage bankers are choosing to depart the residential mortgage 

business, and in some cases, closing or merging their banks. This exodus will cause 

less competition and provide consumers with fewer choices. 

Ability to Repay Rule 

The implementation of the final Ability to Repay (ATR) standard by CFPB, which 

took effect on January 10, 2014, defined new lender underwriting requirements for 

mortgage loans and liabilities. However, the rule has created new hurdles for borrowers, especially low- to moderate-income buyers and self employed borrowers that 

are under increased scrutiny due to the debt-to-income calculation and more stringent documentation requirements. 

The ATR rule establishes standards for complying with the ability-to-repay requirement by defining a ‘‘qualified mortgage’’ (QM). The QM standard is intended 

to balance protecting consumers from unduly risky mortgages and providing lenders 

more certainty about potential liability. Lending outside the QM box still is allowed, 

and in fact, the CFPB is encouraging lenders to make non-QM loans. Lenders, however, must balance being exposed to increased litigation risk with expanding their 

non-QM product offerings. To the extent that lenders will remain cautious during 

the transition and beyond, creditworthy borrowers may not have access to affordable 

mortgage credit, or may be left out of the credit box all together. According to a 

Fannie Mae survey released in August 2014, 80 percent of lenders said they do not 

plan to pursue non-QM loans or prefer to wait and see. 

As required by Dodd-Frank, FHA and VA released separate QM definitions for 

loans insured or guaranteed by these agencies. As the HUD and VA QM definitions 

allow for lenders to follow current FHA and VA underwriting criteria, this has 

helped keep credit flowing. 

The final ATR rule included a 7-year window in which loans that are eligible for 

purchase by Fannie Mae and Freddie Mac are considered qualified mortgages. This 

provision will expire in 2021, or when the conservatorships of the Enterprises end. 

This provision of the ATR rule also has aided the continued flow of conventional 

mortgage credit through this transition period. With the Enterprises still purchasing a large percentage of mortgage originations, the market may not experience 

the full effect of the ATR rule until 2021 or when the conservatorships of the Enterprises has ended. 

Since issuing the final ATR rule, the CFPB has made several amendments to the 

rule to address the practical implementation of the rule. Most recently, CFPB proposed beneficial amendments relating to small creditors and rural underserved 

areas. 

An area that continues to be of concern to NAHB is how the final ATR rule requires lenders to calculate the 3 percent cap on points and fees. The final ATR rule 

includes closing charges paid to affiliated settlement service providers in the 3 percent cap on points and fees, while the points and fees charged by unaffiliated companies are not included. NAHB strongly objects to this disparity and has urged 

CFPB to exclude points and fees paid to affiliated firms when calculating the limit. 

Many home builders and lenders have established settlement service affiliates such 

as mortgage and title companies to facilitate home purchases for consumers. Requiring affiliate fees and points to be included in the 3 percent cap creates disincentives 

to establish these beneficial relationships. Affiliated and non-affiliated settlement 

services should be treated equally. NAHB adamantly believes that fees and points 

from affiliated firms should be excluded in the 3 percent cap, thereby giving equal 

treatment to affiliated and non-affiliated settlement service providers. We strongly 

urge the CFPB to implement such an exclusion. 

H.R. 685, the Mortgage Choice Act, introduced in February, and passed by the 

House on April, 14, 2015, would amend the Truth-in-Lending regulation to clarify 

the final QM rule’s definition of points and fees. The specific adjustments provided 

in the bill would clarify that title insurance charges by a title insurance provider 

affiliated with the lender and a homeowner’s escrowed insurance premiums do not 

count toward the 3 percent cap on the points and fees limit for a QM loan. The bill 

is intended to help more sound loans pass the QM test and ensure that consumers 

can choose the lender and title provider best suited to their needs. 

Representative Andy Barr (R–KY) recently introduced H.R. 1210, the Portfolio 

Lending and Mortgage Access Act. The legislation is intended to ease the ATR requirements for community lenders who may be fearful to originate non-QM loans 


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and, therefore, may limit access to credit for home buyers in their communities they 

believe to be creditworthy. This bill would amend the Truth-in-Lending regulation 

to provide that a loan satisfies the ATR requirement if the loan remains in the originating lender’s portfolio. Banking regulators would be required to treat such a loan 

as a QM, if the lender has, since the loan’s origination, held it on its balance sheet 

and all prepayment penalties with respect to the loan comply with specified limitations. 

NAHB believes the concepts behind each of these bills have merit and should be 

passed by both the House and Senate as methods to ease the components of the 

ATR rule with the most potential to restrict mortgage credit. 

Qualified Residential Mortgages 

The implementation of the Credit Risk Retention rule, also mandated by DoddFrank, was finalized in 2014 and aligns the definition of a qualified residential 

mortgage (QRM) with the QM. Though the rule is not effective until December 2015, 

NAHB believes aligning the QRM with the QM has many benefits. Establishing one 

streamlined regulation, instead of having two separate sets of underwriting criteria, 

will alleviate confusion in the marketplace and will help provide clarity and transparency for home buyers, lenders, investors and other housing market participants. 

Aligning QRM with QM levels the playing field, promotes liquidity in the mortgage 

market and allows access to credit for a diverse range of home buyers, particularly 

first-time and low- to moderate-income home buyers. Additionally, the underwriting 

criteria and product limitations contained in the QM will promote more prudent 

lending and will provide investors with an assurance that the loans are sustainable. 

Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act 

and the Truth in Lending Act Proposal—‘‘Know before you owe’’

In December 2013, the CFPB finalized new mortgage disclosure forms that are 

intended to help consumers make informed decisions when shopping for a mortgage 

and avoid costly surprises at the closing table. The new forms will become effective 

August 1, 2015. The rule applies to most closed-end mortgages but does not apply 

to home-equity lines of credit, reverse mortgages or mortgages not attached to real 

property. The rule also does not apply to loans made by a creditor who makes five 

or fewer mortgages in a year. 

For over 30 years, Federal law has required lenders to provide consumers with 

a Good Faith Estimate of closing costs and a Truth-in-Lending disclosure of the 

loan’s annual percentage rate, total finance charges and total loan payments within 

3 days of applying for a mortgage loan. The law also required the two different 

forms to be re-disclosed shortly before closing on the loan. The information on these 

forms was determined to be overlapping and the language inconsistent. As directed 

by Dodd-Frank, the CFPB updated and integrated the forms based on extensive consumer and industry research. 

The new combined forms are called the ‘‘Loan Estimate’’ which is provided at application and the ‘‘Closing Disclosure’’ which must be provided at least three business days before the consumer closes on the loan. Any change to the information 

provided on the form that is made during that 3-day period will restart the 3-day 

waiting period (with limited exceptions). NAHB and other housing industry stakeholders are concerned with the practical outcome of transitioning to the new forms, 

particularly that there is no opportunity under this regulation to comply early, 

which means that industry will not be able to test systems, in real-time, in real circumstances, until after August 1. NAHB joined with other industry groups and recently wrote CFPB Director Cordray to encourage the agency to announce and implement a ‘‘restrained enforcement and liability’’ or ‘‘grace period’’ for those seeking 

to comply in good faith with the provision after August 1 through the end of 2015. 

NAHB members depend on the certainty of a smooth closing process and NAHB 

is concerned that any confusion related to the new rules, compounded by the fear 

of aggressive enforcement activities, will negatively impact the ability to close on a 

home in a timely manner. 

Lender Credit Overlays and Buy Back Risk 

Lender overlays in the mortgage credit process have been a major factor in the 

greater difficulty potential home buyers are having in obtaining financing as lenders 

impose credit underwriting standards that are more restrictive than those required 

by FHA, VA, Fannie Mae and Freddie Mac. These credit overlays are employed due 

to heightened lender concerns over forced loan buy-backs on mortgages sold to 

Fannie Mae and Freddie Mac and/or greater required indemnifications on FHA-insured and VA-guaranteed loans. 

When lenders sell loans to entities, such as Fannie Mae and Freddie Mac, and 

through the FHA/VA/Ginnie Mae securities process, they are required to make asVerDate 0ct 09 2002 16:40 Jul 29, 2016 Jkt 000000 PO 00000 Frm 00047 Fmt 6621 Sfmt 6621 L:\HE3E8B~1\04-16R~1\HEARING\95735.TXT SHERYL

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1The Impact of Tight Credit Standards on 2009–13 Lending. http://www.urban.org/research/

publication/impact-tight-credit-standards-2009-13-lending. 2The State of the Nation’s Housing 2013. www.jchs.harvard.edu/sites/jchs.harvard.edu/files/

son2013.pdf.

surances that they have performed the appropriate level of due diligence on the loan 

application, and the lenders agree to buy back a loan if it is discovered that they 

were at fault in their underwriting process. These representations and warranties 

(‘‘reps and warrants’’) have been a standard practice in mortgage lending. 

In the aftermath of the collapse in the housing market, the underwriting of delinquent loans was alleged not to have met the established criteria of FHA, the Enterprises, and other secondary market entities. As a result, lenders have faced a protracted struggle with these agencies about the buy back of loans that have been 

deemed ineligible for Enterprise guarantees or Government insurance based on the 

finding of faulty due diligence practices. Lenders complain that the criteria triggering buy-back demands by Fannie Mae and Freddie Mac and insurance claims rejections by FHA and VA are unclear and inconsistent. The resulting uncertainty has 

caused lenders to employ underwriting standards that are more restrictive than 

those required by FHA, VA, Fannie Mae and Freddie Mac. These lender ‘‘overlays’’ 

have closed the credit window to many aspiring home buyers who actually meet the 

loan qualification requirements established for these programs. 

The recent sharp increase in borrower credit scores since 2001 is an indication 

of how lenders have responded to concerns about how the Federal agencies will implement repurchases and indemnifications. A recent report from the Urban Institute 

(UI)1 found that credit has become much less available to borrowers with lower 

credit scores. From 2001 to 2013, the share of new purchase borrowers with FICO 

credit scores below 660 declined from 28 percent to 11 percent; those with FICO 

scores between 660 and 720 remained at 28 percent of the total. Meanwhile the 

share of borrowers with FICOs above 720 increased from 44 percent to 62 percent 

of the total. The UI report estimates that as many as 1.25 million fewer mortgage 

purchases were made in 2013 than would have been made had credit availability 

been the same as in 2001. For 2009–13, UI estimates that 4 million more loans 

would have been made based on 2001 credit standards. 

The weighted average credit score for loans purchased by Fannie Mae and Freddie 

Mac in 2014 was 744, while in fact, both Fannie Mae and Freddie Mac have a minimum credit score requirement of 620 for most purchased mortgage loans. 

FHA will insure mortgage loans with credit scores as low as 500 under certain 

scenarios. However, according to the 2013 State of the Nation’s Housing Report,2

in 2007, borrowers with credit scores below 620 accounted for 45 percent of FHA 

loans. By the end of 2012, that share was under 5 percent. 

Similar trends are evidenced in the share of first-time home buyers which accounted for only 28 percent of home sales in February 2015, well below the historical average of about 40 percent. In the new home market, NAHB survey data indicate the current share of first-time buyers is only 16 percent compared to an historic 

average of 30 percent. 

In 2014, the Enterprises’ regulator, FHFA, and FHA announced efforts to clarify 

and, in some cases, ease, the reps and warrants and identification of loan defects 

that will trigger enforcement actions against lenders. NAHB anticipates positive results from these modifications and is hopeful to see lenders originating to the underwriting specifications of the agencies rather than implementing their own, more 

strict, standards. 

Alternative Credit Scores 

It is possible that the use of alternative credit scores could offer lending opportunities to borrowers currently lacking access to mortgage credit due to a low or inaccurate FICO credit score. Fannie Mae and Freddie Mac have been directed by FHFA 

to assess the feasibility of using alternative credit score models in their automated 

loan-decision models. The Enterprises are planning to study the costs and benefits 

associated with VantageScore 3.0 and FICO Score 9. 

To generate a traditional credit score, a borrower must have one trade line that 

is at least 6 months old, with a balance on it. Fair Isaac Credit Services, Inc. estimates that 50 million U.S. consumers have credit histories that do not meet that 

requirement. These potential borrowers are disproportionately Hispanic (24 percent), African American (14.6 percent), and recent immigrants. However, it is estimated these 50 million people have a history of paying regular bills such as rent, 

utilities, insurance, and telecommunications. 

FICO Score 9’s primary enhancement is its separation of medical debt collection 

from other unresolved debts. As a result, Fair Isaac estimates that a consumer with 


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the median credit score of 711 whose only negative collection issue is medical-related will see his or her credit score increase by 25 points. FICO also recently announced a new credit score based on a consumer’s payment history with telecommunications and utility bills. The new score could help applicants who don’t use 

credit often but are responsible with other monthly payments. 

VantageScore 3.0 claims the ability to calculate a score for 30 to 35 million previously ‘‘unscoreable,’’ or ‘‘thin file,’’ consumers. VantageScore requires just 1 month 

of credit history and less frequent updates than the current FICO score used by the 

Enterprises. Credit scores can now be made available to consumers who are brand 

new to credit, those who only use credit occasionally and people who have not used 

credit at all recently. The VantageScore 3.0 credit score also ignores all paid collections, as well as any collections, paid or unpaid, under $250. 

HUD Secretary Castro also has stated that FHA is exploring the use of new credit 

scoring models that use nontraditional factors, such as rent and utility payments, 

to determine creditworthiness. The potential use of alternative credit scoring models 

by FHA and the Enterprises could help to open the credit box. 

Fees 

Fees for Government-backed mortgages continue to be at an increased level, even 

though the credit quality of the underlying loans has increased significantly, as evidenced by the high FICO scores referenced earlier. These higher fees are usually 

passed on to consumers, making it more expensive for borrowers to obtain a home 

loan or, in some cases, even preventing them from qualifying for a loan. 

In the wake of the housing downturn, FHA steadily and significantly increased 

its upfront and annual mortgage insurance premiums (MIP). The annual MIP on 

a typical 30-year FHA loan (LTV less than 95 percent and loan amount below 

$625,500) was raised six times in 5 years and had reached 130 basis points by April 

2013 compared to 50 basis points in April 2010. Further, FHA also terminated the 

policy that allowed borrowers to stop paying mortgage insurance premiums after 

their loan reaches 78 percent of its original value. As a result, the cost of an FHA 

loan over the life of the loan had become higher than that of a conventional loan 

with private mortgage insurance, which borrowers can stop paying when the LTV 

reaches 78 percent of original value. 

NAHB strongly supports FHA’s announcement in January that, effective with 

case numbers dated on and after January 26, 2015, it would reduce its annual upfront MIP by 50 basis points to 80 basis points on FHA loans with LTVs less than 

95 percent and loan amounts of $625,500 and below. 

At the direction of the FHFA, Fannie Mae and Freddie Mac have been increasing 

their guarantee fees (g-fees) that are charged to lenders to protect against creditrelated losses. G-fees charged by Fannie Mae averaged 62.9 basis points on new single-family originations in Q4 2014. This is a significant increase over 2012 in which 

the average was 39.9 basis points. 

In addition to the g-fees, Fannie Mae and Freddie Mac continue to charge adverse 

market fees and loan level pricing adjustments. Fannie Mae and Freddie Mac have 

charged a 25 basis point adverse market fee since March 2008 for whole loans and 

mortgage loans delivered into MBS. The loan level price adjustments, which have 

been charged since 2009, add delivery fees to mortgages purchased by the Enterprises. The delivery fees which vary based on credit score and loan-to-value ratio 

range from 25 to 325 basis points. This translates into a 6 to 80 basis point increase 

in mortgage financing costs. 

In June 2014, FHFA requested input on setting the g-fees. NAHB’s comments to 

FHFA opposed a further increase in g-fees and urged that affordability should be 

a significant consideration in setting g-fees. NAHB’s comments also included a recommendation for the Enterprises to eliminate the upfront adverse market charge 

and loan level price adjustments. Current market conditions in which defaults and 

foreclosures are declining and housing markets nationwide are improving have rendered these charges obsolete. 

Though FHFA still is in the process of reviewing and considering comments received on the g-fee request for input, NAHB is hopeful that Director Watt will make 

an announcement soon that will provide for lower fees to lenders and, ultimately, 

home buyers. 

Downpayments 

In an acknowledgement that high downpayments are a significant impediment to 

some borrowers, especially first-time home buyers, last October FHFA Director Mel 

Watt directed the Enterprises to begin purchasing 3 percent downpayment mortgages from creditworthy borrowers. Fannie Mae began purchasing 97 percent LTV 

mortgages in December and Freddie Mac’s purchase program began in March. 


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3 Urban Institute, Why the GSEs’ Support of Low-Downpayment Loans Again is No Big Deal. 

http://www.urban.org/urban-wire/why-government-sponsored-enterprises-support-low-downpayment-loans-again-no-big-deal.

NAHB agrees with Director Watt’s assessment that 3-percent downpayment mortgages can be made safely by imposing strict credit and underwriting standards that 

ensure borrowers have strong credit and meet income, asset and employment requirements. Also, a recent Urban Institute analysis found that the default rates on 

3 to 5 percent downpayment loans and 5 to 10 percent downpayment loans purchased by the Enterprises are similar.3

Appraisals 

The housing recovery also has been impeded by ongoing problems in the U.S. residential appraisal system. While lenders, Federal banking regulators and federally 

related housing agencies implemented corrective measures in response to valuation 

breakdowns that came to light in the wake of the Great Recession, and Congress 

mandated additional measures in the Dodd-Frank Act, these steps did not address 

fundamental flaws and shortcomings of the U.S. residential appraisal framework. 

Improper appraisal practices, a shortage of experienced appraisers and inadequate 

oversight of the appraisal system continue to restrict the flow of mortgage credit 

and retard the housing recovery. NAHB is not advocating that appraisals should be 

higher than the real market. Rather, our goal is to establish an appraisal system 

that produces accurate values through all phases of the housing cycle. 

The principal focus of reforms to-date has been on eliminating undue influence 

on appraisers to produce inflated valuations that facilitate transactions. However, 

when home prices began declining, improper appraisal practices exacerbated the 

slide in values. Some appraisers used distressed sales—many of which involved 

properties that were neglected and in poor physical condition—as comparables in assessing the value of brand new homes, without accounting for major differences in 

condition and quality. Without such adjustments, the two housing types are not 

comparable. The inappropriate manner in which distressed sales were utilized distorted home valuations. Use of the cost and income approaches in conjunction with 

the comparable sales approach could mitigate such distortions. 

The dramatic increase in the use of Appraisal Management Companies (AMCs) 

is another factor contributing to inaccurate appraisals. Some AMCs have reduced 

appraiser compensation, which has led to more activity by appraisers with less 

training and experience, and shortened turnaround times for valuations to as little 

as 48 hours. These changes have had a significant adverse effect on appraisal quality. 

Other challenges facing the appraisal industry include shortcomings in appraiser 

training and experience in dealing with new construction and green building. Additionally there is insufficient new construction, energy efficient and green building 

data available to appraisers and current valuation practices do not provide a process 

for expedited appeals of inaccurate or faulty appraisals. Oversight of appraiser 

qualifications and appraisal practices falls to the individual states, and many jurisdictions have inadequate resources to adequately perform this function. In some 

states, fees collected for appraiser licensing and certification are swept into a general fund and are not utilized in appraisal/appraiser oversight and enforcement. 

NAHB has been a leading advocate for correcting the valuation process and has 

undertaken a number of actions to raise awareness and address the adverse impacts 

inaccurate appraisals are having on the housing sector. NAHB has conducted five 

Appraisal Summits to provide opportunities for the agencies and organizations that 

establish appraisal standards and guidelines to join housing stakeholders in a constructive dialog on major appraisal topics of concern. 

Through the Appraisal Summits and feedback from builders and others in the 

field, NAHB has identified the following key areas of focus to improve current appraisal requirements and practices, which are presented in a white paper entitled 

A Comprehensive Blueprint for Residential Appraisal Reform, which contains the following recommendations:

Strengthen Education, Training and Experience Requirements for Appraisers of New 

Home Construction, including: 

• The establishment of greater education, training and experience requirements 

for those who are assigned appraisals of new construction to ensure that lot values and building costs, including those for energy efficient, green building and 

other evolving new construction techniques and mortgage products, are fully 

considered in valuation of new home construction.


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• The incorporation of the qualifications for appraisers of new construction into 

appraisal regulations and guidelines of the bank regulatory agencies, Fannie 

Mae, Freddie Mac, FHA, VA, and USDA.

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

• Establishment of an appraisal database system for new construction.

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

VA and

• USDA in their Uniform Appraisal Dataset (UAD).

• Expansion of the UAD to include new construction, energy efficient and green 

building data standards. Develop New Appraisal Standards and Best Practices 

for Conducting Appraisals in Distressed Markets by:

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

• Giving greater weight in distressed markets to alternative means of valuation, 

such as the cost-based approach to value.

• Revising banking agency guidelines to require the appraisal entities used by financial institutions to avoid the use of distressed sales as comparables for new 

construction sales and, if distressed sales are the only comparables available, 

to make adjustments to accurately reflect possible condition and stigma issues 

associated with distressed properties.

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

• Federal agency adoption of an appeals structure similar in design to that of the 

Department of Veterans Affairs Loan Guaranty Service Home Loan Program.

• The establishment of more efficient, timely and effective processes for State and 

local appraisal oversight.

• The establishment of a timely value dispute resolution process that is fair, balanced and appropriate to allow interested parties to appeal appraisal values 

when appraisal techniques and/or assumptions are incorrect.

Strengthen Oversight of Appraisal Activities through:

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

• Full implementation of appraisal mandates in recent Federal legislation addressing:

• Appraisal independence

• Customary and reasonable fees

• Mandatory reporting of appraisal standards violations

• Strengthening of State appraisal oversight and enforcement of regulations

• Dispute resolution

• Establishment of best practices for effective and consistent appraisal practices, 

policies and procedures.

NAHB stands ready to work with appraisal, housing and financial stakeholders 

to address the real challenges we face in restoring the public trust in how we build, 

transfer, value and finance the American consumer’s most valuable asset. Solving 

these issues, in the short and long term, is a critical step toward establishing an 

efficient and sustainable housing finance system. 

Regulatory Constraints to Housing Production Credit 

Despite signs of improvement in recent months, many home builders continue to 

deal with a significant adverse shift in terms and availability of land acquisition, 

land development and home construction (AD&C) loans. Lenders are reluctant to extend new AD&C credit citing regulatory requirements or examiner pressure on 

banks to shrink their AD&C loan portfolios as reasons for their actions. While Federal bank regulators maintain that they are not encouraging institutions to stop 

making loans or to indiscriminately shrink their portfolios, reports from NAHB 

members in a number of different geographies continue to suggest that bank examiners in the field are maintaining a more aggressive posture. 

According to data from the FDIC and NAHB analysis, the outstanding stock of 

1–4 unit residential AD&C loans made by FDIC-insured institutions to residential 


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construction businesses rose by $1.158 billion during the fourth quarter of 2014, a 

quarterly increase of 2.32 percent. On a year-over-year basis, the stock of residential 

AD&C loans is up 17 percent from the final quarter of 2013. Despite these gains, 

AD&C lending remains much reduced from years past. The current stock of existing residential AD&C loans of $51.2 billion now stands 74.9 percent lower than the peak level of AD&C lending of $203.8 billion reached 

during the first quarter of 2008. However, the count of single-family homes under 

construction is down only 33 percent from the first quarter of 2008 compared to 

today. Thus, there exists a lending gap between home building demand and available credit. This gap is being made up with other sources of capital, including equity, investments from non-FDIC insured institutions and lending from other private sources, which may in some cases offer less favorable terms for home builders 

than traditional AD&C loans. 

Concentrations in Commercial Real Estate Lending 

In general, the Federal banking regulators have been reminding financial institutions to adhere to the December 2006 bank regulatory guidance Concentrations in 

Commercial Real Estate Lending, Sound Risk Management Practices issued by the 

Office of the Comptroller of the Currency (OCC); the Board of Governors of the Federal Reserve System (Federal Reserve); and the Federal Deposit Insurance Corporation (FDIC) (collectively ‘‘the Agencies’’) in which the Agencies specified criteria they 

would review to determine when a bank was exposed to potential CRE concentration 

risk. A financial institution is considered to have a high CRE concentration, and 

thus subject to the Guidance, if it exceeds or is rapidly approaching the following 

thresholds:

• If loans for construction, land development, and other land loans equal 100 percent or more of total capital, the institution would be considered to have a CRE 

concentration and should have heightened risk management practices.

• If loans for construction, land development, and other land loans secured by 

multifamily and non farm nonresidential property (excluding loans secured by 

owner-occupied properties) equal 300 percent or more of total capital, the institution would be considered to have a CRE concentration and should employ 

heightened risk management practices. 

The guidance emphasized that the 100 percent and 300 percent thresholds are not 

to be considered as limits or caps on bank CRE lending but rather are intended as 

guidelines for banks and their examiners in determining appropriate loan underwriting and review systems, risk management practices and levels of reserves and 

capital. 

NAHB continues to raise awareness in Congress about the lack of AD&C financing and the possible adverse economic impacts of this situation. 

Basel III 

In mid-2013, the U.S. Federal banking agencies approved a new regulatory capital 

regime for all federally insured banking institutions. Referred to as Basel III, the 

new requirements increase the quantity and quality of capital for all federally insured banking institutions and will impose additional capital thresholds for the 

largest banking organizations. Basel III was effective for the largest banks beginning January 2014; compliance for community banks was mandatory beginning January 2015. 

Basel III revised the definition of High Volatility Commercial Real Estate 

(HVCRE) and required HVCRE financings to be risk-weighted at 150 percent up 

from 100 percent. AD&C loans considered HVCRE financings which generally will 

include commercial real estate projects with an LTV greater than 80 percent and 

borrower-contributed capital of less than 15 percent of the project’s ‘‘as completed’’ 

value. 

HVCRE loans do not include:

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

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

The new HVCRE capital requirement is affecting the ability of community banks 

to provide financing for AD&C loans using traditional methods and will impede the 

ability of banks to make high quality AD&C loans to builders and developers. As 

AD&C lending finally begins to recover, NAHB is extremely concerned that this rule 

introduces a significant new impediment to further improvement. 


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Cost of Regulation 

NAHB appreciates the Committee’s focus on regulatory activities that are adversely impacting the housing credit availability. Along with the challenges faced 

by home buyers and home builders in securing financing, regulatory burdens impose 

costs on the development of land and the construction/remodeling of homes, both 

multifamily and single-family, that are passed along to home buyers/homeowners 

and renters through higher costs for housing, both in terms of prices and rents. New 

regulations are being developed that impact all aspects of home building. For instance, the housing and construction industry is actively engaged with OSHA, EPA, 

FEMA and other agencies on new regulations which could drive up the cost of housing further. 

NAHB survey data of builders has demonstrated that, on average, regulation imposed during development accounts for 16.4 percent of the price of a home built for 

sale; regulation imposed during construction accounts for 8.6 percent of the price. 

Thus, in total, 25 percent of the price of an average single-family home built for sale 

is attributable to regulation imposed by all units of government at various points 

along the development/construction process. Most of these burdens are associated 

with permitting, land use, and construction codes, however, other financial burdens 

impose costs on the construction process and contribute to an increased cost of housing. 

In turn, higher housing costs ‘‘price out’’ households from home ownership. For 

example, according to 2014 estimates from NAHB, on a national basis, a $1,000 increase in home prices leads to pricing out just slightly more than 206,000 individuals from a home purchase. The size of this impact does vary widely across States 

and metro areas, depending on population, income distributions and new home 

prices. 

Housing is an important source of economic growth and job creation; and regulations are limiting home builders’ ability to grow and contribute positively to the 

economy. As of the final quarter of 2014, housing’s share of gross domestic product 

(GDP) was 15.2 percent, with home building yielding 3.1 percentage points of that 

total. Historically, residential investment has averaged roughly 5 percent of GDP 

while housing services have averaged between 12 percent and 13 percent, for a combined 17 percent to 18 percent of GDP. While these shares tend to vary over the 

business cycle, clearly housing is an important factor in a healthy economy. Job creation is one of the important ways that housing contributes to GDP. NAHB estimates that building an average new single family home creates 3.05 jobs; building 

an average new multifamily rental unit creates 1.16 jobs; and every $100,000 spent 

on residential remodeling creates 1.11 jobs. Therefore, the cost and availability of 

credit for builders and home buyers has a direct impact on the ability of housing 

to contribute to economic growth. 

All of these issues must be factored into the cost of housing. As the cost of housing 

increases and the credit box remains tight, home buyers and renters will have fewer 

safe, decent and affordable housing options. 

Conclusion 

NAHB supports steps to ensure that mortgage lending occurs in a safe and sound 

manner, with appropriate underwriting, prudent risk management and sound consumer safeguards and disclosure. NAHB continues to advocate for comprehensive 

mortgage finance system reform. While we believe regulatory barriers can be alleviated to some degree by the various regulators of the system as well as by specific 

legislative reforms, comprehensive legislation would ensure that components of reform are not in contradiction, but will work together to offer the hoped-for result; 

minimum disruptions to the mortgage markets while ensuring consumer protections. 

PREPARED STATEMENT OF CHRIS POLYCHRON

2015 PRESIDENT, NATIONAL ASSOCIATION OF REALTORS®

APRIL 16, 2015

INTRODUCTION 

Thank you for the opportunity to testify today. My name is Chris Polychron. I am 

the 2015 President of the National Association of REALTORS® (NAR). A REALTOR® for 27 years, I am an executive broker with 1st Choice Realty in Hot Springs, 

specializing in residential and commercial brokerage. 

While we have seen great progress in our economic recovery, access to affordable 

mortgage credit remains a problematic obstacle for prospective home buyers. The 


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number of first-time buyers entering the market is at the lowest point since 1987, 

despite historically low mortgage rates. The Nation’s home ownership rate has fallen almost to levels last seen in 1990. Today, the number of homes purchased annually remains less than 70 percent of what was purchased prior to the real estate 

bubble and subsequent collapse. 

Credit remains tight as lenders remain leery of taking on risk. NAR has long supported strong underwriting standards that require all mortgage originators to verify 

the borrower’s ability to repay the loan based on all its terms, including taxes and 

insurance. However, there remain some unnecessary regulatory burdens that are 

preventing qualified, credit-worthy borrowers from obtaining the American dream of 

home ownership. These fall into four specific areas:

• Consumer Financial Protection Bureau Issues

• Specialty Markets Challenges

• Short Sales and Foreclosure Matters

• Lending Policies 

CONSUMER FINANCIAL PROTECTION BUREAU (CFPB) ISSUES 

NAR appreciates the CFPB’s approach in proposing regulations that recognize the 

balance between access to credit and responsible lending. We support regulations 

such as the Qualified Mortgage (QM) rule to ensure that borrowers can repay their 

mortgage. We generally believe that these rules have created certainty in the mortgage market and have encouraged increased mortgage liquidity and availability, 

while ensuring consumers are afforded necessary protections. However, we believe 

there are certain changes that can be made to existing rules that will promote a 

safe, but more robust housing market. 

3 PERCENT CAP ON POINTS & FEES NEEDS TO BE FIXED 

This year, the U.S. House Financial Services Committee passed H.R. 685, ‘‘The 

Mortgage Choice Act.’’ This bill is identical to legislation that passed the House last 

year. This legislation is a bipartisan compromise that reduces discrimination 

against mortgage firms with affiliates in the calculation of fees and points in the 

Dodd-Frank Ability to Repay/Qualified Mortgage rule. The QM rule sets the standard for mortgages by providing significant compliance certainty to QM loans that 

do not have risky features and meet certain requirements. A key requirement is 

that points and fees for a QM may not exceed 3 percent of the loan amount. The 

inherent discrimination in this rule arises from the fact that under current law and 

rules, what constitutes a ‘‘fee’’ or a ‘‘point’’ varies greatly depending upon who is 

making the loan and what arrangements are made by consumers to obtain closing 

services. As a result of these definitions, many loan originators affiliated with other 

settlement service providers are not be able to make QM loans to a significant segment of otherwise qualified borrowers. 

The discrimination in the calculation of fees and points is being felt by consumers 

who are seeing reduced choices and added obstacles in their transactions. A Spring 

2014 NAR survey of affiliated mortgage lenders revealed almost half experienced 

problems due to the ATR/QM rule. When the 3 percent cap was cited as the cause, 

a significant number had certain services outsourced or were not able to complete 

the transaction. Where services were outsourced and charges known to the lender, 

nearly half of loans (43.8 percent) included higher fees. NAR strongly urges the Senate to introduce companion legislation and work to pass the bill this year. 

RESPA/TILA REFORM MUST BE ENFORCED SLOWLY 

On August 1, 2015, significant Real Estate Settlement Procedures Act (RESPA) 

and Truth in Lending (TILA) changes go into effect during the busiest transaction 

time of the year. There will no longer be a Good Faith Estimate (GFEs) or Truth 

in Lending disclosures. Those two forms have been combined into a single ‘‘Loan Estimate’’ or ‘‘LE.’’ While NAR is supportive of this harmonization, there will be unanticipated problems and issues uncovered in the implementation. NAR, as well as 

other industry groups, have urged CFPB to provide for a restrained enforcement period on the RESPA–TILA integration regulation, and have asked them to clarify 

TILA and RESPA liabilities under the regulation. 

COMMUNITY BANK LENDING SHOULD BE ENCOURAGED 

Ensuring community banks can continue to maintain good relationships and provide mortgage credit to their customers without being overloaded with regulations 

intended for more complex financial institutions is an important goal. 

NAR supports strong underwriting standards and believes that all mortgage originators should act in ‘‘good faith and with fair dealings’’ in a mortgage transaction 

and treat all parties honestly. This idea is at the core of community banks which 


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base their reputations on a relationship-lending model. These standards had been 

the basis for offering mortgage credit for decades until the mid-2000s which saw a 

proliferation of lenders offering mortgage products that were unstainable for most 

borrowers. 

In May 2005, NAR adopted principles that warned that consumers were being 

taken advantage of by intemperate, and often predatory, lending. We acknowledged 

then too that, in a credit-driven economy, the legislative and regulatory response to 

lending abuses could go too far and inadvertently limit the availability of reasonable 

credit for borrowers. Unfortunately, this restriction of credit was exactly what the 

market experienced. As a result of lenders and regulators over-correcting in response to the abuses in the middle of the previous decade, NAR called on the credit 

and lending communities and Federal regulators to reassess the entire credit structure and look for ways to increase the availability of credit to qualified borrowers 

who are good credit risks. 

Noting the importance of both of these principles, NAR supported the balance that 

the January 2013 mortgage rules achieved including strong consumer protections, 

the promotion of mortgage liquidity, and important ability-to-repay standards. One 

compliance option allows the creditor to make a reasonable and good faith determination that the borrower has a reasonable ability to repay the loan and related 

obligations, based on verified and documented information based on all its terms, 

including taxes and insurance. 

The CFPB’s proposed amendments recognize that community banks have a long 

history of this common sense approach to underwriting and that the relationshiplending model is one that should be maintained. Of course, any exception to the general rule must be limited and not become the general rule; moderating regulatory 

burdens for small lenders needs to be balanced with maintaining principles of 

strong underwriting based on a borrower’s ability-to-repay. 

SPECIALTY MARKETS SHOULD HAVE SPECIAL CONSIDERATION 

As stated, we believe that exceptions to the CFPB rules must be made on a very 

limited and specific basis. Certain markets may warrant that type of consideration. 

Rural communities and manufactured housing loans fall into this category. 

RURAL COMMUNITIES 

Rural citizens face unique challenges finding access to credit. Almost 20 percent 

of the U.S. population lives in rural areas or small towns and nearly all of the counties with the highest poverty rates in America are rural. NAR recognizes the 

uniqueness of rural communities and the key role that housing plays in building 

strong communities. REALTORS® who live in and serve these communities also understand the need for specialized programs to meet the needs of Americans living 

in rural areas. 

The CFPB has updated its own definition of a rural community for lending policies. NAR supports the recent changes they have made, but also believe communities should be able to petition the CFPB to be considered rural. To this end, NAR 

supports S. 871, the ‘‘Helping Expand Lending Practices in (HELP) Rural Communities Act’’, introduced by Majority Leader McConnell (R–KY), along with Senators 

Heller (R–NV), Capito (R–WV) and Paul (R–KY). This bill will allow communities 

to apply for a designation as a rural community. There are a number of factors to 

be considered when determining if a community warrants a rural designation—and 

some factors commonly used can be misleading. For example, the population determined by the census is a common tool used to determine a communities’ rural nature. But institutions like prisons and colleges can distort the actual population of 

a community. This legislation does not require the CFPB to grant a rural designation, but simply allows communities to apply for reconsideration. 

The Association also support changes to the process by which loans are approved 

under the Rural Housing Service (RHS) of the Department of Agriculture. Today, 

every RHS loan must be reviewed and approved by staff of the Rural Housing Service. In recent years, RHS staffing has been dramatically reduced, and borrowers 

have experienced significant delays in loan approval. Both the Veterans Affairs loan 

guaranty and the FHA mortgage insurance program utilize private lenders for direct endorsement. Providing RHS with the authority to approve direct endorsed 

lenders would create great efficiencies for the Service and for home buyers. RHS, 

in turn, would have additional staff time needed to focus on a strengthened lender 

monitoring process and risk management. NAR strongly urges Congress to provide 

RHS with direct endorsement authority to ease burdens on the agency and accelerate loan processing for borrowers. 


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MANUFACTURED HOUSING LOANS 

Nearly 20 million Americans live in manufactured homes. These homes are often 

a more accessible and affordable way for many people to buy their own home. Manufactured housing has come a long way with respect to the features and quality of 

life it provides homeowners. Today, manufactured homes blend seamlessly into 

many markets or neighborhoods. In many areas of the country, particularly rural 

communities, manufactured homes are the only type of quality affordable housing 

available. 

The Dodd-Frank Act regulations have mistakenly resulted in manufactured homes 

becoming less available as an affordable housing option. We support S. 682, the 

‘‘Preserving Access to Manufactured Housing Act’’, introduced by Senators Donnelly 

(D–IN), Toomey (R–PA), Manchin (D–WV), and Cotton (R–AR). This legislation will 

preserve manufactured housing as an affordable housing option without reducing 

important consumer protections. 

S. 682 clarifies the difference between manufactured housing manufacturers and 

loan originators, and ensures that low-dollar manufactured housing loans are exempt from Home Ownership and Equity Protection Act (HOEPA) standards. The 

costs of originating and servicing a manufactured loan are not much different than 

those of a more traditionally built home, even though the loan itself is often much 

smaller. Therefore, the closing costs of a manufactured loan as a percentage of the 

loan are much higher than the percentage on a more expensive home. This can 

cause manufactured housing loans to violate caps in Dodd-Frank and be categorized 

as ‘‘High-Cost,’’ or predatory. S. 682 will exempt manufactured loans from this label. 

FORECLOSURES AND SHORT SALES REMAIN PROBLEMATIC 

Too often, short sales are still a story of delay and unrealistic views of current 

home values, resulting in the potential buyer canceling the contract and the property going into foreclosure. Enormous amounts of time are spent on potential short 

sales that ultimately result in foreclosures. Even if successful, the process usually 

takes many months and countless hours and often requires re-marketing because 

buyers lose patience and terminate the contract. 

CERTAINTY IS NEEDED TO MAKE THE SYSTEM WORK 

NAR believes that the short sale process would significantly improve with the 

passage of S. 361, ‘‘The Prompt Notification of Short Sale Act,’’ introduced by Senators Brown (D–OH) and Murkowski (R–AK) last year. This legislation requires 

servicers to decide whether to approve a short sale within 30 days of completion of 

the file. The bill attempts to prod servicers to make the short sales process more 

efficient by setting standards and penalizing them for inadequate performance. 

Streamlining short sales will reduce the amount of time it takes to sell the property, 

improve the likelihood the transaction will close, and reduce the number of foreclosures. This will benefit the lender, the seller, the buyer, the community. 

TAXPAYERS NEED RELIEF 

Today, more than 5 million families remain in a home that is ‘‘under water.’’ 

While Congress provided relief in recent years, uncertainty exists for these homeowners today. For many of these homeowners, a short sale or workout is the most 

viable option. However, the income tax exemption on mortgage debt forgiven in a 

short sale or a workout for principal residences was extended late last year retroactively, but expired at the end of 2014. Not having this relief, many families will 

simply walk away and accept a foreclosure on their home. This is contrary to the 

goal of every policy designed to keep people in their homes and prevent foreclosures. 

Unless remedied, homeowners who participate in a workout or short sale will 

have to pay tax on ‘‘phantom income’’ from forgiven debt. This is not only unfair 

but harms families, neighborhoods and communities. NAR urges all Members to extend this provision of the tax code. Without this provision, distressed homeowners 

will decide to take a pass on opportunities for workouts with the lender or short 

sales, opting instead for continued delinquency or possible default until foreclosure, 

or simply to walk away from the property. This will destabilize the communities 

where such homes are located. 

LENDING POLICIES CONTINUE TO CONSTRAIN ACCESS TO CREDIT 

Loan pricing and lending restrictions also are making it more difficult for creditworthy borrowers to purchase a home. We believe that these types of rules should 

be directly commensurate with actual risk. Borrowers should not be subject to higher fees or burdens that are unnecessary. 


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1 Based on estimates derived from FHA’s condo lookup tool as of 2/24/15.

CONDO RESTRICTIONS PREVENTING HOMEOWNERSHIP OPPORTUNITIES 

Condominiums often represent the most affordable options for first-time home 

buyers, including minorities. However, the Federal Housing Administration (FHA) 

and the Government-Sponsored Enterprises (GSEs) have significant restrictions on 

the purchase of condominiums. However, NAR supports developing policies that will 

give current homeowners and potential buyers of condos access to more flexible and 

affordable financing opportunities as well as a wider choice of approved condo developments. Specifically, we have five areas of concern.

1. Owner Occupancy—FHA requires that a condominium property be at least 50 

percent owner occupied. FHA’s ratio greatly limits the number of condominium 

buildings available to credit-worthy borrowers. This policy is also self-fulfilling. 

If a building has less than the 50 percent owner-occupancy ratio, sellers of 

units have fewer buyers who are eligible, leading them to rent out their unit 

rather than sell. This makes it difficult for many buildings to achieve the 50 

percent requirement. By way of contrast, the GSEs do not place limits on the 

owner-occupancy of a condominium project if the borrower is buying it as a primary residence. NAR strongly urges FHA to eliminate this requirement to 

open up more properties for FHA-eligible buyers.

2. Project Approval Process—FHA requires the entire condominium project to be 

approved prior to a buyer purchasing a unit. This certification process is costly 

and time-consuming, and difficult for the often volunteer boards of condominium buildings. Less than 20 percent of all condominium properties nationwide have FHA approval.1 NAR strongly urges FHA to reduce the burdens associated with project certification. NAR also recommends that the spot loan approval process be reinstated to allow purchases in some buildings that do not 

have FHA certification. 

3. Delinquent Dues—Following the housing crisis, a number of condominium and 

homeowner associations have units that are behind in paying their dues. Both 

FHA and the GSEs restrict approval of properties where more than 15 percent 

of the units have delinquent dues. While NAR appreciates the need to make 

sure properties are properly capitalized with appropriate reserves; dues payment should not be a sole determinant. Some associations may have compensated for delinquencies by building reserves or taking other steps to ensure 

that delinquencies are not impacting their financial stability. This requirement 

should NOT be a determining factor, but instead be a part of an overall review 

of a property’s finances.

4. Commercial Space—Multi-use properties and new ‘‘town center’’ developments 

are very popular, and lauded by HUD as creating benefits for communities in 

providing easy access to amenities and transportation. Yet, condominium associations with commercial space are restricted from approval by both the GSEs 

and FHA. The GSEs limit commercial space to 20 percent, but provide waivers. 

FHA’s limit is 25 percent, also with allowable waivers. The current policy 

hinders efforts to build neighborhoods that have a mix of residential housing 

and businesses with access to public transit. The Association urges FHA and 

the GSEs to lift these restrictions.

5. Transfer Fees—FHA has a policy that prohibits FHA mortgage insurance on 

any property that has a transfer fee covenant. Fees that increase the costs of 

housing can disenfranchise those who wish to obtain the American dream; 

however, fees that provide a direct benefit to homeowners and improve the 

property are legitimate and should be permitted. The blanket policy used by 

FHA can greatly disadvantage the millions of homeowners living in community 

associations, making it much harder for them to sell their homes. FHFA has 

previously dealt with this issue, following a thoughtful and lengthy rulemaking. FHFA’s final rule on transfer fee covenants establishes a clear, national standard to protect homeowners from equity-stripping private transfer 

fees while preserving the preeminence of State and local governments over 

land use standards.

FHA should accept a mortgagee’s compliance with FHFA’s transfer fee covenant 

regulation as compliance with relevant FHA mortgage insurance program rules, 

guidelines and requirements. Any additional and potentially conflicting Federal 

standard on transfer fee covenants by FHA will cause confusion in the housing market and require community associations to amend governing documents. AmendVerDate 0ct 09 2002 16:40 Jul 29, 2016 Jkt 000000 PO 00000 Frm 00057 Fmt 6621 Sfmt 6621 L:\HE3E8B~1\04-16R~1\HEARING\95735.TXT SHERYL

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2Serious Delinquent Rates, Retrieved April 13, 2015, from Neighborhood Watch, Early Warning System. https://entp.hud.gov/sfnw/public/. 3http://blog.metrotrends.org/2015/04/million-mortgage-loans-missing-2009-2013-due-tightcredit-standards/?utmlsource=iContact&utmlmedium=email&utmlcampaign=Housing

%20Finance%20Policy%20Center&utmlcontent=HFPC+newsletter+4%2F8%2F2015.

ments to community association covenants, conditions, and restrictions can be difficult to execute and by statute generally require legal counsel and the approval of 

at least a supermajority of owners. We urge FHA to mirror FHFA’s rule, and prohibit only those fees that don’t benefit the homeowner and association where they 

live. 

There are additional concerns related to condo rules including investor ownership, 

concentration limits, and pre-sale requirements that also should be changed. REALTORS® were pleased to see a recent notice by Fannie Mae, loosening some restrictions. We look forward to the publishing of FHA’s upcoming condo rule and are 

hopeful that it will loosen many of the current restrictions. 

Condominium unit mortgages are among the strongest performing in the FHA 

portfolio. According to FHA data from 2014, the national serious delinquency rate 

for condominium projects is 0.89 percent versus 1.17 for single-family homes.2 Condominiums are often the most affordable option for first-time home buyers, or older 

homeowners who wish to downsize. We strongly believe that qualified home buyers 

should not be prevented from this option, simply due to mortgage restrictions. 

HIGH G–FEES STILL HURTING CONSUMERS 

High guarantee fees (g-fees) and loan level pricing adjustments (LLPAs) charged 

by the GSEs are negatively impacting the housing recovery. These Enterprises buy 

single-family mortgages from mortgage companies, commercial banks, credit unions, 

and other financial institutions. A key revenue component for the GSEs is a g-fee 

received for guaranteeing the payment of principal and interest on their mortgage 

backed securities (MBS). The g-fee is a significant factor in determining profits 

earned from this credit guarantee. The g-fee covers projected credit losses from borrower defaults over the life of the loans, administrative costs, and a return on capital. 

Continued increases in g-fees and upfront borrower costs will extend a trend of 

reduced access to mortgage credit, which is counter to a principal duty of the FHFA 

Director under the Housing and Economic Recovery Act of 2008 (HERA). Continuing 

to increase the fee will mean that larger numbers of consumers, many of them firsttime home buyers, will be forced to pay substantially higher mortgage rates, or be 

left with limited housing finance options. NAR believes borrowers who are either 

purchasing a home or refinancing their existing mortgage using conventional financing are being charged excessive fees due to policy goals that go beyond protecting 

taxpayers from GSE losses. 

NAR is especially concerned with the disparate impact the changes will have on 

first-time home buyers and other traditionally underserved borrowers. These families are more likely to bear the brunt of these fees, either because they have thin 

credit files and traditional credit models do not reflect payments toward housing expenses and utilities; or because they often make smaller down payments than do 

other borrowers. 

FHFA seems to believe that by raising costs for loans purchased or guaranteed 

by the GSEs, they can lure private sector capital back to the mortgage market. 

However, we believe this policy does not account for the aversion to, and lack of 

trust in, issuers of private mortgage backed securities that many investors still harbor since suffering tremendous losses during the recent housing crisis. This lack of 

trust remains and is hard to quantify. When increasing fees, the GSEs must include 

performance measures to ensure they are meeting the goal of increasing private sector participation. In addition, the Agency should examine other factors that are 

holding back the private market in conjunction with the Treasury Department. The 

National Association of REALTORS® believes that future data will show that the 

effect of raising fees will simply be increased costs to home buying taxpayers who 

can afford to become homeowners, and that the true effect will be redirection of 

more mortgage loans to FHA without a robust private sector return. 

CONCLUSION 

The Urban Institute recently reported that ‘‘If credit standards had been similar 

to those of 2001, more than 4 million additional loans would have been made between 2009 and 2013. The missing loans grew from 500,000 in 2009 to 1.25 million 

in 2013.’’3 While we generally support recent regulations such as QM, policies still 

exist that unnecessarily constrain lending to credit-worthy borrowers. While no one 


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wants to see a return to the unscrupulous, predatory lending practices that caused 

the Great Recession, some modifications of existing regulations may be necessary 

to ensure a robust housing market. 

Adjustments to rules issued by the CFPB including 3 percent cap on points and 

fees, enactment of RESPA/TILA harmonization, and encouraging responsible community bank lending will help provide consumers with valuable protections and safe 

access to affordable credit. Small market areas such as rural and manufactured 

housing must also be provided with flexibility appropriate to their market conditions. Americans who continue to struggle with underwater mortgages or mortgages 

they simply cannot afford should be provide protections and given certainty so they 

can make decisions appropriate for their families. Last, loans must be priced to reflect actual risk, and unnecessary restrictions must be removed to allow families to 

achieve the American Dream of home ownership. 

Thank you for allowing me to share the view of the National Association of REALTORS®, and we look forward to working with you. 


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RESPONSE TO WRITTEN QUESTION OF SENATOR HELLER 

FROM TOM WOODS 

Q.1. A major issue for many potential home buyers and homeowners is flood insurance. Right now, homeowners essentially have 

no option but to buy Government-backed National Flood Insurance 

Program policies to meet mandatory purchase requirements. The 

Biggert-Waters flood insurance bill Congress passed had the unintended consequence of making it more difficult for private insurers 

to provide private flood insurance and for lenders to accept those 

policies. Right now lenders are being forced to reject many residential private flood policies. Senator Tester and I have introduced legislation in the past that would try to solve this problem. 

I would like to know, Mr. Woods, if you support the development 

of a private flood insurance market that meet mandatory purchase 

requirements and could this help increase home ownership because 

consumers will have more insurance options?

A.1. Thank you Senator Heller for your question regarding NAHB’s 

support of the development of a private flood insurance market 

that meets mandatory purchase requirements and if this could help 

increase home ownership because consumers would have more insurance options. 

NAHB does not have policy on State-regulated insurance markets; however, we would welcome open competition and a vibrant 

private market. 

In NAHB’s experience, without the NFIP, many communities 

would be unable to provide affordable housing to many of their citizens. One of the leading causes of the housing affordability problem 

is the shortage of buildable land. By guaranteeing affordable flood 

insurance, the NFIP allows communities to use land that would 

otherwise be too costly due to high flood insurance premiums. 

Through the NFIP, flood insurance policies remain available and 

affordable, and residential structures can be constructed in 

floodplains as long as they are built to withstand flooding. 

RESPONSE TO WRITTEN QUESTION OF SENATOR HEITKAMP 

FROM TOM WOODS 

Q.1. Overlapping regulations in our mortgage markets have the potential to constrain credit and prevent otherwise worthy borrowers 

from qualifying for mortgages. That said, the Consumer Financial 

Protection Bureau (CFPB) has attempted to accommodate small 

and rural communities, institutions, and their customers during 

the rulemaking process by issuing a number of exceptions for these 

areas and revising rules when the existing regulations have proven 

unworkable or unduly burdensome. Below, find a list of regulatory 

accommodations that have been made by CFPB. How successful 

has each action been in providing relief, to what extent is each 


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1 National Association of REALTORS® (NAR) Press Release. Existing-Home Sales Lose Momentum in April. May 21, 2015. Retrieved from: http://www.realtor.org/news-releases/2015/

05/existing-home-sales-lose-momentum-in-april.

measure deficient, and what steps can the CFPB take to improve 

each provision? Please provide any data or other information to 

support your position.

a. Small Creditor QM: Established a Qualified Mortgage (QM) 

Option that provides loans originated by small institutions—

assets of less than $2 billion and make fewer than 2,000 loans 

annually—and held in portfolio for a minimum of 3 years a 

safe harbor.

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

or underserved areas.

i. Escrow: Exempted small creditors who operate predominantly in rural or underserved areas from requirements to 

establish escrow accounts for higher priced mortgage 

loans.

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

rural.

A.1. Thank you Senator Heitkamp for your question on the Consumer Financial Protection Bureau’s (CFPB) efforts to accommodate industry concerns through the rulemaking process. NAHB 

supports balancing mortgage lending standards and consumer protections and appreciates that the CFPB has made a concerted effort 

to solicit feedback from industry on the practical implementation of 

the 2013 mortgage rules. NAHB commends CFPB’s efforts to monitor the impact of the new mortgage rules and appreciates that the 

CFPB is willing to adjust the rules in response to concerns in areas 

where improvements are needed. 

NAHB supports the actions that CFPB has taken to provide relief to small financial institutions and those institutions lending in 

rural and underserved areas. NAHB believes that raising the loan 

origination limit for determining eligibility for small creditor status, along with the expanded definition of rural and the additional 

provisions, will provide small financial institutions with more flexibility in meeting the unique needs of the communities that they 

serve. 

However, tight lending conditions continue to keep buyers on the 

sidelines even as the housing market recovers. At a time when 

housing is affordable and interest rates are low, more buyers 

should be able to enter the housing market. However, many creditworthy borrowers are not taking advantage of these opportunities. 

This impact is evidenced by the reduced participation rate of firsttime home buyers that has dropped to 30 percent of the purchase 

market1 from the historical rate of about 40 percent of sales. 

NAHB believes that a healthy housing market includes broad 

participation from all population segments. NAHB has encouraged 

the CFPB to further investigate the impact of the new mortgage 


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regulations, including the debt-to-income ratios and documentation 

requirements, on entry level buyers and other important market 

segments to ensure that creditworthy borrowers are able to access 

mortgage credit. Broader availability of safe and responsible credit 

increases home ownership opportunities and provides benefits to 

the housing market and the overall economy. 

NAHB believes that the CFPB should take additional steps to 

address today’s tight lending environment, such as adjusting the 

QM 3 percent cap on points and fees to exclude fees paid to affiliated businesses, and to provide a reasonable hold-harmless period 

for enforcement of the of the CFPB’s TILA–RESPA Integrated Disclosures (TRID) regulation for those that make good-faith efforts to 

comply. 

RESPONSE TO WRITTEN QUESTION OF CHAIRMAN SHELBY 

FROM J. DAVID MOTLEY 

Q.1. You testified that loan officers employed by nonbank lenders 

are required to be licensed under the SAFE Act. Your testimony 

advocates for a transition period for new loan officers of nonbank 

lenders to work while they are earning their certification, so long 

as these employees were previously loan officers with another institution. 

How could this particular proposal aid in the expansion of mortgage credit of the reduction in the cost of credit? Based on the average time period to complete this transition, how long should this 

transition period last?

A.1. The Secure and Fair Enforcement for Mortgage Licensing 

(SAFE) Act, enacted in 2008, mandates a nationwide licensing and 

registration system for residential mortgage loan originators 

(MLOs). Some of the objectives of the SAFE Act include creating 

increased accountability for MLOs, greater consumer protection, 

and providing home buyers with tools to help them select their loan 

officers. Unfortunately, in its current form, the SAFE Act creates 

a two-tiered licensing system that impedes the mobility of mortgage loan officers (notwithstanding the fact that Federal depositories are required to conduct regular job-specific training for their 

consumer-facing employees). 

The SAFE Act requires MLOs employed by nonbank lenders to 

be licensed, which includes pre-licensing and annual continuing 

education requirements, passage of a comprehensive test, criminal 

and financial background reviews conducted by State regulators, 

and registration in the National Mortgage Licensing System and 

Registry. By contrast, MLOs employed by federally insured depositories or their affiliates must only be registered in the NMLS, and 

do not have to meet testing and specific education requirements. 

This two-tiered structure creates a significant disincentive for 

loan officers to transition from a depository to a nondepository. 

These MLOs must wait for weeks, or even months, while they meet 

the SAFE Act’s licensing and testing requirements—despite the 

fact that they have already been employed and registered as a loan 

officer at a depository. 

Nonbank lenders or independent mortgage banks (IMBs) typically focus exclusively on mortgage lending. In recent years, large 


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depository-institutions have moved away from the home purchase 

business and toward other types of mortgage-related business, including refinancing, servicing portfolio retention, and making more 

jumbo and adjustable rate loans that can be held for investment. 

In contrast, from 2008 to 2013, the IMBs’ share of the home purchase market grew from 25 percent to 40 percent with a particular 

focus on providing loan products for first-time home buyers and underserved borrowers. 

A small amendment to the SAFE Act to require States to issue 

transitional licenses to registered loan officers seeking employment 

with nondepositories would help to eliminate the delays and hurdles in hiring highly qualified loan officers to work for IMBs and 

focus their efforts on providing home purchase mortgage credit. 

These individuals should be able to continue originating loans for 

120 days after leaving their bank employer (and while beginning 

their work for an IMB). Similarly, a State-licensed loan originator 

in one State who takes a similar position in another State would 

have a 120-day grace period to obtain a license in the new State. 

This 120 period is based on the amount of time it typically takes 

for an MLO to receive a license and is also consistent with laws 

in States that have already passed legislation to permit transitional licensing. 

This narrow and simple solution creating transitional licenses 

would eliminate a significant impediment to IMBs hiring highly 

qualified bank loan officers. IMBs have made the commitment to 

provide mortgage credit to a broad range of creditworthy borrowers. By increasing labor market mobility, loan originators could 

freely move to lenders that are best able to serve their clients 

through competitively priced products that will insure more qualified borrowers access to credit. 

RESPONSE TO WRITTEN QUESTION OF SENATOR VITTER 

FROM J. DAVID MOTLEY 

Q.1. Mr. Motley, In your statement you assert that ‘‘New servicing 

rules have dramatically driven up the cost to service loans and 

driven down efficiency in servicing operations’’ and cite that loans 

serviced per full-time employees have decreased from 1,638 in 2008 

to 790 in 2014. Moreover, you cite that direct costs to service each 

loan have increased from $173 per loan in 2008 to $309 in 2014, 

and costs to service loans in default have risen from $423 per year 

in 2007 to $2,214 in 2014.’’

Which regulations have most directly increased the cost and 

amount of time to service these loans?

A.1. It is difficult to isolate one particular regulation as the direct 

driver of the significant increase in servicing costs, due to the sheer 

number of new regulations from Dodd-Frank as well as the increased costs associated with the volume of foreclosures following 

the 2008 financial crisis. Costs have increased across the board but 

particularly in the areas of collections, loss mitigation, recordkeeping, borrower communications, vendor management, servicing 

technology, and quality control and quality assurance. 

There have also been large increases in compliance costs in this 

time period as servicers implement the myriad new Federal and 


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State requirements as well as the costs associated with the National Mortgage Servicing Settlement among the larger servicers. 

The CFPB’s broad and prescriptive servicing rule necessitated costly system overhauls, training expenses, and ongoing compliance 

outlays and has certainly played a role in the increased costs of 

servicing. 

The effect of implementing regulations is also demonstrated by 

the increase in costs of servicing performing loans as well as nonperforming loans, suggesting that the impact of the new regulatory 

paradigm will be continued to be felt well into the future. 

RESPONSE TO WRITTEN QUESTION OF SENATOR HELLER 

FROM J. DAVID MOTLEY 

Q.1. A major issue for many potential home buyers and homeowners is flood insurance. Right now, homeowners essentially have 

no option but to buy Government-backed National Flood Insurance 

Program policies to meet mandatory purchase requirements. The 

Biggert-Waters flood insurance bill Congress passed had the unintended consequence of making it more difficult for private insurers 

to provide private flood insurance and for lenders to accept those 

policies. Right now lenders are being forced to reject many residential private flood policies. Senator Tester and I have introduced legislation in the past that would try to solve this problem. 

I would like to know, Mr. Motley, if you support the development 

of a private flood insurance market that meet mandatory purchase 

requirements and could this help increase home ownership because 

consumers will have more insurance options?

A.1. The Mortgage Bankers Association supports the development 

of a private flood insurance market that meets mandatory purchase 

requirements. A competitive and sustainable flood insurance market will expand available insurance options, lower costs, and increase the number of at-risk properties that are insured. Increased 

private sector involvement can also serve to shift some of the burden of post-disaster recovery and rebuilding from taxpayers to the 

private sector thereby limiting the Federal Government’s exposure 

to flood loss. 

RESPONSE TO WRITTEN QUESTION OF SENATOR HEITKAMP 

FROM J. DAVID MOTLEY 

Q.1. Overlapping regulations in our mortgage markets have the potential to constrain credit and prevent otherwise worthy borrowers 

from qualifying for mortgages. That said, the Consumer Financial 

Protection Bureau (CFPB) has attempted to accommodate small 

and rural communities, institutions, and their customers during 

the rulemaking process by issuing a number of exceptions for these 

areas and revising rules when the existing regulations have proven 

unworkable or unduly burdensome. Below, find a list of regulatory 

accommodations that have been made by CFPB. How successful 

has each action been in providing relief, to what extent is each 

measure deficient, and what steps can the CFPB take to improve 

each provision? Please provide any data or other information to 

support your position.


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a. Small Creditor QM: Established a Qualified Mortgage (QM) 

Option that provides loans originated by small institutions—

assets of less than $2 billion and make fewer than 2,000 loans 

annually—and held in portfolio for a minimum of 3 years a 

safe harbor.

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

or underserved areas.

i. Escrow: Exempted small creditors who operate predominantly in rural or underserved areas from requirements to 

establish escrow accounts for higher priced mortgage 

loans.

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

rural.

A.1. MBA believes it is time to consider changes in the QM definition to mitigate the adverse impact the CFPB’s Ability to Repay 

rule has had on access to credit for some borrowers. In this regard, 

MBA appreciates the CFPB’s efforts regarding the Small Creditor 

and Balloon QM as well as the Rural Definition identified in your 

question. Nevertheless, MBA believes changes to the QM definition 

are better made holistically and not limited to certain lenders 

based on charter types or business models. Consumers should not 

be forced to discern which institutions offer particular types of 

loans and their choices should not be limited to particular providers. Stratification of the market by establishing different underwriting standards for some lenders and not others only causes unnecessary consumer confusion and will lessen competition. A holistic approach to revising the QM would ensure a competitive market 

for all types of QM loans, and would not burden the consumer with 

figuring out which lenders offer which QM products. Accordingly, 

as detailed in our testimony we believe: (1) in addition to adding 

certain protections against the re-emergence of loans with risky 

features such as pay option ARMs, stated-income underwriting, 

and short-term balloon terms, any new portfolio QM also should be 

made available to all originators that process, fund and sell these 

loans to a bank (or REIT) that will retain the loans in portfolio for 

the required holding period; (2) the spread over the APOR for defining a safe harbor QM should be expanded to 200 basis points; 

(3) the definition of smaller loans should be increased to $200,000, 

with adjustments for inflation and a sliding scale that permits progressively higher points and fees caps for these smaller loans; (4) 

the right to cure or correct inadvertent errors be extended to DTI 

miscalculations and typographical and technical errors and omissions; and (5) title insurance fees paid to lender-affiliated companies should be excluded from the calculation of ‘‘points and fees’’ 

under QM just as such fees to non-affiliated companies are excluded.


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