U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

81–757 PDF 2013

QUALIFIED MORTGAGES: EXAMINING THE 

IMPACT OF THE ABILITY TO REPAY RULE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

MAY 21, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–22 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

SEAN P. DUFFY, Wisconsin, Vice Chairman 

SPENCER BACHUS, Alabama 

GARY G. MILLER, California 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

MARLIN A. STUTZMAN, Indiana 

ROBERT PITTENGER, North Carolina 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

GREGORY W. MEEKS, New York, Ranking 

Member 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

NYDIA M. VELA ́ ZQUEZ, New York 

STEPHEN F. LYNCH, Massachusetts 

MICHAEL E. CAPUANO, Massachusetts 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 21, 2013 ..................................................................................................... 1 

Appendix: 

May 21, 2013 ..................................................................................................... 47 

WITNESSES 

TUESDAY, MAY 21, 2013 

Carroll, Peter, Assistant Director for Mortgage Markets, Consumer Financial 

Protection Bureau ................................................................................................ 10 

Cochran, Kelly, Assistant Director for Regulations, Consumer Financial Protection Bureau ...................................................................................................... 8 

APPENDIX 

Prepared statements: 

Huizenga, Hon. Bill .......................................................................................... 48 

Joint statement of Peter Carroll and Kelly Thompson Cochran .................. 49 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Capito, Hon. Shelley Moore: 

Written statement of the American Land Title Association ......................... 55 

Written statement of the Credit Union National Association ...................... 59 

Written statement of the Independent Community Bankers of America .... 61 

Written statement of the National Association of Federal Credit Unions .. 138 

Written statement of the National Association of REALTORS® ................. 140 

Written statement of WesBanco, Inc. ............................................................. 144 

Duffy, Hon. Sean: 

CFPB QM rule for Wisconsin .......................................................................... 153 

Huizenga, Hon. Bill: 

Written statement of the Real Estate Services Providers Council, Inc. ...... 154 

Peter Carroll and Kelly Thompson Cochran: 

Written responses to questions submitted by Representative Ellison ......... 161 

Written responses to questions submitted by Representative Watt ............ 165 

(1) 

QUALIFIED MORTGAGES: EXAMINING THE 

IMPACT OF THE ABILITY TO REPAY RULE 

Tuesday, May 21, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

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

[chairwoman of the subcommittee] presiding. 

Members present: Representatives Capito, Miller, McHenry, 

Campbell, Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, 

Duffy, Stutzman, Pittenger, Barr, Cotton; Meeks, Maloney, Watt, 

Hinojosa, Scott, Green, Ellison, Velazquez, Lynch, Capuano, Murphy, Delaney, and Heck. 

Ex officio present: Representative Hensarling. 

Also present: Representatives Huizenga and Rothfus. 

Chairwoman CAPITO. The subcommittee will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. 

I now recognize myself for 5 minutes for an opening statement. 

In January, the Consumer Financial Protection Bureau (CFPB) released the final Ability-to-Repay rule for Qualified Mortgages 

(QMs). This is a very important topic. 

Called for by Title 14 of the Dodd-Frank Act, this 800-page rule 

will potentially forever change the mortgage market in this Nation. 

While the intent is to protect consumers from fraudulent mortgages, the practical implications of this rule could result in the constriction of mortgage credit for consumers. 

I fear, and I have heard this anecdotally, that this approach of 

‘‘Washington knows best’’ will harm the very people that the rule 

seeks to help: borrowers who are on the fringe of lacking access to 

mainstream financial services. 

Since the release of this rule, I have heard from many community banks and credit unions in my district about the adverse effect 

of this rule and the adverse effect on the communities that they 

serve. 

These financial services professionals are on the front lines of 

lending in their communities. They know their customers and they 

also know what type of financial products are appropriate for their 

customers based on their unique circumstances. 

2 

Many of them have expressed great concerns about their continued ability to serve their community’s needs for mortgage credit 

under the regime established by the rule. 

One of the most glaring concerns of the rule is the overly restrictive definition of what is a rural community. Bill Loving, who is 

president and CEO of Pendleton County Bank in my district in 

West Virginia, raised this issue at a subcommittee hearing last 

month. 

He said, ‘‘I think the members of this committee would be surprised at what counties in their own States and districts fail to 

qualify as rural. For instance, in the State of West Virginia, 26 out 

of 55 counties fail to meet the definition of rural. Under any reasonable definition, the entire State of West Virginia would be considered rural.’’ 

I am certain my ranking member would consider my entire State 

rural compared to where he lives. To assert that nearly half of the 

State of West Virginia is not rural demonstrates a lack of familiarity with what constitutes a rural community. 

Having an accurate rural definition is essential for community 

banks and credit unions that currently offer balloon loans to their 

customers. 

Linda Ashley, who is president and CEO of Poca Valley Bank in 

my district, recently wrote to me about the importance of this 

project: ‘‘Balloon loans enable us to better manage interest rate 

risk and balloon loans are a product with which our customer base 

has been comfortable for many, many years. We encourage you to 

help preserve our ability to serve our customers.’’ 

There is a niche demand for these types of loans in rural communities. These loans allow borrowers who would not otherwise be 

able to access credit to purchase a home. The decision of whether 

or not a borrower should be able to access this type of credit is best 

determined by the lender working with the individual borrower. 

This type of labor-intensive relationship lending is the linchpin of 

community-based lending. 

I see my time is running out, so I am going to shorten my statement and submit the rest of the statement for the record. 

I would also like to submit letters from my community bankers 

for the record. Without objection, it is so ordered. 

There is a very real concern that the implementation of this rule 

will result in less credit, less borrowing, and less availability of 

mortgages for many of our constituents. 

With that, I would like to recognize the ranking member of the 

subcommittee, Mr. Meeks, for 3 minutes for an opening statement. 

Mr. MEEKS. Thank you, Madam Chairwoman, for holding this 

hearing today. 

And I would like to thank the distinguished panel for being here 

as we examine what is very important: the impact of the Abilityto-Repay rule on Qualified Mortgages. 

Sometimes, I come to hearings and you have in your mindset 

what should or shouldn’t happen based upon what you have talked 

about. Sometimes, you may come with a different perspective, and 

in Washington, sometimes it might be a Democratic idea or it 

might be a Republican idea. 

3 

This is what we have to get right. I still believe in the American 

dream. And the American dream is owning a home, and owning a 

home can mean the difference for a family and a community. 

It can mean the difference in someone’s getting an education and 

not getting an education. And that is why it is tremendously important that we get this as right as we possibly can. 

I have never seen a perfect bill in my 14 years in this House of 

Representatives, so I know that no bill is perfect, but this really 

affects and can affect peoples’ lives, so how we get it done and how 

we do it is important. 

I have concerns when we start talking about the QM rule and 

the QRM rule and the differences and it becomes complicated and 

individuals don’t—especially some of the banks, small community 

banks which did not cause the financial crisis that we entered into; 

it seems as though they may be unfairly hurt by this. 

In fact, I was talking to one banker last night who said, ‘‘Look, 

we are just going to stop giving out mortgages altogether.’’ In fact, 

they have, but they have made arrangements with Morgan Stanley—they have Morgan Stanley in the bank—to do the mortgages 

and they just got out of the business altogether because they said 

they can’t take the risk of fines and not knowing what qualifies 

and what doesn’t qualify because a lot of the rules are not clear to 

them. 

When you talk about whether or not the cap, the 3 percent cap 

and what is included therein, it is not clear. And whether or not 

you take in the whole person, as opposed to just having a cookie 

box situation where you have to fall in this box and you are not 

allowed to take in the consideration of the whole person, that customer. 

I have said it before in this committee and I say it again, if it 

wasn’t for someone taking in the fact that my parents, their whole 

situation, they would have never owned a home. Had they not 

owned a home, I would not be sitting here today because that home 

helped finance my and my sister’s education. 

I want to make sure that we are not cutting out opportunities 

for individuals who want to own a home which will make the community good, and which changes their lives and their children’s 

lives for generations yet to come. 

And I am concerned from what I have seen thus far and what 

I am hearing from community banks and small banks that that 

very well may happen if we don’t get this thing right. 

So I will be looking forward to hearing from the witnesses as we 

move forward, and I yield back the balance of my time. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Duffy for 2 minutes for an opening 

statement. 

Mr. DUFFY. Thank you, Madam Chairwoman. 

I want to address my comments at the CFPB in a broad sense. 

I think this is an appropriate time after what has happened over 

the last several weeks, the issues that have come out with the IRS 

and the AP to reflect on the structure of the CFPB. 

When my friends across the aisle in the House wrote this portion 

of Dodd-Frank, they had talked about having a commission of bipartisan members to run the CFPB. 

4 

The way the rule has come out, the CFPB is run by a single, politically appointed Director. The CFPB is a very, very powerful 

agency that has a huge impact on the kind of credit and access to 

credit people in all of our districts receive. 

And you look at that powerful agency and I think we can learn 

some things from what happened with the IRS. You have an agency that is also very powerful that targets Americans for their political beliefs, their political views, and it has a chilling effect on people with that political view and belief to organize around that set 

of ideas; it has a chilling effect. What has happened with the press? 

You have had an attack on the AP, Fox News, I don’t know who 

else; but they have told us that has had a chilling effect on their 

ability to access information from informants and whistleblowers in 

regard to how the government is working. 

What relationship does that have to the CFPB? I have a chance 

to talk to a lot of bankers, big and small, and they talk about the 

exams that are going on from the CFPB that are nothing like the 

other regulators do to them. 

You are very powerful. You are very aggressive, and when I say, 

‘‘Golly, that is great information, we should expose this. Come on 

in and testify. We want to hear your story,’’ guess what they say? 

‘‘No way, because we are afraid of the retribution. We are afraid 

of the impact on our institution from the CFPB because we are 

going to talk about what they are doing to us.’’ 

Again, a powerful agency that has a huge impact on a very important segment of our economy shouldn’t be run by one director. 

It should be bipartisan, so we have a whole set of people with different views overseeing what the agency is doing. I yield back. 

Chairwoman CAPITO. Thank you. The gentleman yields back. 

I would like to recognize Mr. Ellison for 3 minutes for an opening 

statement. 

Mr. ELLISON. Let me thank the chairwoman and the ranking 

member for this excellent hearing; it is very important. 

I think it has been said by some that if we have greater rules 

regarding mortgages, and if rules contemplated now regarding 

Qualified Mortgages go into place, it could result in fewer loans 

and less borrowing. I must say, I hope so. 

The fact is, there were a lot of loans that should not have been 

issued in the last several years. Let’s never forget that we are not 

here simply by accident. We are not here because people like regulation; 4 million foreclosures happened. 

As a matter of fact, 92 percent of subprime mortgages were rated 

AAA, but then after the meltdown, nearly all of them were considered junk bonds. 

So it is not entirely a bad thing that some mortgages which 

seemed like a good idea before the meltdown may now be looked 

at with greater scrutiny. 

A great many of the products that we saw were predatory in nature. As a matter of fact, 70 percent of the subprime loans from 

2005 to 2007 were refis with features like exploding ARMs, negative amortization, and balloon payments. 

Of course, balloon payments may be okay for some, but they 

weren’t okay for all the people who got them. And we should be 

more diligent in making sure that the product fits the customer. 

5 

The products weren’t designed to extend credit to creditworthy 

borrowers but to target vulnerable homeowners with little equity 

built up in their homes. 

Lenders often stood to gain more from a default and foreclosure 

than the loan performed. And it was exactly this perversion of economic incentives that led to a meltdown in the economy and the 

foreclosure crisis that has only recently shown any sign of slowing. 

In the wake of that crisis, there have been many injustices visited upon homeowners, and it is unlikely that many of the homeowners and many Americans who were forced to bear the burden 

of the economic crisis will ever be made whole. 

But we did manage to do one thing right, and I think that is the 

establishment of the Consumer Financial Protection Bureau. Now 

as the ranking member very wisely said, there has never been a 

perfect piece of legislation, there has never been a Federal agency 

or a corporation that works perfectly. 

Therefore, this committee will have the responsibility to monitor 

and offer oversight, and where it appears that the agency is too aggressive, we should say something. But where it appears that consumers don’t have an advocate, we should say something there, too. 

What we are striving for is balance, not to side with consumers or 

producers, but balance. 

I yield back. 

Chairwoman CAPITO. The gentleman yields back. 

I recognize Mr. Miller for 11⁄2 minutes for an opening statement. 

Mr. MILLER. Thank you, Madam Chairwoman. 

We see the housing market starting to recover and the economy 

is going with it, which I think we all agree is important. We need 

to ensure that policies we pass in Washington don’t disrupt that in 

a negative way, and that is the problem I have with QM today. 

It is not a personal attack, I just think we need to look at the 

reality of what we are doing out there. The ATR rule will govern 

lending for the foreseeable future. I think none of us will disagree 

with that comment. 

The definition of QM, which is meant to protect consumers 

versus predatory lending, is a good definition. In 2001, I started introducing language that defined predatory versus subprime and 

that should be a goal we have. But I am concerned that the QM 

definition as written will probably hurt more people than it will 

help. 

I looked at a recent study by CoreLogic, and it said that mortgages made in 2010, half of them would not qualify under the QM 

definition, and I have talked to loan originators up and down the 

State, I have talked to GSA’s and they say those are some of the 

best performing loans that they have on the books today because 

they used good underwriting standards. 

But the lenders I am talking to say that we will not originate 

mortgages that do not fall under the QM label. I know that there 

is a period we have to come into that in the GSE’s but I don’t think 

it is going to happen. They are saying they won’t do it, and I think 

the 3 percent point cap as determining the ability to repay a mortgage need to be more flexible. 

6 

I think it is drawn too narrowly, but we need to identify modifications to the QM that would make it workable in the marketplace, and I don’t believe it is today. 

Like I said, the housing market is showing signs of recovery and 

we need to make sure that eligible borrowers—I don’t want to be 

making loans to people who can’t repay them, but the QM rule has 

to be flexible enough to allow eligible buyers to buy homes. 

And I see my time has expired. I yield back. 

Chairwoman CAPITO. The gentleman yields back. 

I would like to recognize Mrs. Maloney for 2 minutes for an opening statement. 

Mrs. MALONEY. Thank you. 

And I welcome the witnesses. There were a number of provisions 

within Dodd-Frank that tackled the important issue of consumer 

lending, and the Qualified Mortgage rule is certainly among the 

most important. 

The CFPB in my opinion has worked diligently to write a fair 

and balanced rule that followed the intent Congress laid out for responsible home lending. 

No one disputes that in the years leading up to the financial 

meltdown, mortgage lending got out of hand, and underwriting was 

nonexistent. The new QM rule will ensure that borrowers are protected from the risky lending practices that contributed to so many 

homeowners ending up in delinquency. 

The Bureau has handled over 150,000 complaints. It has helped 

6 million consumers reap over $400 million in refunds as a result 

of enforcement actions against deceptive practices, all while testifying before Congress at least 35 times. 

I want to especially mention the rule that the chairlady and I 

worked on to treat stay-at-home moms fairly in their access to 

credit and credit cards, and the Bureau has worked diligently towards its mission, and I look forward to hearing more about your 

work in your testimony today. 

And thank you. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Westmoreland for 11⁄2 minutes for 

an opening statement. 

Mr. WESTMORELAND. Thank you, Chairwoman Capito, and 

thanks for yielding and for holding this hearing. 

I do not believe that I have ever heard a good word from my constituents about the Qualified Mortgage rule. From homebuyers, I 

hear many might not be able to qualify for a home because they 

fall outside QM’s government-anointed standards. 

From bankers, I hear that credit will not be available for some 

borrowers and they have to prepare for possibly 30 years of potential litigation from borrowers who cannot repay. 

Policies like QM are the most dangerous to economic freedom in 

this country. If a borrower doesn’t fit into the government-approved 

box, you pay higher prices. Ironically, for the minority and low-income borrowers the QM rule will supposedly help, in reality, it will 

limit the opportunities for these Americans to better their lives 

through homeownership. 

In the end, QM will create another housing bubble just like the 

Clinton affordable housing goals of the 1990s created the 2008 

7 

housing crisis. This country needs sensible housing regulation that 

allows the market to set the price and the qualifications for eligible 

borrowers. 

I urge this committee to swiftly vote to repeal QM and to return 

all Americans to their economic freedom. 

And with that, Madam Chairwoman, I yield back. 

Chairwoman CAPITO. The gentleman yields back. 

Mr. Green, for 2 minutes. 

Mr. GREEN. Thank you very much, Madam Chairwoman. 

I thank you and the ranking member. 

And I thank the witnesses for appearing. 

Somewhere along the way, in the 1980s we ceased to qualify people as homeowners and we started to qualify them as homebuyers. 

In fact, the Internal Revenue Code provided certain advantages to 

buying homes and selling them within a certain amount of time. 

We decided that for some reason, it was not important to have 

the person who qualified the purchaser, to maintain some relationship such that that person wanted to be assured that the person 

borrowing could in fact afford the loan. 

This is how we got into the 3-27s, the 2-28s, the no-doc loans, 

the loans that were in some ways making it available for those who 

wanted to buy and flip and take advantage of the fact that the 

market was moving, but it didn’t help people who wanted to simply 

buy a home and live in a home, and many persons received mortgages that were not suitable for their circumstances. 

I am proud to say that we have this Consumer Financial Protection Bureau. It is important that consumers have advocates for 

them. There were allegedly agencies available to help consumers at 

the time all of these things came into being, but for whatever reason, they did not function efficaciously for consumers. 

I am hopeful that we will achieve the balance that Member 

Ellison called to our attention. Balance is important, but as we 

achieve the balance, let’s make sure we continue to focus on the 

consumer and make sure that the consumer receives the type of 

product that he or she can afford. 

I am also interested in a definition. I have heard many definitions of community bank, community banks versus small banks, 

and I am curious as to whether or not you have embarked upon 

defining community banks versus small banks. 

And finally, your Office of Servicemember Affairs; I care a great 

deal about the persons who serve us in our military, and my hope 

is that we will help protect them from some of those who seek to 

encroach upon their financial circumstances with fraudulent items. 

I thank you Madam Chairwoman, and I yield back. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Fitzpatrick for 11⁄2 minutes. 

Mr. FITZPATRICK. Thank you, Madam Chairwoman. 

As I have been meeting with bankers and credit unions in and 

around my district, the conversation inevitably turns to this new 

Qualified Mortgage rule. 

Lenders in Pennsylvania are very concerned, and understandably 

so, because they serve the community by making loans, and their 

ability to provide that service depends on the ability to assess creditworthiness. And there is concern that by constructing a box in 

8 

which they must operate that is inappropriate, that qualified buyers and borrowers won’t have access to credit. 

We all want business to be successful and for capital to be available in our communities but when it comes to this issue, I mainly 

want to ensure that responsible, working-class families in my district can still buy their first home. 

We are all unified in our opposition to ever going back to the prebubble days; however, we can’t allow overregulation to dry up credit for the families trying to participate in the American dream. 

So I hope to receive those assurances here today. I look forward 

to the testimony, and I yield back. 

Chairwoman CAPITO. The gentleman yields back. 

That concludes our opening statements. I would like to ask all 

of the guests and Members to join with me in a moment of silence 

of our thoughts and prayers for those victims and families in the 

State of Oklahoma. Thank you. 

[moment of silence] 

Thank you. 

I would now like to welcome our panel of distinguished witnesses. Our first witness is Mr. Peter Carroll, the Assistant Director for Mortgage Markets at the Consumer Financial Protection 

Bureau. 

Ms. COCHRAN. Actually, I will start and— 

Chairwoman CAPITO. All right. Let me introduce you, then. Excuse me. 

Ms. COCHRAN. Thank you. 

Chairwoman CAPITO. Ms. Kelly Thompson Cochran is the Assistant Director for Regulations at the Consumer Financial Protection 

Bureau. Welcome, and we will recognize you for your 5-minute 

statement. 

STATEMENT OF KELLY THOMPSON COCHRAN, ASSISTANT DIRECTOR FOR REGULATIONS, CONSUMER FINANCIAL PROTECTION BUREAU 

Ms. COCHRAN. Thank you, Chairwoman Capito, Ranking Member 

Meeks, and members of the subcommittee for this opportunity to 

testify about the Bureau’s Ability to Repay a Qualified Mortgage 

rule and address the concerns that you have raised this morning. 

I am Kelly Cochran, the Assistant Director for Regulations at the 

Bureau, and my colleague, Peter Carroll, and I are honored to represent the Bureau here this morning. 

During the years leading up to the mortgage crisis, too many 

mortgages were made to consumers without regard for their ability 

to repay the loans. Loose underwriting practices by some creditors 

such as failure to verify the consumer’s income and assets, socalled no-documentation loans, and qualifying consumers for loans 

based only on their ability to repay low introductory interest rates 

contributed to a mortgage crisis that led to this Nation’s most serious recession since the Great Depression. 

Congress, in the Dodd-Frank Act, adopted a provision to protect 

consumers from such irresponsible practices by requiring creditors 

to make a reasonable, good-faith determination of consumers’ ability to repay their loans based on verified and documented information. 

9 

The Act also provides a presumption of compliance with this requirement for a certain category of loans called Qualified Mortgages. However, the statute did not define how strong the presumption would be, for instance, whether it would function as a 

Safe Harbor or could be rebutted upon certain showings by consumers. And it also left significant discretion as to how Qualified 

Mortgages would be defined. 

The Federal Reserve Board issued a proposal to implement these 

provisions prior to the transfer of authority to the Bureau in July 

2011. In January of this year, the Bureau issued both a final rule 

to implement these provisions and a proposal to make certain additional adjustments both to facilitate access to credit and to clarify 

certain provisions defining Qualified Mortgages. 

We are now working to finalize that proposal so that the new 

rule as a whole can take effect on January 10, 2014. Our written 

testimony contains a summary of the outreach that we conducted 

in connection with the rulemaking and of the rule itself. 

Today, we wanted to briefly highlight some of the major policy 

considerations that underlie the features of the rule. Our first consideration in crafting the rule was to protect consumers by preventing the return to irresponsible lending practices. 

The General Ability to Repay Standard is designed as a commonsense measure to ensure that creditors use reliable information 

when they are underwriting and that they evaluate consumers’ 

ability to make payments throughout the life of the loan. 

Although this statute was not as specific with regard to documentation and the underwriting requirements for Qualified Mortgages, we felt that it was important to ensure that creditors also 

consider consumers’ individual financial circumstances when making Qualified Mortgages. 

Accordingly, the rule requires that creditors consider consumers’ 

debts, incomes, and assets in making Qualified Mortgages in addition to meeting certain statutory limitations on loan features and 

up-front costs. 

At the same time, we also carefully consider the need for longterm flexibility. We do not believe that it is possible by rule to define every circumstance in which a mortgage is affordable given 

that underwriting is a highly complex and individualized process. 

We therefore worked to structure the rule in a way that allows 

room for a range of reasonable underwriting practices and models 

that are used by different types of creditors today. 

We were also concerned that as the mortgage market strengthens, the rule should provide appropriate safeguards without becoming a straitjacket. 

We balance these considerations in many places within the rulemaking, including both leaving flexibility under the general abilityto-repay standards for reasonable underwriting practices and creating different types of Qualified Mortgages that use different sets 

of safeguards to ensure that affordability is being appropriately 

considered. 

My colleague, Peter Carroll, will now discuss those Qualified 

Mortgage provisions and some of the additional policy considerations that went into their formulations. 

10 

[The joint prepared statement of Ms. Cochran and Mr. Carroll 

can be found on page 49 of the appendix.] 

STATEMENT OF PETER CARROLL, ASSISTANT DIRECTOR FOR 

MORTGAGE MARKETS, CONSUMER FINANCIAL PROTECTION 

BUREAU 

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

Meeks, and members of the subcommittee for this opportunity to 

testify about the Bureau’s Ability to Repay and Qualified Mortgage 

rule. 

I am Peter Carroll, the Bureau’s Assistant Director of Mortgage 

Markets. I am also honored to represent the Bureau here this 

morning. 

Building on our policy considerations, the Qualified Mortgage 

provisions of the rule were the most complex part of the rulemaking. This was in part because the creation of a general abilityto-repay requirement that carries potential liability for creditors 

and asset needs has created anxiety in the market. 

A 2008 Federal Reserve Board rule that requires assessment of 

a consumer’s ability to repay certain higher-priced mortgage loans 

does not appear to have a caused a significant increase in litigation; however, we recognize that concerns about liability under the 

Dodd-Frank Act, the ability-to-repay requirement might cause 

creditors to constrain their lending, particularly in the first few 

years after the rule takes effect. 

Access to mortgage credit is already constrained in this market 

and we were concerned about unduly exacerbating these constraints throughout rulemaking, while still ensuring responsible 

lending. Several features of the rule address this concern. 

First, we provided for different types of Qualified Mortgages that 

we expect will cover the vast majority of today’s mortgage market. 

We created a general definition of Qualified Mortgage based on 

bright line standards that include a 43 percent debt-to-income 

ratio. 

Second, we created a temporary Qualified Mortgage definition 

based on eligibility for purchase or guarantee by the GSE’s while 

they are in conservatorship and certain government agencies 

whether those loans were sold or held on portfolio. 

This definition makes it easier for creditworthy consumers with 

debt-to-income ratios above 43 percent to access credit while the industry gets more comfortable with the rule. 

Third, we calibrated the strength of the presumption of compliance for Qualified Mortgages based on the loan’s pricing. We believe the Safe Harbor will provide certainty to creditors in the 

prime market and the rebuttable presumption of compliance will 

create strong incentives for more responsible lending in the 

nonprime market. 

At the same time, the rebuttable presumption preserves important consumer remedies in the nonprime market. 

Therefore, we believe that the Qualified Mortgage definition is 

structured to encourage responsible credit in all parts of the market over time. 

As my colleague, Kelly, stated, we do not believe that it is possible by rule to define every instance in which a mortgage is affordVerDate Nov 24 2008 17:48 Nov 05, 2013 Jkt 081757 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\81757.TXT TERRI
11 

able, but we are also concerned that an overly broad definition 

could stigmatize responsible nonqualified mortgages or leave insufficient liquidity for those loans which could restrict access to credit 

for some consumers. 

For this reason, we defined Qualified Mortgages to provide greater protection to consumers and certainty to creditors while leaving 

room for a market for nonqualified mortgages where appropriate. 

We will continue to watch the health of mortgage markets once 

this rule takes effect to ensure it is working as we expect it will. 

To address access to credit concerns, we also made changes to the 

part of the rule that treats certain balloon payment loans as Qualified Mortgages if they are originated and held in portfolio by small 

creditors in rural or underserved areas. 

We significantly expanded the definition of rural areas from the 

Federal Reserve Board’s original proposal and made other adjustments to make it easier for small creditors to continue making responsible balloon loans going forward. 

Several elements of the proposed rule that we issued along with 

the final rule, particularly the proposal to extend Qualified Mortgage status to certain portfolio loans by small creditors, are also intended to address access-to-credit concerns. 

Finally, we want to highlight that the Bureau has made an agency-wide commitment to provide implementation support for this 

and our other mortgage rules. We did this in part because we realized that such efforts are particularly important to small creditors 

that do not have large legal and compliance teams. 

We recognize that an efficient implementation process will ultimately benefit consumers in the market as a whole. For example, 

we have published a plain English summary of the rule and a compliance guide designed particularly for smaller institutions that 

will need to update their policies and procedures and provide training for staff on the rule. 

We are also publishing clarifications to the rule as needed to respond to questions from various stakeholders. We are coordinating 

with other agencies to develop examination procedures and are developing videos, checklists, and other tools that might be useful to 

creditors as they prepare for the implementation date. 

Thank you again for the opportunity to appear before you today 

and provide you with an overview of the Ability to Repay and 

Qualified Mortgage rule. We would be happy to answer your questions. 

[The joint prepared statement of Ms. Cochran and Mr. Carroll 

can be found on page 49 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Thank you both, and I will recognize myself for 5 minutes for 

questioning. 

You mentioned in your statement, Mr. Carroll, that you expect 

over time to see markets developed for the nonqualified mortgage. 

That sort of goes against anecdotally what I have seen and heard; 

most folks who write mortgages feel if it doesn’t fall within the 

QM, there is no way they are going to write the mortgages. What 

evidence do you have that this market is going to develop around 

this rule? 

12 

Mr. CARROLL. Chairwoman Capito, thank you very much for this 

question. 

The definition of the nonqualified mortgage space was something 

that was definitely a major part of the work we did in defining the 

Qualified Mortgage. 

We are really trying to calibrate the definition of a Qualified 

Mortgage based on feedback we received from broad sections of the 

market, including both industry advocates as well as consumer advocates. 

There was certainly consensus that a broad Qualified Mortgage 

was needed, so the Qualified Mortgage would cover a broad sector 

of the market. This was a key concern that was expressed to us 

during the rulemaking process. 

Also, that bright lines be created so that creditors knew how to 

comply with whatever the Qualified Mortgage definition would be, 

is something of which we heard a lot. 

In the short term, while the market is recovering, we feel it is 

very clear that the markets are going to be looking to the Qualified 

Mortgage space. That is why we did extend our definition to cover 

a majority of the market. 

We are expecting that over time—based on our analysis, we do 

think that it is possible to quantify the risks associated with nonqualified mortgage lending— 

Chairwoman CAPITO. Could you move the microphone up close to 

you? 

Mr. CARROLL. I am sorry. Yes. 

Chairwoman CAPITO. I might have to interrupt you here, because 

I only have 5 minutes, but go ahead. 

Mr. CARROLL. Sure. No, no, it is fine. 

We do think it is possible to quantify the risks associated with 

nonqualified mortgage lending. We think that is something market 

participants will do over the course of the next few years as they 

become comfortable with the rule, but in the short term, I think 

we agree that a broad Qualified Mortgage space is going to be important— 

Chairwoman CAPITO. So the statistics that I think Congressman 

Miller pointed out, that 52 percent of the loans that were written 

in 2010 would not fall into this Qualified Mortgage space, that is, 

half the people are not going to be able to get a Qualified Mortgage 

and therefore the lenders are going to be much less and probably 

will be unable to write those mortgages. 

I have a banker in West Virginia who has written 3,800 loans 

a year. He says, ‘‘The QM rules will cause us to offer less credit 

and generally the customers who will fall off the table are higherrisk, lower-income customers, and West Virginia has many of 

these.’’ And I think you will hear this concern expressed a lot. 

One of the questions you mentioned is that the phase-in is going 

to be complicated. You are reaching out to help institutions to do 

that. Do you have any contingency plans that if we get up to January 10th and there is still mass confusion when this comes on 

stream, you could push these dates back? 

Ms. COCHRAN. If I can take that one, the Dodd-Frank Act itself 

in Section 1400 sets certain requirements with regard to the implementation process. 

13 

That provision required us, where rules are required to be promulgated under the statute, to issue them by January 21st of this 

year. Also, it requires for required regulations, that they be implemented within 1 year after they have been issued in final form. 

That is why we are investing so much into the regulatory implementation process, to facilitate and support particularly with regard to small creditors. We realize that they have a limited compliance and legal staff, and it is important for us to do everything we 

can to help meet that deadline. 

Chairwoman CAPITO. So at this point, no. No contingency plans 

to push back. 

My last question is—I have a bank in the northern part of the 

State which has a charitable organization sort of modeled after 

Habitat for Humanity, but they help folks who really—it is under 

$100,000 loans—would and it is a gift basically, but their customers who have, that they vet very well and it is a wonderful 

charitable program are not going to fall into this ability-to-repay 

tranche and this bank is saying, ‘‘We are going to have to stop this 

charitable program because we can’t take the risk.’’ 

What kind of provisions do you have for exceptions to this where 

you really—these folks are going to have no other way to get a 

home, no other way to access credit without a charitable program, 

confined to one county by a small and very benevolent family who 

many years ago decided that housing was critical to these families? 

Ms. COCHRAN. As we mentioned, at the time that we issued a 

final rule we also issued a proposal to make certain additional adjustments. A number of those adjustments were focused on the potential exceptions to the Ability to Repay and Qualified Mortgage 

regime to address access to credit. 

So this includes certain types of nonprofits, certain housing stabilization programs, housing finance agencies, and other very specialized lenders that are specifically focused on low- to moderateincome populations and making sure that they can access credit in 

situations where conventional lenders are not willing to make those 

loans. 

That proposal is still pending. We are working to finalize it as 

quickly as possible because we think it is an extremely important 

issue. It had not been proposed as part of the original rulemaking, 

so we wanted to seek comment on it before finalizing, but we are 

working very hard to tie that up. 

Chairwoman CAPITO. Well, I would encourage you to move forward on that. 

And I will now recognize my ranking member for 5 minutes. 

Mr. MEEKS. Thank you. 

And let me say as I have heard on both sides we know that especially no-doc loans were the cause of this problem that we had, the 

financial crisis. What my concern is, most of the loans that we saw 

that caused the problem really were not issued by credit unions or 

community banks. 

Yet, it seems as though the rule as promulgated is going to have 

a direct effect on them more so than anyone else. Now I know that 

there was a comment period that was open where individuals could 

raise comments and concerns in regards to what you were looking 

at. 

14 

So my question to you is, did you receive comments and concerns 

from some of the community banks and the credit unions? What 

were those? And are any reflected in some of the decisions that you 

made when you promulgated the rules? 

Ms. COCHRAN. Thank you so much for the question. 

Yes, we received extensive comment from small community-based 

creditors, banks, credit unions, and so on, both in the original rulemaking and as part of the concurrent proposal that I just mentioned. 

So in the final rule, we made a number of adjustments to address 

concerns that had been raised by these institutions, including significantly increasing the size of the provisions for Qualified Mortgages that involve balloon payments. 

Generally, the Dodd-Frank Act strongly disfavors balloon payment loans, but Congress did provide a provision that allows such 

loans under certain circumstances to receive Qualified Mortgage 

status if they are made by small institutions that are operating 

predominantly in rural or in underserved areas. 

We significantly increased the size of the definition, and in the 

concurrent proposal we also sought additional comments about creating a fourth category of Qualified Mortgages that would be available to small creditors, regardless of whether they operated in 

rural or underserved areas. 

We recognize that these institutions are using relationship-based 

lending, that is highly effective, that often leads to much lower 

foreclosure rates, and we believed it was appropriate to propose a 

separate category of Qualified Mortgages to recognize the fact that 

these institutions, when they are holding the loans on portfolio, 

have significant reasons to do a good job of underwriting, and are 

serving their consumers well. 

That proposal is still pending, but we are working to tie that off 

as quickly as possible. We are very sensitive to concerns about how 

this rule will impact small institutions. That is one of the main 

reasons we went back out for comment to continue to consider how 

the different parts of the rule were going to influence small institutions. 

We have also proposed increasing the threshold between Qualified Mortgages that receive a Safe Harbor and those that receive 

a rebuttable presumption for small creditors in light of the fact 

that they often have higher costs of funds. So those are still live 

issues, but we are taking them very seriously, and are hoping to 

tie them off quickly. 

Mr. MEEKS. On those live issues, for example, because that is 

what I also have concern about where the debt to income capital 

for 43 percent looks like it unduly reduces the credit for low- and 

moderate-income borrowers especially, you have young people who 

are buying homes for the first time or who still have student loans, 

so this could just knock them out of the market altogether, of being 

able to look forward to buying a home, and so that is a huge impact, I would think. 

Ms. COCHRAN. For the balloon Qualified Mortgage rules, which 

have already been finalized, we require that small creditors consider debt-to-income ratios but not be bound by a 43 percent 

15 

threshold. We have proposed the same approach with regard to the 

new category of small portfolio Qualified Mortgage. 

As I said, we know that these institutions are using highly individualized relationship lending models and that they are highly effective. We did not feel in that circumstance it was necessary to 

provide a bright line threshold as long as they are considering consumers’ debt, income, and assets. 

Mr. MEEKS. I only have 39 seconds, so I don’t know if I can get 

everything in. 

My question is to Mr. Carroll, in that the CFPB addressed the 

issue of affiliate discrimination in the calculation of fees and points 

in the final QM rule, and I was wondering if that has been causing 

a big issue in New York because of the pending costs and whether 

or not that can be re-calculated? 

Mr. CARROLL. Thank you, Congressman. 

Affiliate fees are required by the statute to be included in the 3 

percent point and fee cap. We did receive a lot of comments on this 

issue. 

On the one hand, there are arguments that affiliates create challenges to competition in the market for those services. On the other 

hand, there are arguments that affiliates create a more streamlined process that can reduce costs in the market. 

We have considered these arguments in our rulemaking and 

right now we have reflected the statute’s requirement that those be 

counted in the points and fees test. 

Chairwoman CAPITO. Thank you. 

Mr. Duffy, for 5 minutes. 

Mr. DUFFY. Thank you, Madam Chairwoman. 

Everyone on this committee, and probably in Congress, agrees 

that we needed some changes to how our lenders were making 

loans. Many of us are concerned about the no interest, the negative 

amortization, the low or no downpayments. We weren’t verifying 

income or assets. There were big problems that needed to be fixed, 

and I think all of us would agree with that. 

But I think what we are starting to see here too is an agreement 

that we understand one size doesn’t fit all, and I know that we 

have tasked you to try to make one size fit all, but you start to see 

all of the problems that come from a government that is very large, 

very expansive, and says, this is the cookie-cutter system that we 

are going to make you work in. 

And I think we see this pendulum swinging back and forth 

where we had gone too far over, lax standards and that helped us 

create the crisis. 

Now I think with this rule we have swung the pendulum all the 

way over to the other side, instead of maybe going back to some 

of the standards that we used when the system actually worked. 

When we talked about the five C’s—the character, capital, capacity, collateral, and conditions—we did pretty well, and we actually 

empowered people in this industry, our bankers to evaluate their 

clients with sound standards to make good loans. That actually did 

work. 

Now, we have taken all of the discretion out of banking and really we can get rid of all of our bankers. You can just go fill out a 

form online and submit it and it can be approved or denied based 

16 

on the very rigid standards that we have with the QM rule, and 

that is one of my concerns with how rigid this is. 

And I also have a concern that many of the loans that have been 

made over the last several years wouldn’t fit this definition—many 

of our mortgages wouldn’t fit this definition. Has the CFPB done 

a study to look at the mortgages that have been made and what 

percentage of them would fit within the QM rule that has been 

drafted and the percentage that would not fit within your rule? 

Mr. CARROLL. Yes, Congressman, we did do that study as part 

of our cost-benefit analysis within our rulemaking. We did size the 

market, and by our numbers, we got our general definition of a 43 

percent debt-to-income ratio, and by our calculations, that is roughly three-quarters of the market of recent vintages that is covered. 

And that— 

Mr. DUFFY. So three-quarters of the mortgages you analyzed 

would have fit within your QM— 

Mr. CARROLL. Within the Qualified Mortgage definition we have 

laid out. Our objective with the rulemaking was to get closer to 100 

percent, which was why we created this temporary definition for 

loans that are eligible for insurance or purchase by the GSE’s or 

FHA. When we size that in, we get closer to 100 percent of recent 

year loans. 

Ms. COCHRAN. If I might add to that, on two aspects. 

First, with regard to the analysis we did, the one area where we 

could not model was with regard to the 3 percent points and fees 

cap because we did not have the data for that. 

We were able to consider the loan features and other underwriting requirements, so we were able to build that in and model 

it. And as the chairman mentioned, there have been, I think, other 

analyses of these that have come to different percentages. We believe that our percentage and analysis was in fact correct and that 

the overall number is above 90 percent. 

One of the things that I wanted to mention about the flexibility 

point is—and I discussed this in my original testimony—we 

thought very hard about that issue and we really did not believe 

that a one-size-fits-all approach makes sense. 

So for instance, the ability-to-repay requirements provide a fair 

amount of coverage with regard to using reasonable, reliable, thirdparty methods, but even there, we provided flexibility for lenders 

to use reasonable sources. 

Also, the statute provides specific rules with regard to how you 

calculate the monthly payments so that negative amortization 

loans and so on are treated consistently. 

But when it comes to considering underwriting criteria such as 

how much you weigh debt-to-income ratio versus credit score 

versus other features, the rule requires that it be considered, but 

it does not dictate underwriting models. 

We felt that it was extremely important to leave room for reasonable underwriting practices in a range of models that are being 

used today. So we were very carefully balancing it both on the ability-to-repay side and through the different types of Qualified Mortgages. 

Mr. DUFFY. And I don’t know that the committee has received 

that study—have you seen it, Madam Chairwoman? 

17 

Chairwoman CAPITO. I do not have that study. 

Mr. DUFFY. Would you mind providing your analysis to the committee so we could take a look at what you have done? 

Ms. COCHRAN. Absolutely. It is part of our Federal Register notice on the final rule, but we can excerpt it and provide it to the 

committee. 

Mr. DUFFY. Thank you, and I just want to make one other point 

in my last 15 seconds. 

There is a great concern in the part of the country where I live, 

in rural Wisconsin, and the definition that allows for our rural balloon mortgages. 

I have a rural Wisconsin map here on the northwest corner, and 

if you are driving between Chippewa and Taylor County or Rusk 

and Chip or Dunn and Barron and Lincoln, listen, there is no difference. 

It is farms as far as the eye can see for 30 miles on either side 

of the county line. And it creates some real problems and disadvantages within my community the way the rule is written. 

Hopefully, we can consider some different standards on how we 

are doing our balloon mortgages. I yield back. 

Chairwoman CAPITO. Thank you. Mr. Watt? 

Mr. WATT. Thank you, Madam Chairwoman, and Ranking Member Meeks for convening this very important hearing. 

I want to start by expressing my appreciation to the CFPB for 

what I think is a very good effort in a very, very difficult terrain 

and reminding the committee that one of the reasons that we 

punted this responsibility to somebody other than this committee 

or the Senate Banking Committee or the conference committee was 

because of the difficulty of addressing all of these are very delicate 

nuances. 

We were operating in a period where obviously the pendulum 

had swung way too far in the direction of allowing loans that 

shouldn’t have been allowed to be made and there was concern that 

we were going to swing the pendulum back too far in the opposite 

direction. 

And so our desire under this bill, of which Representative Miller 

and I were the primary sponsors, initially at least, was to try to 

find a new balance without constraining credit unduly, at least 

credit to people who were worthy of getting credit, and still not 

allow the kinds of abuses that had taken place in the marketplace. 

So a lot of the the detail of this was really punted to the CFPB 

and the Federal Reserve initially and then to the CFPB to work 

out these nuances and the CFPB was very responsive in listening 

to a whole range of people, including those of us who had advocated 

aggressively for constraints on the market to clean it up back in 

the opposite direction to define what a Qualified Mortgage was. 

And I think we really got to a pretty good balance as an initial 

proposition. Obviously, there are always going to be people secondguessing whether you got the correct balance. Probably the people 

we would prefer to see doing this wouldn’t be Members of Congress 

sitting on this committee trying to do this. 

I do want to ask about this 3 percent cap. I know the 3 percent 

cap is in the law itself. You said you couldn’t model the 3 percent 

cap because you didn’t have sufficient information. 

18 

What would it take to do that model, because there are a lot of 

questions being raised now about whether the 3 percent cap itself, 

which is statutory, not something that the CFPB did, is an appropriate cap? What would it take to model that? 

Mr. CARROLL. Thank you, Congressman. 

It is a terrific question. I think what we would need is a representative sample of affiliate fees across the country that would 

represent just an ordinary course of typical mortgage transactions— 

Mr. WATT. Okay, so you could undertake that study and help of 

the committee going forward if the committee decided to look more 

closely at where the 3 percent ought to be 3.25 percent or 3.5 percent? 

Mr. CARROLL. We would be very happy to provide technical assistance, yes. 

Mr. WATT. Okay. 

The second thing is that when we introduced the bill, Mr. Clay 

on our side on this committee offered an amendment that struck 

this differentiation between affiliated and unaffiliated title insurance companies. 

We actually supported Mr. Clay’s amendment and the bill we reported out did not have this affiliated/unaffiliated dichotomy. You 

have looked at that. Do you think that the affiliated/nonaffiliated 

distinction serves a useful purpose at this point? 

Mr. CARROLL. With regards to affiliated title? 

Mr. WATT. Yes. 

Mr. CARROLL. We have heard many comments, Congressman, 

about affiliated title versus non-affiliated title. Specifically, in that 

particular sector there could be safeguards in place that should be 

considered, and that there is generally State oversight of the premiums charged around affiliate title. We did hear those comments 

during the rulemaking process and— 

Mr. WATT. My time is up, but could you just submit to the committee some of the alternative approaches you think might be considered to address this affiliated/unaffiliated title issue? 

Mr. CARROLL. I would be happy to follow up, Congressman. 

Mr. WATT. Thank you so much. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Miller, for 5 minutes. 

Mr. MILLER. Am I safe in saying that you are hearing bipartisan 

unhappiness with your rule? If it is not—I think we can all raise 

our hands saying we are on happy to begin with. 

It appears to me that the rule is much more restrictive than the 

legislation that enabled you to do what you are doing and I can’t 

believe you can’t make this work without us having to pass a new 

law to clarify a law that should have given you flexibility to make 

it work. 

So I think we are trying to tell you that we have a problem with 

what we are hearing out there and you said you used—they said 

three-quarters of the loans you reviewed met the QM rule. What 

year were those loans made? 

Mr. CARROLL. That was looking at 2011 loans. 

19 

Mr. MILLER. Okay, so half of them in 2010, CoreLogic says would 

not meet your QM rule. Three-quarters in 2011 don’t meet the QM 

rule, and everybody, Freddie Mac and Fannie Mae, everybody is 

saying that loans made in 2010 are performing very well. FHA’s 

are performing very well. 

So, that is problematic. It raises a big flag saying, hey guys, let’s 

go back and see what we can do out there. You are going to get 

us a copy of the study you used to make your determination, is that 

correct? I heard you say that. Okay. 

Recently, you gave a 7-year exemption to Freddie and Fannie to 

implement the QM rule. Is that correct? 

Mr. CARROLL. Yes, Congressman. 

Mr. MILLER. That raises a huge concern on my part of why would 

you give them 7 years if it is a good rule and then they are coming 

back saying no, we are going to implement it immediately, which 

is even more bothersome. 

Can you please address that? 

Ms. COCHRAN. If I might explain. We, as I mentioned, created 

multiple definitions of Qualified Mortgage under the rule. The first 

definition of Qualified Mortgage, the general definition, uses a 43 

percent debt-to-income ratio. We did that because we received extensive comment from industry saying they needed bright lines to 

determine exactly what was a Qualified Mortgage and what was 

not. 

This threshold, 43 percent, is the historical threshold that has 

been used by the Federal Housing Administration and is familiar 

to lenders. It is a relatively broad threshold compared to certain 

other ones that are used and we felt it was an appropriate and familiar threshold to use. 

At the same time, we realized there was concern that responsible, creditworthy borrowers over 43 percent would have a difficult 

time in the first few years after the regulation took effect— 

Mr. MILLER. That is a concern right there. 

Ms. COCHRAN. —in getting— 

Mr. MILLER. And right on that point, we are in a very moderate 

recovery, very moderate. 

Ms. COCHRAN. We were very concerned about that. 

Mr. MILLER. Very sensitive. I am really concerned about it and 

they are saying, FHA is saying no, we are going to implement it 

day one. That has to create some concern for you because your 

study obviously said we need to allow this more time. 

So I am saying based on their decision to implement immediately, I am asking you I think you are hearing the concern on 

both sides to go back and look at it and say maybe we need to do 

something a little differently than we have because every lender I 

am talking to, everybody says we are not making any loans that 

do not meet the QM rule. 

Ms. COCHRAN. Right. 

Mr. MILLER. That is a recipe for immediate disaster come—this 

coming January, in my opinion. I am looking at a marketplace that 

has been devastated for years. Now we are looking at—I would say 

near the third quarter of last year you started to see it get a little 

healthier. 

20 

This year, you are even seeing a little better marketplace. Peoples’ home values are starting to come back up a little bit. Should 

we decide to implement a rule that devastates the lending industry 

overall, those values are going to go right back down. I am not 

mad—I am concerned. 

Please don’t take my comments as a personal criticism. I am saying that I am hearing both sides of this saying, ‘‘We have a huge 

concern.’’ I am hearing the private sector saying, ‘‘We have a major 

concern because we are not going to do anything that puts us outside of the QM rule,’’ and based on that, I think you need to do 

something and also I heard a comment on the 3 percent cap on 

points and fees—none of those were used in your study because 

they weren’t implemented in so that didn’t even apply. 

And I am not sure you knew what was supposed to be even put 

into the 3 percent when you implemented the rule. Legislatively, 

it was kind of—it allowed you a broad area to review before you 

implemented that, and I am not certain that it is not critical that 

you did that. 

So I think that needs to absolutely be revisited. Mr. Watt also 

said the same thing. We don’t have to go rewrite a law to give you 

leeway that you already have, but I have a lot of questions and I 

am not going to get to them because I am really concerned about 

the comments you made because they are very enlightening and 

they are not negative, they are just enlightening and the comments 

that you are hearing us up here, we are very concerned and if we 

don’t do something to modify this rule before January, I think you 

see the same recipe coming that I see and it is not healthy. It is 

not good and I would strongly encourage you to not force us to legislatively change the rule to be more flexible in the rule. 

I yield back the balance of my time. 

Chairwoman CAPITO. Thank you 

Mr. Green, for 5 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman. 

Please permit me to extend to Mr. Cordray my best wishes, and 

let him know that I am looking forward to a future meeting with 

him. 

Madam Chairwoman, I would like to, if I may, call to our attention an article in the New York Times entitled, ‘‘U.S. Consumer 

Watchdog to Issue Mortgage Rules.’’ This article calls to our attention the following: ‘‘Mortgage bankers generally applaud the new 

regulations saying they clear up uncertainty that has hung over 

the home-lending business since the financial crisis.’’ 

It goes on to say, ‘‘These rules offer protection for consumers and 

a clear, safe environment for banks to do business. I understand 

that you have not created a perfect rule. But I also understand that 

we cannot allow the perfect to become an enemy of the good,’’ something we often say here. 

So I am going to segue now to something else that I call to your 

attention because I am concerned about servicemembers and I am 

concerned that too many of them are still falling victims to scams. 

Some might ask, how many is too many? One is too many, and 

here are some of the things that cause me a good deal of consternation. I understand that the postdated check scam still looms large. 

21 

Car titles are being utilized, too, as a part of scams. They have 

businesses located just outside of military bases because they can’t 

engage in on-base solicitation. 

We still have retirement benefits that may be a part of scams. 

They are being reassigned. Some of these scams originate in foreign countries. So could you just tell me quickly, are we looking at 

the scams that are being perpetrated upon our military personnel? 

Ms. COCHRAN. Obviously, our Office of Servicemember Affairs is 

taking the lead for the agency in working on all these issues. They 

coordinate very closely with other parts of the Federal Government 

and are trying to bring greater transparency and awareness to all 

sorts of issues, including scams. 

I believe that they have been aware and gathering information 

about all of these issues, and we would be happy to relay your 

question and provide more specifics. I don’t think either of us can 

speak to the details of what they have learned. 

Mr. GREEN. Thank you. I think that is a fair answer, because I 

know what you came prepared to discuss today. I just could not 

pass up the opportunity to speak up for servicepeople. 

Ms. COCHRAN. It is something we take very seriously. We appreciate it. 

Mr. GREEN. Thank you very much. 

Let’s move quickly to another topic that we brought up, community banks versus small banks. I appreciate greatly the question 

that the ranking member posed and I thought you gave an answer 

that was acceptable, but could you kindly give me a quick indication as to whether or not you are making a distinction between a 

community bank and a small bank, and if so, what is that distinction? 

Ms. COCHRAN. We have looked at the impact on small creditors 

throughout the Dodd-Frank Act mortgage rulemakings, and in a 

number of places we have made accommodations or changes in the 

way the rules apply to smaller institutions. 

But we have done that in a context-specific setting. So we are not 

applying a single definition in all circumstances. Instead, we are 

looking at the particular activities at issue. 

So for instance, in the Qualified Mortgage and escrow 

rulemakings, we looked at a definition of small creditor that was 

focused on what types of creditors might have difficulty in 

escrowing and providing adjustable rate mortgages as compared to 

balloon mortgages. 

So we set one threshold there for those provisions and we are 

proposing to continue that threshold with regard to the new category of Qualified Mortgage. In the— 

Mr. GREEN. If I may intercede just quickly, are you focusing 

more on a small institution as opposed to a community bank? 

Ms. COCHRAN. We are looking at a number of factors when we 

set those thresholds. What we set as a threshold was $2 billion in 

assets and that the institution along with its affiliates was originating no more than 500 first lien mortgages a year. 

We were doing that because we were looking for institutions that 

are using relationship-based lending that are accountable to a specific community, so not only are they holding these loans in portfolio, but because of the nature of their lending practice, they have 

22 

very strong incentives and very strong practices to protect consumers. 

In the servicing context, we also looked at and exempted small 

servicers from certain parts of those rules. 

Mr. GREEN. Let me intercede quickly to ask— 

Ms. COCHRAN. But we put a different definition there— 

Mr. GREEN. —because I have 3 seconds— 

Ms. COCHRAN. —based on— 

Mr. GREEN. —quickly, I must ask, when will this new rule be 

available for us to visit with you about? 

Ms. COCHRAN. We are working to implement it as quickly as we 

can. We will issue it shortly because we want to get it finished. We 

know it is extremely important as people are working towards implementation. 

Mr. GREEN. It is, and I thank you very much. 

I yield back, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

Just one question, out of curiosity. Has either one of you ever 

worked in the private sector and made a housing loan? 

Mr. CARROLL. Congressman, I have worked in the private sector 

serving banks. 

Mr. LUETKEMEYER. Serving? What do you mean? Have you ever 

made a house loan? 

Mr. CARROLL. No. No, Congressman. 

Mr. LUETKEMEYER. Ms. Cochran? 

Ms. COCHRAN. I was in private practice mostly for financial institution clients prior to going into government. 

Mr. LUETKEMEYER. But you never made a loan? 

Ms. COCHRAN. No. 

Mr. LUETKEMEYER. Okay. 

Just out of curiosity—one of the things you are working through 

this morning is the results of the low-doc loans. We went in and 

we thought we were really bright. We wanted to start to make it 

all quick and easy and available. The system was working and now 

all of a sudden we have low-doc loans and now it is all messed up 

and now we are trying to fix it. Is that roughly right? 

Ms. COCHRAN. That was certainly one of the concerns— 

Mr. LUETKEMEYER. One of the problems we have? Okay. 

So as we try and fix this, you now have been directed by the law 

that Congress passed to try to figure out how Qualified Mortgage— 

to come up with a standard. 

I guess the question is—and I have this difficulty sometimes with 

a lot of individuals who serve in the bureaucracy from the standpoint of interpreting those laws sometimes can be difficult and the 

intent of Congress. 

And when they make a rule, suddenly they believe that is the 

only way that this rule can be made and they become very inflexible. 

Do you have enough flexibility that you believe with the way this 

rule was or the law was propagated, the law was put before you 

that you have the flexibility to be able to make the changes that 

can accommodate the things we are talking about this morning? 

23 

Ms. COCHRAN. We structured the rule in a way that specifically 

provided for flexibility. As— 

Mr. LUETKEMEYER. I am not talking about the lenders. I am talking about you. 

Ms. COCHRAN. Yes. 

Mr. LUETKEMEYER. Do you have enough flexibility to go back and 

make the changes we are talking about this morning? 

Because we have talked about a lot of things. We talked about— 

Mr. Watt talked about the 3 percent, Mr. Miller talked about a lot 

of things with regard to this. Somebody else, I think it was Mr. 

Duffy, talked about the rural definition here. There are a lot of 

things that need to be worked on. Do you have enough flexibility 

to make those changes and are you willing to do that? 

Ms. COCHRAN. We have created a structure that we believe will 

be helpful in considering where further adjustments are necessary 

in the rulemaking. One of the things that we did, in addition to 

creating the main definition of Qualified Mortgage and the temporary definition of Qualified Mortgage, which is not an exemption 

for Fannie and Freddie— 

Mr. LUETKEMEYER. You are not answering my question. All due 

respect, Ms. Cochran, you are not answering my question. 

It is very simple. Do you have the flexibility and are you willing 

to use it to make the changes we are requesting this morning and 

discussing? Yes or no? 

Ms. COCHRAN. We made the best decisions that we could in the 

rulemaking process— 

Mr. LUETKEMEYER. Okay. I will grant you have done—you have 

made your decision. Now are you willing to go back and take a look 

at changing it based on the things we are discussing this morning? 

Ms. COCHRAN. We are continuing to consider a number of the 

issues that were discussed this morning in the context of the concurrent proposal, and as I discussed we want to tie that off as 

quickly as possible. 

We do believe that we have flexibility there and we proposed 

those changes to make sure that we address some of the concerns 

that have been raised. 

We have also structured the rules so that as the 7 years progresses and the temporary category of Qualified Mortgage would 

come to a close, we would have the ability to look at the market, 

how it is developing, if it is developing as we predicted, and make 

adjustments to the rule at that time, if necessary. 

Mr. LUETKEMEYER. Okay, so is there enough flexibility in the 

rule then to allow you to do that? Or in the law? You feel you have 

enough flexibility then apparently, is that right? 

Ms. COCHRAN. We believe that we have flexibility to make important decisions and that we are continuing to use that appropriately, 

yes. 

[laughter] 

Mr. LUETKEMEYER. Okay. Well, no wonder we can’t get anything 

done here. We can’t get a straight answer. 

Okay, with regards to the level of participation you anticipate by 

the different groups, agencies, you broke it down to different banks, 

small lenders, big banks, mortgage lenders, and we have had two 

24 

different, three or four different numbers around here this morning 

with regards to participation. 

It would seem to me by the definition of a Qualified Mortgage 

and the Safe Harbor that it provides that those loans that are 

made outside that Safe Harbor would then have an inordinate 

amount of liability risk for the lender, will they not? 

Do you not believe that will be the inference from protecting and 

having Safe Harbor loans that are made that way and those obviously that are not? Wouldn’t you believe that would be the case? 

Mr. CARROLL. Congressman, that is a very good question. 

We calculated what we believe the litigation risk might be in our 

1022 analysis for nonqualified mortgages and then the lesser 

amount of litigation risk for Qualified Mortgages that carry rebuttable presumption of compliance. 

Mr. LUETKEMEYER. Where I am going with this is if there is 

more risk, inherent risk with those mortgages that are made outside that, and the lenders then are less willing to do that, there 

is going to be an access to credit problem. 

If you have an access to credit problem, where are they going to 

go? Some will go to agencies like FHA, which is making loans according to this testimony we have heard in this committee, before 

that are kind of like Freddie and Fannie were making, that are 

kind of beyond the scope. 

Now, we are going to wind up forcing them into a government 

agency that is already in trouble. So, this is a self-fulfilling problem 

with the way we are structuring this. 

And I see I am out of time, I appreciate the indulgence of the 

chairman. 

Thank you. 

Chairwoman CAPITO. Thank you. 

I would like to state that without objection, members of the full 

committee who are not members of this subcommittee may sit on 

the dais and participate in today’s hearing. 

I would also like to submit statements for the record from the 

American Land Title Association; the Credit Union National Association; the Independent Community Bankers of America; the National Association of Federal Credit Unions; the National Association of REALTORS®; and the West Virginia Bankers Association. 

Without objection, it is so ordered. 

Mr. Ellison is recognized for 5 minutes. 

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

Member Meeks. 

Please do convey my appreciation to Mr. Cordray. I hope he does 

get confirmed. I think it will be for the benefit of the country. 

I would like to ask a question. There has been some discussion 

about mortgages that may or may not be made that are outside of 

the QM. I wonder if you could talk about those a little bit and what 

the last several years has taught us about, I don’t know, no job, 

no income, no money down-type loans, prepayment penalties, balloon payments, 2-28s, 3-27s. 

There is a reason that you guys have focused on certain types of 

loans, to say these would be considered the safe ones, and there is 

a reason why some are not. 

25 

I wonder if you could elaborate on that, and I also wonder if you 

could even discuss this question. The point has been made there 

may be fewer loans made, some loans that were made may not be 

made. 

Is that necessarily a bad thing given some of the difficulties that 

we have seen over the last several years with loans that probably 

should have never been made? Would you care to elaborate on that, 

please? 

Mr. CARROLL. Thank you, Congressman. 

When we were creating the Qualified Mortgage definition, we 

were working with a few kind of core principles. 

At its core, it is an Ability-to-Repay rule where the objective of 

the rulemaking is to eliminate some of the practices that were 

problematic during the financial crisis. 

So eliminating no-doc lending was an important part. Making 

sure that when creditors do a debt-to-income ratio calculation they 

are using the fully indexed rate, the actual rate, not the introductory or teaser rates. It is just some basic practices that creditors 

do today and have been doing for a long time. 

We did hear very broadly, in the midst of the rulemaking process, that a broad Qualified Mortgage definition was important because, since the crisis, there has been a lot of concern about risks 

of all shapes and sizes, whether they would be operational, credit, 

interest rate, compliance-related, litigation-related. 

And so, we did hear very broadly that a broad Qualified Mortgage was important particularly in this stage of the market’s recovery. We have endeavored to try to do that and create a broad 

Qualified Mortgage space, but we did also in the course of our 

work, try to analyze what we think the risks would be in the nonqualified mortgage space. 

And when we run numbers, we find that in a normal market environment, that should be a fairly manageable risk that lenders 

should be able to account for and really what it relates back to is 

that when we draw a Qualified Mortgage space, we want to try to 

draw standards that we think are reasonable. 

So what is a reasonable debt-to-income threshold if we are going 

to provide clarity and bright lines to industry? We locked onto 43 

percent. We felt that was a standard that has served consumers in 

the past. 

It has represented an outer boundary of risk that the FHA has 

used for a number of years and we felt that, as a core definition, 

did cover a pretty broad set with about three-quarters. 

We were challenged in the short term to try to find a mechanism 

that would get us closer to 100 percent. That is why we did decide 

to look to the standards of FHA and the GSEs to accomplish that, 

and this is an important point. 

We are talking about this extension definition. What we are really trying to accomplish is a way that we can, in this stage of the 

market’s recovery, have a mechanism so creditors can extend beyond the 43 percent debt-to-income ratio. That was our objective 

with this rulemaking. 

Mr. ELLISON. Thanks a lot. I guess the only point I am trying 

to make is I am glad my colleagues on both sides of the aisle are 

concerned about making sure there is credit availability, but I hope 

26 

we all also can agree that we believe there was a bunch of loans 

that were done that probably never should have been done. 

And I hope that we keep that in mind, too. Because we can go 

back to the Wild West and that won’t be good either, so let’s keep 

the balance concept in mind. 

Also too, last month the CFPB fined 4 private mortgage insurers 

about $15 million for illegal kickbacks. There have been other problems with inflated appraisals in other ways consumers overpaid. 

Do you think a 3 percent cap on points and fees will make loans 

more affordable and fair to borrowers? 

Ms. COCHRAN. As we mentioned, the 3 percent points and fees 

cap is in the statute itself. It does allow for up to two bona fide 

discount points in addition to that threshold depending on the rate 

of the loan. 

We believe that Congress was looking at the up-front costs to 

consumers and concerns that potentially, where up-front costs are 

very high, creditors and other participants in the process may not 

be as focused on the long-term performance of the loan but rather 

the up-front cost recovery. 

So we have implemented that as directed by the statute and we 

are continuing to consider some aspects of that rule in the concurrent proposal particularly as it relates to loan originator compensation. 

Chairwoman CAPITO. Thank you. 

Mr. McHenry, for 5 minutes. 

Mr. MCHENRY. Thank you, Chairwoman Capito. 

Now, it is interesting, because so many of us have looked at the 

Qualified Mortgage rule, the QM rule and realized that our community bankers and our community credit unions are telling us 

that they are not going to lend outside of the QM standard—and 

you are nodding your head. 

You have heard this as well, and I am sure you have heard it 

this morning but Citizen Cordray, Richard Cordray, I like to call 

him ‘‘citizen’’ rather than ‘‘director’’ based on the non-Senate confirmed nature of his directorship, but Citizen Cordray said in front 

of CUNA, the Credit Union National Association, a short time ago, 

‘‘I know that complying with our new regulations is a worry for 

many of you, so allow me to make a few points clear. First, the criteria for Qualified Mortgages are intended to describe only the 

least risky loans that can be offered to consumers. But plenty of 

responsible lending remains available outside of the Qualified 

Mortgage space, and we encourage you to continue to offer mortgages to those borrowers you can evaluate as posing reasonable 

credit risk. Those that lend responsibly, like credit unions, have no 

reason to fear the Ability-to-Repay rule.’’ 

Now, it is not clear to me based on my conversations with community bankers and credit union leaders that that is in fact true. 

Right? So if Mr. Cordray claims that this question of the ability 

to repay is all right, you are not going to be subject to it if you lend 

outside of it. So why did the CFPB create the Qualified Mortgage 

so narrowly, Mr. Carroll, if in fact the intent was to have lending 

well beyond? 

27 

Mr. CARROLL. Thank you, Congressman, for the question. I think 

our objective was to try to make it broad, and it sounds like there 

is some disagreement today if we have succeeded in doing that. 

Our intention in developing the rule was to build a broad Qualified Mortgage and it sounds like there has been some concern 

about that. 

Mr. MCHENRY. Okay. So we will just disagree on that. 

Let me ask you a separate question. Do you believe that lenders 

are going to originate nonqualified mortgages? 

Mr. CARROLL. We see it happening today— 

Mr. MCHENRY. No. It is happening today because is the QM rule 

imposed upon institutions? 

Mr. CARROLL. No, not until January. 

Mr. MCHENRY. Okay. So therefore, you are talking about preQM, and it is artful. It is a very artful, nice answer, but technically, you are correct. Post-QM, let me restate the question. Do 

you think the lenders are going to originate nonqualified mortgages? 

Mr. CARROLL. We think some will, Congressman. 

Mr. MCHENRY. Some? 

Mr. CARROLL. Yes. 

Mr. MCHENRY. Okay. Based on what belief? 

Mr. CARROLL. We just believe that there will be lenders who are 

going to make loans or that are, where they understand the nature 

of the loans they are working with. For example, we have seen 

some interest-only jumbo products that we suspect will continue 

when the rule takes effect. 

Mr. MCHENRY. Which is how much of the marketplace? 

Mr. CARROLL. It is not a very large— 

Mr. MCHENRY. Excessively small or incredibly small? 

Ms. Cochran, let me ask you this question about legal liability. 

If an institution offers a Qualified Mortgage, there are some liability protections, right? And if they do not offer a Qualified Mortgage, what are the penalties? 

Ms. COCHRAN. The statute provides a 3-year period during which 

a consumer could bring an affirmative claim. The penalties are up 

to 3 years of the finance charge within that phase. 

If the consumer goes into foreclosure, they can also raise a claim 

as an offset and again, penalties are limited to 3 years. So it is less 

than what occurs under the current rule that is already in effect— 

Mr. MCHENRY. Let me ask you, if you have a box that gives legal 

protection and then people—you have institutions lending outside 

of that box, does that become a safety and soundness issue? 

Ms. COCHRAN. We believe that if people are doing responsible 

loans, this is manageable and appropriate. There is already an— 

Mr. MCHENRY. Does it go to safety and soundness for institutions? 

Ms. COCHRAN. There is already an ability-to-repay standard in 

effect for higher-priced mortgage loans. Institutions that are managing— 

Mr. MCHENRY. Higher-priced mortgage loans, okay. 

Ms. COCHRAN. Yes, and institutions are managing that risk— 

Mr. MCHENRY. So those mortgages are a large portion of the 

marketplace? 

28 

Ms. COCHRAN. They are a smaller portion of the marketplace. 

Mr. MCHENRY. They are a very small portion of the marketplace. 

So your reference points are very small and you are being artful 

about your answers today. 

We have deep concerns about the impact this is going to have 

and the CFPB’s mismanagement of a really overly burdensome 

rule. 

I yield back. 

Chairwoman CAPITO. Thank you. 

Ms. Velazquez? 

Ms. VELAZQUEZ. Thank you, Madam Chairwoman. Please bear 

with me. I am suffering from laryngitis. 

Most of my issues and concerns regarding this rule have been 

asked. Of course, I am very much concerned about the fact that the 

private capital has yet to reenter the mortgage market and we 

have to strike a balance between protecting consumers, and at the 

same time, keep access to capital and credit flowing into underserved communities. 

I have a question that I believe has not been asked, and I would 

like to address it to Mr. Carroll. CFPB’s final rule applies the legal 

Safe Harbor to only low price loans whereas the high-priced loans 

are tied to the rebuttable presumption. 

Could you please explain the CFPB’s reasoning for selecting this 

structure rather than instituting a single lender protection for QMs 

across-the-board? 

Mr. CARROLL. I would be happy to. Thank you for the question, 

Congresswoman. 

The statute required us to define a level of protection the creditors would receive from the ability-to-repay liabilities if they make 

a QM loan and so we had to navigate this question and we ended 

up coming up with this bifurcation that says if the loan is a prime 

loan, meaning the APR for the loan is within 150 basis points over 

the average prime operate, we would provide it Safe Harbor status. 

And if it is above that in the nonprime space, we would provide 

the creditor with a rebuttable presumption of compliance. The intent here was to say that if you are generally within the QM space 

and you are working in the prime segment, these are borrowers 

who have a little bit stronger credit profile, may not need as much 

protection as consumers who are higher-priced who are in the 

nonprime space, and so we thought it was appropriate to provide 

a little bit of extra protection for the consumers in that nonprime 

space so that they do have some remedies if the market is getting 

into some of the subprime issues that we saw during the crisis. 

Ms. VELAZQUEZ. Ms. Cochran, would you like to— 

Ms. COCHRAN. Yes, we wanted to provide a certainty for the market going forward. We wanted to provide strong incentives to provide safer loans, and we believe the rebuttable presumption Qualified Mortgage strikes that balance. 

It does provide incentives for lenders to provide Qualified Mortgages at the same time it preserves consumers’ rights in the event 

that there is a problem. We think such problems would be extremely rare, but we thought it was important to preserve that 

flexibility. 

Ms. VELAZQUEZ. Thank you. 

29 

Thank you, Madam Chairwoman. I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Madam Chairwoman. 

Thank you, Mr. Carroll and Ms. Cochran, for your testimony. 

I would like to pick up or where Congressman McHenry left off. 

Given that the FHA decision, that Fannie and Freddie would only 

lend or only buy QM mortgages, do you believe that the lenders 

will continue to lend given that they have to hold these loans on 

their balance sheet? 

Mr. CARROLL. Congressman, I am sorry, which loans were you 

referring to? I couldn’t hear; I apologize. 

Mr. PITTENGER. Loans outside the Qualified Mortgages. 

Mr. CARROLL. Outside the Qualified Mortgages. Particularly in 

the short-term, we heard loud and clear from industry that nonqualified mortgages will be a smaller part of the market in the 

short term. 

That is precisely why we endeavor to create both the general definition for a Qualified Mortgage as well as this temporary extension. At least for the next few years, while the market is continuing 

its recovery, what we hear from most creditors is that they are 

going to want to stick to the Qualified Mortgage space while they 

get acclimated to the rules and get acclimated to the possible risks 

associated with doing non-QM loans. 

We do feel that over time, people will acclimate to that risk, 

which is why we created this temporary extension which covers, by 

our calculations, not including points and fees, roughly three-quarters of the market. 

So that would be a significant retrenchment from what we now 

think is the vast majority of the market, the three quarters of the 

market where we have a significant delta. 

We intend to monitor the market to make sure that the rule that 

we have constructed is operating as we expect it to, and it is something we need to keep tabs on as it moves forward, but we do think 

that over time, people will get acclimated with those risks and we 

will see a market for non-QM loans. 

Mr. PITTENGER. You will assess that over time and make adjustments if needed? 

Ms. COCHRAN. Right. We expected that it would develop in 

niches and specific parts of the market over time as people get 

more comfortable and see specific business opportunities that make 

sense for their models. 

The thing that is helpful about the temporary category of Qualified Mortgage is that it is based on eligibility for purchase or guarantee or insurance by the designated entities. 

It does not actually have to be purchased by them. And we believe that provides a good balance that will allow people to get comfortable both with portfolio loans and securitized loans. 

So it is an important bridge and a mechanism for us to continue 

to assess how the market evolves. We know there are a number of 

other capital, regulatory, and economic conditions that are affecting 

the market causing uncertainty and this gives a bridging mechanism and breathing room for the market to evolve and for us to 

continue to assess as that temporary provision comes closer to— 

30 

Mr. PITTENGER. Okay. 

Let me move on to something else. Given the severity of the 

damages associated with violating the ability-to-repay requirement, 

in writing this rule, did you consider the effect on the safety and 

soundness of small banks and credit unions that hold nonqualified 

mortgages on their balance sheets? 

Ms. COCHRAN. The statute sets the remedies that are provided 

here, and as I started to say earlier, the remedies are actually 

more narrow than what is provided under existing rules today for 

higher-priced mortgage loans. Under those remedies, because of the 

way the rules were written, all finance charges are recoverable. 

In the Dodd-Frank Act, Congress specifically limited it to a 3- 

year period, which we thinks helps significantly in terms of being 

able to model litigation risk. 

So yes, that is obviously something that we looked at. We looked 

at litigation risks. We consulted with the prudential regulators and 

they are of course continuing to evaluate that issue as well. 

Mr. PITTENGER. But you do believe that this could lead to further 

deterioration of the community banks? 

Ms. COCHRAN. We are working very hard to structure the rule 

both in the final rule and the concurrent proposal to accommodate 

and recognize that small community banks provide critical access 

to credit and that their processes and practices are very responsible 

and should be accommodated within the scope of the regulation. So, 

we are working very hard to make sure that it does work for small 

banks as well as other types of lenders. 

Mr. PITTENGER. I hope you will continue to talk to them, especially the ones I talk to. 

Thank you. I yield back the balance of my time. 

Chairwoman CAPITO. The gentleman yields back. 

Mr. Hinojosa? 

Mr. HINOJOSA. Thank you. 

Thank you, Chairwoman Capito and Ranking Member Meeks, for 

holding this important hearing. 

And thank you to the distinguished panel members for sharing 

your insights this morning. 

We cannot forget how the housing market bubble happened. 

Shortly, let me say that unaffordable and balloon mortgages were 

sold to families who were not fully aware of the terms. We also saw 

agents targeting communities of color to push their most predatory 

mortgage products. 

Fast-forward to 4 million foreclosures and the housing market 

meltdown, and we are now faced with ensuring that these unsafe 

practices never happen again. 

With the mortgage rules written by the CFBP, including the 

Qualified Mortgage rule discussed today, we begin the long process 

of creating a healthy housing market for the long term. There is 

a thin line between too little regulation and too much. It seems to 

me that the QM rule released by the CFBP comes close to that 

line. 

My first question is for Mr. Carroll. Some of us have constituents 

in rural areas such as in my congressional district in deep south 

Texas or places where there just aren’t that many institutions that 

are able to extend credit to worthy borrowers. 

31 

In our districts, it actually makes sense for borrowers to have 

terms like balloon payments or other specialized products they 

work out with their local banker. As the chairman of the rural 

housing caucus, I have been fighting for affordable quality housing 

in rural America for over a decade. 

What kind of exceptions exist in the Qualified Mortgage rule for 

small or rural lenders operating in these areas so that they can 

participate? 

Mr. CARROLL. Thank you, Congressman, for the question. 

We do recognize that rural communities in particular have been 

hit hard by the financial crisis and that the creditors who serve 

them have also had a difficult run during the recovery. 

We have tried to do a few things in the rulemaking process to 

address smaller creditors operating in rural areas who have these 

challenges. One is, we have attempted to increase the coverage of 

designated rural areas for the purposes of treating balloon mortgages as Qualified Mortgages. My colleague, Assistant Director 

Cochran, mentioned this earlier. 

We also have proposed, as part of a concurrent proposed rule, an 

exemption for small creditors where, if you are within $2 billion in 

assets, you don’t originate more than 500 loans a year, and you 

hold the loans in portfolios, as long as the loan meets the Qualified 

Mortgage features of a fixed-rate loan or an adjustable rate mortgage, and some of the other protections built into QM, they can 

have an easier method of getting Qualified Mortgage status, meaning they don’t have to look specifically to the 43 percent DTI. They 

can use their own DTI measure and they have an easier access to 

the Safe Harbor; a little bit broader space in the pricing where we 

used 350 basis points over APOR rather than 150. 

And we think these are some methods for providing some relief 

to small creditors. We would be happy to hear from your office if 

you have views on it. 

Mr. HINOJOSA. My second question will be directed to Ms. Kelly 

Cochran. 

I am going to give you a picture of a congressional district that 

I represent which is in deep south Texas, 250 miles from San Antonio, South to McAllen Edinburg, and in the middle, the coastal 

bend has what they call the Eagle Ford Shale Oil and Gas Mine, 

which is bigger than Alaska’s mines. 

In the last 2 years, the actual production has been twice as much 

as was estimated, so that of the 8 counties I represent, 4 of them 

only have plus or minus 10,000 people, and they have lots of banks 

because Karnes County, as an example, received $2 billion in royalties and they have 10,000 people. 

So the banks in that area have plenty of money, yet they are not 

lending money. Do we in Congress need to soften up the regulations because first, they said there wasn’t enough money to meet 

the requirements. Now, they have lots of money, and they are still 

not lending money. So tell me, what do we have to do in Congress 

to open it up? 

Ms. COCHRAN. I think—obviously, I wouldn’t purport to advise 

Congress on what it should do, but I can say some of the ways in 

which the Bureau is thinking about these issues. 

32 

As Pete talked about, we have expanded the definition of rural 

and underserved under the regulation. The way it was proposed 

originally, it would have covered counties that only included 3 percent of the United States population. 

We increased that to 9 percent and we also made a number of 

other adjustments with regards to balloon payment loans to make 

it easier for these institutions to keep lending. 

As Pete mentioned, we also have a concurrent proposal which is 

looking at a number of issues with regard to small creditor impact 

and ways that we can accommodate them within the rule. 

In general, this is a very complicated area. We are very sensitive 

and thinking very hard about it. One issue that is difficult is that 

there are so many different ways to define ‘‘rural.’’ 

Different Federal agencies do it differently for many purposes. 

So, we know there are a number of issues here. We are working 

very hard and we will be happy to report back to you as we are 

tying off this concurrent proposal on what other measures we have 

adopted that may be helpful here. 

We would be happy to provide technical assistance. 

Mr. HINOJOSA. My time has run out, and I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Pearce? 

Mr. PEARCE. Thank you, Madam Chairwoman. I appreciate you 

holding this hearing. 

And I appreciate the participation of the witnesses today. 

The subject of the high-cost loans is something that I wonder 

about. What is the logic behind that? The logic behind the concept 

of high interest or high-cost loans and why we are going to regulate 

those? 

Ms. COCHRAN. High-cost loans—are you talking about under 

the— 

Mr. PEARCE. Section 1431, I think. 

Ms. COCHRAN. With regard to high-cost mortgages under the 

Home Ownership and Equity Protection Act (HOEPA)? HOEPA is 

an existing regime that applies to certain lows depending on their 

points and fee— 

Mr. PEARCE. Yes, just get down to the fine-tuning part of why is 

it there. 

Ms. COCHRAN. It was there because there were a number of practices with regards to refinancing that were problematic in prior 

decades. Congress enacted a law— 

Mr. PEARCE. Okay, just trying to stop corruption from occurring, 

basically the high-cost people jacking up stuff. So who on your staff 

is a specialist on manufactured housing? 

Ms. COCHRAN. We have a number of people who have worked on 

manufactured housing— 

Mr. PEARCE. No, who is a specialist? Who is the one that represents this loan type as you have these discussions? What is their 

name? 

Ms. COCHRAN. We had a team of people who were— 

Mr. PEARCE. Now, do you lead that team? 

Ms. COCHRAN. They report to me. Yes. 

33 

Mr. PEARCE. Okay. So you understand the economics of originating loans? Basically, it costs the same thing to originate a 

$200,000 loan as a $20,000 loan? 

Ms. COCHRAN. We analyzed this question through other rules. 

We do understand, and we adjusted the thresholds for points and 

fees based on the size of the loan because we realize that was a 

concern. 

The Dodd-Frank Act changed the thresholds and changed the 

coverage for high-cost mortgages. We implemented the statute as 

directed and have made adjustments— 

Mr. PEARCE. So you are telling me that the people who quit making trailer house loans are interpreting incorrectly? Because they 

are coming under the high-cost loans now because the cost of origination of the loan is the same. 

Whether it is $200,000 house or a $20,000 mobile home, that percentage then mathematically works out to be above the threshold 

and so a lot of the—most of the banks in New Mexico have quit 

making new loans for trailer houses. 

Fifty percent of the people in New Mexico live in trailer houses, 

so you have effectively shut off the mortgage market to basically 

half of New Mexico. 

We have an average income of $31,000 to $35,000, something in 

that range. So what you have is a de facto war on the poor, and 

I just wonder if anybody up there is thinking about it, and who is 

the person saying, we can’t quite do this because they are shutting 

off these poor people who were making $20,000 and $30,000 loans, 

they are just in there trying to get into something. 

So who is it? Is that you, Ms. Cochran? 

Ms. COCHRAN. We looked at this issue intensively during the 

rulemaking for the high-cost mortgage loans, and I would be happy 

to talk to you about our analysis. 

Mr. PEARCE. I would be happy for you to— 

Ms. COCHRAN. We made adjustments with regard to both the 

points and fees and the rates thresholds for high-cost mortgages to 

account for the fact that manufactured housing has certain unique 

features and also that smaller loans in general have certain costs 

to originate. 

It is something we thought a lot about, that we requested data 

on, and that we looked at very hard. We have heard from some 

people that they will cease to make loans if they are above the 

threshold. 

Mr. PEARCE. I will just tell you that almost every bank in New 

Mexico, and in fact, the one bank who still does it, Texans are coming across trying to borrow money out of New Mexico. So across the 

State line, it is the same. 

The second—and by the way, I would gladly invite you to our office to discuss this because it is a serious problem for us. 

Ms. COCHRAN. We would welcome that. Thank you. 

Mr. PEARCE. The second question is, so you have these QMs and 

then do you have a Director, with Mr. McHenry’s footnote, who 

says, don’t worry about it. Who is going to decide who should have 

worried about it? 

34 

In other words, if people make nonqualified mortgages, who is 

going to decide whether or not they come up against some action 

or not. Is that the agency? Is that you all? 

Ms. COCHRAN. If there is a violation, it could be— 

Mr. PEARCE. No, no, no. Mr. Cordray says, go ahead and do those 

loans outside the QM. We have created a little box here, but go 

ahead and feel free to step outside. Who is going to decide you 

shouldn’t have stepped outside the box? 

The reason I am asking the question is we have an Administration that is willing to check your Internal Revenue Service returns. 

They are willing to subpoena all of the records for all of the AP, 

not just the one or two people, but everybody in the entire workroom. They have released information on the whistleblowers and 

‘‘Fast and Furious’’ and tried to discredit them. 

And I wonder, is the same Administration going to be the one 

who decides who shouldn’t have stepped outside the box and who 

should have stayed in the box? 

That is my question, but I think it is more rhetorical. 

Chairwoman CAPITO. Thank you. 

Mr. Scott, for 5 minutes. 

Mr. SCOTT. Thank you very much, Madam Chairwoman. 

I am one of the cosponsors of H.R. 1077, and I am trying to work 

with this issue. Let me just ask you, why didn’t you, the CFPB, address the issue of affiliate discrimination and the calculation of fees 

and points in the final QM rule? 

Ms. COCHRAN. The Dodd-Frank Act specifically requires that affiliate fees be counted towards the cap on up-front points and fees 

for qualified— 

Mr. SCOTT. Could you do me a favor and just move your microphone a little bit closer? 

Ms. COCHRAN. Yes, I’m sorry. 

The Dodd-Frank Act mandated treatment of affiliate fees with 

regard to the 3 percent threshold for Qualified Mortgages. There 

are a number of places in Dodd-Frank where Congress made a deliberate policy decision with regard to treatment of affiliates of 

creditors and brokers. 

Given that very clear policy choice had been made throughout 

the statute, we did not feel it was appropriate for us to vary from 

that. We implemented that provision as provided in the statute because Congress had made the decision. 

Mr. SCOTT. Do you think it doesn’t make sense to discriminate 

against affiliates on the basis of these fees? To do so reduces the 

competition and the choice of title services and insurance providers. 

Can the CFPB do with this without repurposing the rule? 

Ms. COCHRAN. As Pete mentioned, we have received a great deal 

of comment on this issue on both sides. We recognize they are very 

strongly held views. We—as we said—believed, given the clear 

mandate from Congress, that it was our responsibility to implement that. 

Mr. SCOTT. So is it being considered? 

Ms. COCHRAN. No, it is not. We would certainly not be able to 

do it without a re-proposal as a matter of administrative law that 

simply— 

35 

Mr. SCOTT. Wait a second. You would be able to do it if you received some help from Congress, is that right? 

Ms. COCHRAN. Congress made a very clear policy choice. If Congress changes that policy choice, we would implement it as directed. 

Mr. SCOTT. Okay, now let me ask you about Fannie and Freddie. 

What is the rationale of the CFPB for including Fannie and 

Freddie loan level price adjustments in the calculation of the fees 

and the points? 

Mr. CARROLL. Thank you, Congressman. That is a good question. 

Loan level price adjustments is a topic that has come up during our 

Qualified Mortgage rulemaking— 

Mr. SCOTT. Maybe it is me, and I need to clean out my ears. If 

you will just talk louder; I can’t quite hear you. Go ahead. 

Mr. CARROLL. At the end of the day, loan level price adjustments 

are additional costs imposed based on the credit profile of the borrowers. The more credit risk posed by the consumer, the more fees 

will be charged whether they may be charged as an up-front fee to 

the consumer or may be factored into the interest rate. 

This was a tricky one for us, but when we look at these types 

of charges, we don’t see them like bona fide third-party charges, 

which are just services like title or appraisal; we see them as 

charges that are fairly integral to the rate itself, to the product 

itself being offered to the consumer and these are ultimately costs 

that are borne by the consumer. 

They may manifest through, in this case, the GSE is charging a 

fee to the lender for their guarantee services, but that could just 

as easily be, in the private label space, an aggregator who also 

originates loans. 

We felt, given that these price adjusters are really specific to the 

consumer, that they are borne by the consumer and paid for by the 

consumer at origination, we thought it was appropriate to keep 

them in the rules so that the rule would function as we expected 

it to. 

Mr. SCOTT. Would you consider changing that policy? 

Mr. CARROLL. We would always consider having a conversation 

with Members of Congress to understand your concerns and have 

a dialogue on that. 

Mr. SCOTT. Now, let me ask you about escrows. Would escrows 

for taxes and insurance ever be included in the calculation of fees 

and points? 

Ms. COCHRAN. No, we don’t believe so. 

Mr. SCOTT. Why? 

Ms. COCHRAN. Because those are collections of charges to be paid 

along the life of the loan distinct from the up-front points and fees 

that are charged in connection with the origination of the loan. 

Mr. SCOTT. Okay. 

Thank you very much, Madam Chairwoman. 

Chairwoman CAPITO. Mr. Fitzpatrick? 

Mr. FITZPATRICK. I thank the Chair, and I very much appreciate 

the hearing. 

I hope we can all agree that small community banks did not 

cause the mortgage crisis of 2008. When I am back home in my district in Pennsylvania meeting with local lenders, they tell me that 

36 

the QM rule is or will essentially and assuredly take away the 

judgment that they have and have always had as local lenders and 

will otherwise drive credit for qualified borrowers. 

One lender back home tells me that a main concern, and I think 

the CFPB has heard this several times, is that by branding a mortgage as ‘‘qualified,’’ you are essentially saying that all mortgages 

that don’t meet that criteria are ‘‘unqualified.’’ 

Even if the intent is not to create categories of desirable or undesirable and not desirable mortgages, that is essentially what is 

happening. So the question is, who is going to want to have or to 

hold an ‘‘unqualified’’ mortgage? 

Community banks often have certain niche programs that are 

perfectly legal but serve small consumer bases because it is specifically tailored for those consumers’ or customers’ needs, and when 

the CFPB introduces qualified and unqualified Mortgages, they are 

disregarding the necessity of these programs and penalizing the 

local and community banks that know their customers, know them 

well, what they want, and what is in their best interest. 

So my question for either Mr. Carroll or Ms. Cochran is, was 

there any consideration for or would you be opposed to providing 

exemptions for small institutions that keep these mortgages in 

their own portfolios? And what is the chance that is going to happen? 

Ms. COCHRAN. If I could address that in a couple of ways. 

First of all, of course, Qualified Mortgage is the term used in the 

statute so we have continued to use that. I think there are important pieces of consumer education that will come with this rule as 

we get closer to implementation to make sure the consumers understand what a Qualified Mortgage is, and what it is not. 

In terms of small lender programs, there are three different 

types of Qualified Mortgages under the final rule and we have proposed a fourth category of Qualified Mortgage that is specifically 

for small creditor portfolio loans. 

Many of the loans that small institutions make will fall within 

the definition of Qualified Mortgage, and the reason we proposed 

a fourth category is that we believed it was appropriate to look at 

this, because we realized that relationship lenders, small community institutions, have many reasons and business models that are 

of great service to consumers. 

They provide critical access to credit and they have extremely 

low foreclosure rates, and typically very responsible lending practices. We wanted to make sure that we encouraged and accommodated that type of lending within the scope of the rule and so we 

have thought very hard to both, in the balloon payment context 

and with regard to this new proposal, which we are hoping to finalize as quickly as possible, to accommodate exactly those kinds of— 

Mr. FITZPATRICK. So, you have just described the community 

lenders in my area of southeastern Pennsylvania. Do you agree 

that those lenders did not contribute to or create the mortgage crisis of 2008? We agree on that, correct? 

Ms. COCHRAN. Exactly. And as I mentioned, their foreclosure 

rates, their lending, their profile of the data shows that they have 

generally very responsible models. We wanted to accommodate and 

recognize that within the course of the rule. 

37 

Mr. FITZPATRICK. And those lenders most likely to hold the loans 

in their own portfolio, correct? 

Ms. COCHRAN. Right. Both of the Qualified Mortgage provisions 

for small creditors, both the balloon payment and the proposed new 

category, are specifically for portfolio loans. 

Mr. FITZPATRICK. So why not just exempt the small community 

bankers from the rule? Why not? 

Ms. COCHRAN. We believe that balance is important. This strikes 

the appropriate balance by providing greater protection, greater 

certainties for those creditors, recognizing their good models, and 

at the same time providing in the event that there is an abuse, 

that there is a small creditor that is not operating under those 

same practices, a consumer would have an ability to seek redress 

in such situations. 

Mr. FITZPATRICK. I yield back. 

Chairwoman CAPITO. Mr. Capuano? 

Mr. CAPUANO. Thank you, Madam Chairwoman. 

Mr. Carroll, Ms. Cochran, I have heard a lot of detail today and 

a lot of concern. I think some of it is legitimate. I am sure you 

share some of the same concerns. My first, and possibly my only 

question, is kind of simple. 

I am interested in the availability of credit. Several million people got mortgages last year. 

There is no doubt that a handful of them probably shouldn’t have 

gotten a mortgage. They are going to get into trouble. My question 

is, have you made an internal judgment as to how many fewer 

loans will be made when this rule is adopted next year? 

How many people who got loans this year do you expect to not 

be able to qualify next year, not be able to get loans next year, I 

guess? 

Mr. CARROLL. We think it will be small, Congressman. 

I think that we have tried to calibrate this rule so that again, 

going back to this notion of a broad QM, is to provide minimal disruption to the market in the short term while we are transitioning 

into this— 

Mr. CAPUANO. When you say small, can you give me—1 percent, 

10 percent, 20 percent? 

Mr. CARROLL. The vast majority are covered in the Qualified 

Mortgage space. We expect those loans will continue to get made. 

There may be some loans on the margins that banks would have 

to do as a nonqualified mortgage and choose not to because they 

don’t match our Qualified Mortgage— 

Ms. COCHRAN. Part of it is that the lending practices have 

changed so much from the height of the build-up to the crisis that 

we think things like no-doc loans— 

Mr. CAPUANO. I am not—that is why I asked about last year. I 

didn’t ask about 2008. I can’t imagine anybody in their right mind 

would want us to go back to the 2008 standard, and if they do, I 

think they should say so. 

So I am using last year because I am not sure we are at the right 

point yet but I am just trying to get an idea. I think most of us 

would see that last year was a pretty tight market and most mortgages being made are probably pretty conservative lately. 

38 

And I guess I am just trying—the reason I ask is because there 

is one number out here that suggests 48 percent of the loans made 

in 2010 would no longer be made because banks will stop making 

them. 

If that is the number, obviously I think that should concern a lot 

of people and I am just wondering if you have a competitive number—I am not going to hold you to a specific number; a range, anything. 

Mr. CARROLL. Yes, let me describe the distinction, I think, between our numbers and some of the other numbers that might be 

in the market. We put our core definition at roughly three-quarters 

of the market being covered by QM and then adding this extension— 

Mr. CAPUANO. The explanation can come later. I am just looking 

for a relatively simple answer if there is one. 

Mr. CARROLL. I— 

Mr. CAPUANO. Do you have a number, an estimated number, as 

to how many people who got loans in the last year or the year before, whatever your base your might be—how many of them would 

not be able to get loans next year? Either based on QM or because 

the people will not be making nonqualified mortgages. 

Mr. CARROLL. Based on QM, we think it will be a small number. 

I would say though at the same time there is the potential for credit to continue to loosen in the market on the basis of factors that— 

Mr. CAPUANO. Good. I am glad you said that. I agree with you. 

When you say small, I need to get—is it less than 10 percent? Less 

than 5 percent? 

Mr. CARROLL. Yes, less than 10 percent. I would put the number 

in my office and our calculations around the 5 percent margin, at 

most. 

Mr. CAPUANO. That is good. Thank you for the answer. I guess 

the next question I have really is, what if you are wrong? 

What if this 48 percent number is right? And you find it out, 

after a period of adjustment all of a sudden come March of next 

year and mortgages given have plummeted, do you have the ability 

to make quick adjustments to your rules? 

And again, I know how long it takes to make a rule, have you 

allowed yourself a back door out of this rule to make an emergency 

declaration or whatever? What if you are wrong? 

I am not arguing that you are. I am not qualified to make that 

argument. What if they are right and you are wrong and all of a 

sudden most of America can no longer get a loan or if there is a 

hole—an unforeseen one for trailers or whatever it might be? Do 

you have the ability to make a quick, even if temporary, adjustment to your rule to address something that maybe your estimates 

were wrong on? 

Ms. COCHRAN. Yes, we would have to go through certain procedures to do a quick adjustment. 

We are in the process of making quick clarifications to the rule 

now as different interpretive issues come up and we can do some 

of these procedures in the event that there was a problem. 

I think a lot of the debate is really about what happens as the 

temporary provision expires. As we discussed, that is a longer-term 

39 

question. We specifically set the outside threshold at 7 years because the Bureau is required to do a thorough— 

Mr. CAPUANO. When you say quick, could you again, give me a 

general idea, for the sake of discussion, come February 15th, all of 

a sudden the entire country agrees that okay, you have tightened 

up too much, 3 percent should be 4 percent or whatever it might 

be. If you decide February 1st that you agree, everybody agrees 

that it has to be changed, when can you change it? March 1st, June 

1st, next January? 

Ms. COCHRAN. We would have to look at the specific circumstances. Generally, we have to provide a brief notice and comment period before we would change a rule. 

Mr. CAPUANO. How brief? 

Ms. COCHRAN. Obviously, there are different circumstances 

under which the Administrative Procedure Act can allow expedited 

process— 

Mr. CAPUANO. Yes, but you are not—I am a defender of the 

CFPB and I am concerned about some of the details and that is all 

well and good, but for me details—we will work out what we can 

do. 

What I am concerned with is okay, with all of the best interests 

at heart, with all of your best estimates, I am not qualified to say 

that your estimates are wrong. I mean, they are estimates. That 

is what they are based on. And you are just more qualified than 

I am. 

My concern is if you are wrong and it takes 9 months to adjust 

that problem, then we are possibly on the brink of another economic crisis that could be averted. 

All I am asking is, have you built in or will you build in a back 

door in case you are wrong? Not because I think you are wrong, 

but if you decide you are wrong, and say, ‘‘Oh my God, the estimates were wrong,’’ and it happens. 

On occasion, even I have made a mistake that I have wanted to 

correct, and I am simply asking, have you allowed yourself the opportunity to do that and if it is 6 months, I have a problem. 

Ms. COCHRAN. The circumstances depend on what happens, but 

we do have more flexibility than that— 

Mr. CAPUANO. That is not an answer. 

Ms. COCHRAN. —it would not be a matter of 9 months— 

Mr. CAPUANO. I appreciate— 

Chairwoman CAPITO. The gentleman’s time has expired. Thank 

you. 

Mr. CAPUANO. Not good for a friend. 

Chairwoman CAPITO. Mr. Barr? 

Mr. BARR. Thank you, Madam Chairwoman. 

Mr. Carroll, Ms. Cochran, thanks for your testimony today. 

I think what you are hearing today is not any kind of objection 

to the idea that there was some response that was warranted to 

the mortgage subprime prices, but more concern that the overreaction involved here is something that is depriving the market, 

the mortgage marketplace of flexibility, depriving consumers of access to mortgage credit, which is what you all spoke to at the very 

beginning in terms of what you all want to avoid. 

40 

But what I want to do is talk about, and I would encourage you 

to take back to the Bureau, some of the bipartisan concerns that 

have been expressed here today, and I would like to echo or follow 

on the comments from the gentleman from Texas, Mr. Hinojosa, in 

talking about the rural designation issue. 

My district in central and eastern Kentucky includes a number 

of counties that are manifestly rural, but fall outside of the rural 

designation under your QM rule. 

So my question would be to you all, obviously Kentucky bankers, 

bankers all across this country use balloon mortgages to mitigate 

interest risk, interest rate risk, balloon loans held in portfolio give 

consumers significant interest rate flexibility. 

With these rural communities—and in my case, Bath County, 

Kentucky, is a rural community but for whatever reason the CFPB 

does not recognize it as a rural community, a rural county. 

In light of this feedback that you are getting from both sides of 

the aisle, what is the CFPB doing to revisit this definition of rural? 

Are you thinking about changing the definition through maybe use 

of the rural housing loan program definition, or I have heard a 

process whereby interested parties could petition the Bureau to be 

considered rural? What are you doing to address this problem? 

Ms. COCHRAN. As we discussed, there is a concurrent proposal 

out right now that is looking at small creditor issues with regard 

to access to credit, not just in the question of rural balloons, but 

more broadly. 

We are looking at that and looking at our options and how then 

we can appropriately balance those considerations. We have heard 

a great deal of comment about the rural definition in particular. 

There are a lot of interesting ideas about different ways to define 

it, and over time, that is something I think that we want to continue to consider. 

We are looking holistically at this right now. We cannot talk 

about a pending proposal, but our goal is to get it out as quickly 

as possible. We are extremely sensitive to what we are hearing 

about consumers on this issue and we are working to strike an appropriate balance that will preserve access to credit. 

Mr. BARR. When you talk about regulatory straitjackets, this is 

what we are talking about. When you define Bath County, Kentucky, as nonrural, you are just flat out wrong. So please consider 

that and take that back to the Bureau. 

One quick additional question: I hear frequently from our bankers that they are receiving mixed signals from regulators, particularly with respect to the Community Reinvestment Act mandates 

and the QM rule. And so what I want to ask you all is what assurances can you give to Kentucky community banks that they will 

not receive a negative CRA audit if their mortgage lending decisions reflect compliance with your QM rule? 

Ms. COCHRAN. The Community Reinvestment Act is administrated by other agencies, not the CFPB. We have been working 

with the prudential regulators and other appropriate Federal regulators throughout our rulemaking process to coordinate and get 

their feedback on our QM rule and also as they think about implications of QM for their— 

41 

Mr. BARR. Do you acknowledge that there is a conflict? Do you 

acknowledge that there is a conflict between the requirements of 

the CRA and your Qualified Mortgage rule? 

Ms. COCHRAN. I have not studied this issue in detail. I would not, 

at this point, be comfortable saying that there is a conflict. I can 

say that it is something we would be happy to take back as we continue our discussion with prudential regulators to continue to discuss and make sure that agency coordination is appropriate. 

In general, we think that is an important issue throughout the 

rulemaking. We would be happy to follow up with you about specifically what you are hearing on CRA. 

Mr. BARR. We are hearing it. We are hearing it very loud and 

clear, and what is really a problem is the contradictory messages 

that lenders are receiving from the regulators. 

My final question is on cost of compliance. Lenders are obviously 

going to be tasked in implementing the QM rule with systematically and comprehensively documenting that even though they 

have followed safe and sound practices, they have to prove that 

they followed the prescribed underwriting processes to determine 

that the borrower has the ability to repay. 

Have you all analyzed the cost of compliance of documenting following all of the requirements to achieve a Safe Harbor status, and 

what additional compliance costs that is going to impose on some 

of these small community banks that simply don’t have the staffing 

that would be required to properly implement this rule? 

Ms. COCHRAN. Yes, we did consider, as Pete talked about earlier, 

the cost of compliance and other impacts of this regulation. Our 

sense is that, given how much underwriting practices have 

changed, this is not a significant deviation from what people are 

doing now. 

Obviously, there are always concerns when a new rule comes in 

and people need to calibrate and make sure that they are in compliance. That is why we are working so hard on the regulation implementation efforts, to make sure that we facilitate that process 

as much as we can. 

We are very sensitive to the concerns of small institutions on 

this, and that is why we are providing a compliance guidance and 

videos and all of the other things that Pete talked about. 

Mr. BARR. My time has expired. I yield back. 

Chairwoman CAPITO. Mr. Murphy? 

Mr. MURPHY. Thank you, Madam Chairwoman. And thank you 

both for your testimony. 

Back to this 3 percent rule. It looks like originally the threshold 

was $75,000 and now it is $100,000. Number one, how did you 

come to raise it? What happened there? 

And then number two, did you think of tying this to an average 

cost for an area, considering that New York City might be different 

than a rural area in my district? 

Ms. COCHRAN. We looked at this issue and we received extensive 

comment on it. We did what analysis we could around the costs to 

try and calibrate properly. I don’t know that we got a suggestion 

specifically about average costs in specific areas, so that might be 

something that would be helpful to follow up on. 

42 

It certainly was a concern and we adjusted significantly from the 

proposal because we thought more flexibility was needed. We understand that there are certain costs in originating a loan that 

don’t vary much based on the principal side and so we were trying 

to accommodate that rule in how we set the threshold. So it is 

something to which we are very sensitive. 

Mr. MURPHY. Okay, so you would be open to perhaps tying it to 

an average rate for a market, because as was mentioned earlier, 

there are a certain amount of fixed costs that do go into issuing 

these mortgages? 

Ms. COCHRAN. We did the best analysis we could with the information we had. I would be very interested in talking to you about 

the idea. Obviously, it is something we have to look at. 

Mr. MURPHY. Okay. One more question. With this Safe Harbor 

approach, the CFPB is giving lenders the ability to know and say 

that certain people meet this ability-to-repay standard. Does this 

create an implicit inability to repay for loans that are outside QM? 

Ms. COCHRAN. No, as we have discussed, we have really set the 

long-term threshold for Qualified Mortgage in a way that we believe was important to recognize and acknowledge that there are 

responsible good loans to be made outside of the Qualified Mortgage space. 

We believe it is appropriate for those loans to be considered on 

an individualized basis without a presumption that they automatically comply. We believe that there is significant responsible credit 

in that and, over time, creditors will see those opportunities and 

expand into that space. 

In the short term, while they are figuring that out and getting 

comfortable, we have also expanded the definition of Qualified 

Mortgage to provide the bridge as we discussed earlier. 

Mr. MURPHY. So the complaints I am hearing from community 

bankers and credit unions, do you think they are temporary or do 

you think they are justified? 

Ms. COCHRAN. We know this is a difficult time. We know that 

there is uncertainty around this rule and a number of other conditions in the market. And we believe those concerns are real and 

they will affect business decisions in the short run. 

That is why we structured the rule to provide a transition mechanism over time. We do believe that, as conditions become more 

certain, as other pieces fall into place and people get more comfortable with the rule, they will feel more comfortable expanding 

into other parts of the market. 

We really tried hard to design a rule that would, in the longterm, provide accessible credit in all parts of the market. Obviously, that is a balancing act and it is a difficult process to manage 

over time with so many sources of uncertainty, but we believe this 

is a good framework for doing that. 

Mr. MURPHY. Have you all sort of come up with some ideas and 

theories for what you can do if you do see in a year or 2 years, kind 

of adding on to what Mr. Capuano said, that we can do to loosen 

up to ensure that the private sector does in fact enter the market 

if we see in a year that they are really not because of the cost? 

Ms. COCHRAN. We will continue to monitor the market on an ongoing basis. That is part of the Bureau’s basic mission and also an 

43 

important part of the accountability after any rulemaking. So we 

expect we will continue to monitor over time and specifically at the 

5-year mark, when the Bureau is required to do a very extensive 

evaluation of significant rules. So we certainly expect that would 

happen before the expiration of the 7-year period for the temporary 

definition. 

We also expect to be doing this on an ongoing basis. This is a 

core part of our mission, and if we start to see things that are not 

developing as we expected, then obviously we would have to consider whether adjustments would be appropriate. 

Mr. MURPHY. Okay, great. Thank you. 

Chairwoman CAPITO. Mr. Westmoreland? 

Mr. WESTMORELAND. Thank you. I think Mr. Luetkemeyer asked 

you both if you have ever made a loan and I think both of your 

answers were no. What experience professionally or just in life 

have you had to come up with what a qualified borrower was if you 

never made a loan? Have you ever made a loan to anybody in your 

family or to anybody? 

Mr. CARROLL. No, Congressman, I have not made a loan to anybody. 

Mr. WESTMORELAND. Ms. Cochran? 

Ms. COCHRAN. No. 

Mr. WESTMORELAND. Okay. So how do you go about figuring out 

who is a qualified borrower? 

Mr. CARROLL. First, we are working with the statute and when— 

Mr. WESTMORELAND. No, I am talking about—what if somebody 

came in, what makes them a qualified borrower? Is it how much 

he owes, what his credit history is, who his mom and dad are— 

what gave you that insight to say, all right, this guy would be a 

qualified buyer, and this guy is not. 

Ms. COCHRAN. So, if I may address it. The statute set out and 

directed the Bureau to define what is a Qualified Mortgage. It did 

not tell us to define what is a qualified borrower. And as I talked 

about in my original opening testimony— 

Mr. WESTMORELAND. It is kind of the same thing. If you have 

somebody who fits the Qualified Mortgage, isn’t he going to be a 

qualified buyer? 

Ms. COCHRAN. What we believed was important was to create 

flexibility. As I said in the beginning, we don’t believe that by rule 

we can define every single instance of an affordable mortgage. Underwriting was too complex for that and it is too individualized. 

So what we were doing was defining a class of loans where it 

made sense to presume that the creditor had properly evaluated 

the ability to repay. Overall, that would provide flexibility so that 

creditors will make that determination using reasonable standards. 

Mr. WESTMORELAND. But you are creating the rules, right? 

Ms. COCHRAN. Yes. We are doing it the way Congress directed 

us to do in defining Qualified Mortgage, but we very specifically did 

not consider that to be defining the outer limits of what is a qualified borrower. 

We believe that is best left to the market. What we were trying 

to do was implement the statutory provisions in a way that provided certainty for the market so that they could go ahead and use 

reasonable practices to continue doing what they do best. 

44 

Mr. WESTMORELAND. Okay. 

Now, Mr. Carroll, you had previously been at Overture. Is that 

correct? 

Mr. CARROLL. Correct. 

Mr. WESTMORELAND. And when did you leave Overture? 

Mr. CARROLL. 2011 

Mr. WESTMORELAND. 2011. Did Overture come up with a program or somebody at Overture come up with a program where 

Fannie Mae could reduce their approval time from say 30 days to 

30 minutes or less? 

Mr. CARROLL. The company, Overture Technologies, was involved 

in developing automated underwriting capabilities and credit risk 

models for a variety of different banks. 

Mr. WESTMORELAND. Okay. So you cut the time down from 30 

days processing to 30 minutes or less. 

Mr. CARROLL. One of the features of automated underwriting is 

to create a more efficient underwriting— 

Mr. WESTMORELAND. Okay. So you can do a qualified borrower 

in less than 30 minutes. What kind of documentation did you have 

to get or how long did it take to fill out this online application to 

get this Qualified Mortgage or buyer or whatever you want to call 

it in less than 30 minutes? Was it like a no-doc loan? 

Mr. CARROLL. The underwriting programs that were used by the 

customers of the company ranged from full documentation programs to Alt-A programs and subprime programs. 

Mr. WESTMORELAND. So you could do a full documentation and 

have it approved in less than 30 minutes online? That is amazing. 

Mr. CARROLL. Well, it just— 

Mr. WESTMORELAND. Great technology. 

Mr. CARROLL. The technology was very good to do full documentation decisioning, but you still have to go and look at the paperwork after the fact. 

Mr. WESTMORELAND. Okay. 

Ms. Cochran, you previously worked at a law firm and did litigation, as far as I guess borrowers or consumers? What kind of lawsuits were you involved in or who did you sue? 

Ms. COCHRAN. Generally, my claims were financial institutions 

that were defending against lawsuits. I also did a fair amount of 

regulatory counseling and how to comply with Federal consumer financial law for those same clients as well as some other types of 

litigation that were not related to the financial sector. 

Mr. WESTMORELAND. So these consumer financial laws that you 

were defending— 

Ms. COCHRAN. I was generally working as a defense attorney for 

financial institutions which had been sued for violations of the 

Truth in Lending Act or other statutes and regulations, and working with them both in defense of the lawsuit and in counseling 

them in terms of ongoing compliance requirements under those regulations and statutes. 

Mr. WESTMORELAND. So you actually represented the institutions 

that were being sued by consumers? 

Ms. COCHRAN. Yes, in many cases I did. 

Mr. WESTMORELAND. So now you are on the other side of the 

fence. 

45 

I yield back. 

Chairwoman CAPITO. Mr. Heck? 

Mr. HECK. Thank you. 

I think my question is most appropriately addressed to Ms. Cochran. I am trying to better understand that this issue of what happens to what is incentivized in the way of lending practices vis-avis QM and non-QM. 

And what I can’t quite get my arms around is what the change 

will be next year for borrowers in terms of their rights of action 

under non-QM versus what it is today. 

Ms. COCHRAN. So, under the rules that were adopted by the Federal Reserve Board, the ability-to-repay requirement applies today 

to higher-priced mortgage loans. If there is a violation of that loan, 

the consumer can sue and recover all of their finance charges. 

The Dodd-Frank Act basically expands that requirement so it applies to the broader mortgage market, not just higher-priced mortgage loans, and it limits the remedies so that only up to 3 years 

worth of finance charges will be recoverable in the event that there 

is a successful suit. 

As we have talked about before, there are different gradations 

here with regard to Qualified Mortgage, Safe Harbor, and rebuttable presumption, inability to repay, but that is the basic framework that applies to the statute. 

Mr. HECK. I didn’t follow you. 

Ms. COCHRAN. Okay. 

Mr. HECK. I am trying to understand if I am a non-QM borrower 

next February— 

Ms. COCHRAN. Right. 

Mr. HECK. —on what kind of an expanded basis can I sue my 

lender versus today? 

Ms. COCHRAN. Today, the ability-to-repay requirements only 

apply to a higher-priced mortgage loan. After January, they would 

apply more broadly to the market in general. If the loan was not 

a Qualified Mortgage so it was originated under the general abilityto-repay standard, then in that case, the consumer remedies would 

be up to 3 years of finance charges in the event that the consumer 

was successful on the suit. 

Mr. HECK. And today they— 

Ms. COCHRAN. Today, they can recover the entire length of finance charges, so depending on when the suit was brought, that 

could actually be a larger amount of money. It depends on the circumstances of the case. 

Mr. HECK. Thank you, I think. I also want to ask about the loans 

and fees. First of all, quickly, did I understand you correctly that 

the 3 percent is actually specifically stipulated in Dodd-Frank? 

Ms. COCHRAN. It is. The statute provides for up to 2 bona fide 

discount points in addition to the 3 percent depending on the rate 

of the loan, but that is the general threshold. 

Mr. HECK. Part of what I don’t understand is how we have over 

time allowed for increasing Federal regulation of title insurance 

and what I don’t understand is how that relates to the foundational 

insurance regulation law, namely McCarran-Ferguson. 

I don’t understand how it is that we can say regulation of insurance is up to the States in exchange for which you are not subject 

46 

to antitrust but then first I gather it was in HOEPA and now in 

this we effectively have intruded upon that territory. Do you follow 

me? 

Ms. COCHRAN. The statute provides that affiliate fees in certain 

circumstances count toward the threshold for Qualified Mortgage 

and the threshold for a high-cost mortgage. 

So in the case of title insurance that is affiliated with the creditor, that would count towards those thresholds. That was the decision that Congress made in the Dodd-Frank Act, with regard to 

Qualified Mortgages, and as we discussed earlier, we have implemented that as the statute directed us. 

Mr. HECK. Does that in any way compromise the underlying covenant of McCarran-Ferguson? 

Ms. COCHRAN. I am not sure that I am qualified to speak to that. 

I think it is a decision that Congress made in the Dodd-Frank Act 

based on a number of policy parameters, and I don’t know all that 

went into that decision. We have implemented the statute as directed. 

Mr. HECK. Thank you very much. 

Thank you, Madam Chairwoman. I yield back the balance of my 

time. 

Chairwoman CAPITO. Thank you. I believe that concludes our 

hearing. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

The hearing is now adjourned. And thank you both. 

[Whereupon, at 12:17 p.m., the hearing was adjourned.] 

(47) 

A P P E N D I X 

May 21, 2013 

48 


81757.001

OPENING STATEMENT OF REI'. BILL HUIZENGA 

House Financial Services Subcommittee on Financial Institutions and Consumer Credit 

"Qualified Mortgages: Examining the Impact of the Ahility to Repay Rule" 

May 21. 2012 

Good morning, and thank you Chairwoman Capito and Ranking Member Meeks for holding this 

important hearing and allowing me the opportunity to participate today. As someone who 

worked the housing industry. this is very important to me and more importantly. to our 

constituents. 

We arc here today to discuss the Qualified Mortgage (QM)!Abilily to Repay Rule as mandated 

by the Dodd-Frank Wall Street Refoml Act. The QM rule is the primary means for mortgage 

lenders to satisfy "ability to repay" requirements, Additionally. Dodd-Frank provides that a 

QM may not have points and fees in excess of 3 percent ofthe loan amount. As currently 

defined, "points and kes" include (among other charges): 0) fees paid to a!1iliated (but not 

unaffiliated) title companies, (ii) salaries paid to loan originators. (iii) amounts of insurance and 

taxes held in escrow, (iv) loanlcvel price adjustments, and (v) payments by lenders to 

correspondent banks. credit unions and mortgage brokers in wholesale transactions. a result 

orthis problematic definition. many affiliated loans. particularly those made to low- and 

moderate-income borrowers. would not qualify as QMs and would be unlikely to be made or 

would only he available at higher rates due to heightened liability risks. Consumers would lose 

the ability to choose to take advantage of the convenience and market ctTiciencies otfered by 

one-stop shopping. 

along with Ranking Member Meeks. introduced bipartisan legislation that would clarify the 

way "points and Ices" are calculated. Our legislation. H.R. 1077, the Consumer Mortgage 

Choice Act, is nmTowly focused to promote access to afTordable mortgage credit without 

overturning the impotian! consumer protections and sound underwriting required under DoddFrank's "ability repay" provisions. 

Mrs. Chairwoman, thank you again for holding this impottant hearing und I look forward to 

hearing from the witnesses today. 
49 


81757.002

Introduction 

Written Testimony of 

Peter CarrolL Assistant Director for Mortgage Markets, and 

Kelly Cochran, Assistant Director for Regulations, 

Consumer Protection Bureau 

Before the 

House Committee on Financial Services 

Subcommittee on Financial Institutions and Consumer Credit 

May 21, 20Ll 

Thank you Chairman Capito. Ranking Member Meeks, and members of the Subcommittee fiJI' 

this opportunity to testify about the Bureau's Ability-to-Repay/Qualified Mortgage rule, We are 

honored to represent the Bureau here this morning to present an overview of the rule, our 

rulewriting process, and some of the policy considerations that shaped development. 

the mortgage crisis, too many mortgages were made to consumers 

to their to repay the loans, Loose underwriting practices by some 

failure to verify the consumer's income or assets (so called "no .. doc" loans) 

and qualifying consumers for mortgages based only on their ahility to pay low "teaser" interest 

rates that would allow monthly payments to jnmp to potentially unaffordable kvels after the first 

few years--4:ontributcd to mortgage crisis lhal led to the nation's most serious recession since 

the Great Depression. 

The Dodd-Frank Act protects consumers from such irresponsible practices by creditors 

to make a reasonahle, good faith determination based on veri fled and 

that consumers have a reasonable ability 10 repay their mortgages. The provision 

extends to most of the mortgage market a 2008 Federal Reserve Board rule that prohibits 

creditors frol1l111aking mortgage loans" without assessing consumers' ability to 

repay the loans, The Act also established a presumption of compliance with the 

abilitY-lo-repay requirement for a ce11ail1 category of loans called mortgages," The 

Board proposed a rule to implement these requirements before passed to the Bureau to 

finalize the rule. III January, the Bureau issued a tlnal rule (0 the statute and provide 

further clarity as to what will be required of creditors, The rule take effect on January 10, 

2014, 

In developing the final rule, the Bureau considered the record, including nearly 2,000 comment 

letters. We also received additional information and new data pertaining to the proposed rule, 

For this reason, wc reopened the comment period to further encourage dialogue and gather 

feedback the new data. We also reached out to stakeholders to gain a better understanding of 

potential on small creditors, t()r example, by holding a roundtable, 

of public feedback and our data analysis. we concluded that, in today's market 

remains so constrained that some consumers, even those lVith strong credit, may 

or buying a home. For this reason. we the rule not just to 

by curtailing certain problematic practices, but also to 
50 


81757.003

encourage creditors to provide responsible loans to consumers in all segments of the covered 

market. "Ve recognized that, while providing transition mechanisms and certain hright-Iine 

standards can help industry adjust to the new rule, was also important to provide flexibility for 

a range of reasonable underwriting practices as the mortgage market changes over time. So (he 

rule strikes a careful balance between providing bright lines to give certainty and clarity to 

creditors while also allowing flexibility for the mOl1gage market to evolve and innovate in ways 

that encourage the provision of responsible credit. We know thal there is much work to do as 

industry works to implement the rule. Howevcr, we believe lhat the broad positive feedback we 

have received in response to the rule--.. and to our processes for rulcwriting and 

lhut the rule will help the market over time reach a more 

for both consumers and providers of res pOll sible credit. 

Ability-tn-Repay Determillations 

The final rule the statutory requirement that creditors make reasonable, good faith 

determinations ability to repay their mortgages at the time the loan madc. 

While the final rule describes certain minimum requirements le)r creditors making such 

determinations, it does not dictate that they follow particular underwriting models. Rather, the 

Bureau believes that-subject (0 certain floors created by the Act·--it is entirely appropriate for 

creditors to employ a variety of standards to evaluate their customers' repayment ability. 

At minimum, the rule requires creditors to evaluate the borrower's income, savings, other 

assets, and debts. Creditors must generally use reasonably reliable third-party records to verify 

the information they use to evaluate these factors, which means creditors can no longer make 

"no-doc" loans. The rule also provides that monthly payments must generally be calculated by 

assuming the loan repaid in substantially equal monthly payments during the loan term. For 

adjustable-rate mortgages, the monthly payment must be calculated using the higher ofthc fuily 

indexed rate or an introductory rate. This means that creditors can no longer qualify borrowers 

based only on low introductory "teaser" rates. 

special rules to encourage creditors to refinance "non-standard 

include various types of mortgages which can lead to payment shock that 

can result in default·--into "standard mortgages" with fixed rates for at least five years that 

reduce consumers' monthly payments. 

By rooting out reckless and unsustainable lending without dictating specific underwriting 

models, we believe the rule consumers and strengthens the housing market while 

preserving flexibility for 

Qllalified Mortgages 

The final rule also implements the statutory creating a category ofloans called 

"qualified mortgages" that are entitled to a presumption that the creditor making the loan 

satislled the ability-to-repay requirements because they arc subject to additional safeguards, 

2 
51 


81757.004

The Act did nol specify whether the presumption of compliance for qualified mortgages is 

conclusive (i.e., creates a safe harbor) or whether it can be rebutted the consumer. 1Inal 

rule provides a safe harbor for loans that satisfy the definition of a mortgage and arc not 

"higher-priced" (which is similar to the pricing threshold defined by the Board's 2008 rule). The 

final rule provides a rebuttable presumption for higher-priced qualified mortgages. but defines 

with pm1icularity the grounds for rebutting that presumption. to additional certainty to 

creditors and consumers. The line the Bureau is drawing is one has long been recognized as 

rule of thumb to separate prime loans from subprime loans and we believe it strikes the 

appropriate balance between providing certainty to creditors making qualified mortgages and 

extending important protections to consumers in riskier loans. 

Although Congress defined some or the criteria for these qualified mortgages, it also recognized 

that it may be necessary for the Bureau to prescribe further specifies. As such. the final rule 

implements the statutory criteria, which generally prohibit loans with negative amortization, 

interest-only payments. balloon payments, or terms exceeding 30 years from being qualified 

mortgages, "No-doc" loans also cannot be qualified mortgages. Qualified mortgages also 

cannot have up front costs points and fees above the level specillcd by Congress. 

The rule also establishes general underwriting criteria for qualified mortgages. for example, the 

rule requires that the loans be underwritten based on the highest monthly payment that will apply 

in the first five years of the loan. Most importantly. the rule that the consumer's total 

monthly debts-including the mortgage payment and related expenses such taxes and 

insllrancc---cannot add lip to more than 43 percent of the consumer's monthly gross income, 

The appendix to the rule details the calculation of debt-to-income for these purposes. The 

Bureau believes that these criteria will COllsumers by ensuring that creditors use a set of 

underwriting requirements that safeguard affordability. At the same time. these criteria 

bright lines for creditors who to make qualified mortgages. 

In defining the boundaries of qualifIed mortgagt~S, the Bureau did not intend to stigmatize loans 

that lall outside those boundaries or to signal that responsible lending can or should take 

only within the qualified mortgage space. Quite the contrary, the tlnal rule makes clear the 

Bureau expects over time to sec markets for non-qualilled mortgages, At the same time, 

we recognize that, in light of the current state mortgage market, ereditors and investors 

remain concerned about managing risks and may initially be reluctant to make loans that are not 

qualified mortgages. even if such loans were responsibly underwritten. 

The final rule therefore provides for a second, temporary category of qualified mortgages that 

have more flexible underwriting requirements so long as they satisfy the general product feature 

requirements for a qualified mortgage (no negative amortization, interest-only, or balloon 

payments and meet the loan term restriction and points and fecs cap) and also satisfy the 

underwriting requirements of Fannie Mae or Freddie Mac (the government sponsored entities, or 

GSEs) or certain federal agencies. This temporary provision will phase out over time as the 

various federal agencies issue their own mortgage rules and, at the latest, after seven 

years. The temporary provision for GSE also will expire jf GSE conservatorship ends, 

The Bureau continue to observe the health of the mortgage market going forward to ensure 

the availability of responsihle credit outside the mortgage space. 

3 
52 


81757.005

Small Creditors 

The Bureau recognizes that with few community banks and credit unions did not 

engage in the type of risky lending that to the mortgage the same time, the Bureau 

knows these institutions may be more likely to retreat fhlln the mortgage market if the 

regulations implementing the Dodd-Frank Act arc too burdensome, which could restrict access to 

credit for some borrowers, For this reason, the Bureau tailored the final rule to encourage small 

creditors to continue providing certain credit products, while carefully balancing consumer 

protections. 

For the rule a special provision in the Dodd-Frank Act that would 

balloon-payment loans qualified mortgages iflhey arc originated and held in 

portfolio by small creditors operating predominantly in rural or underserved areas. This 

provision is designed to assure credit availability in rural areas, where some creditors only 

oHer balloon-payment m011gages. Loans are only eligible if they have a term of at least 

years, a lixed interest rate, and meet eCI1ain basic underwriting standards; debt-to-income ratios 

must be considered but are not subject to the 43 percent general requirement. The Bureau 

significantly expanded the definition ofrural and made other adjustments to the original 

proposed rules to make easier small creditors to continue making responsible balloon loans 

going fonvard. 

In addition, at the same time it issued the tlnal rule, the Bureau amendments to rule 

to accommodate mortgage lending by smaller for portfolio loans made 

small creditors-including those operating outside of what are designated as rural or 

Iln,ri,,,'''"'rrveil areas. The proposal generally would treat these loans as qualified mortgages even if 

the loans exceed the 43 percent debt-to-income ratio, as long as the creditor considered debt-toincome or residual income hefore making the loan, and as long as the loans meet the product 

feature and other Jor qualified mortgages. provision would cover 

institutions that less than $2 in assets and, with extend 500 or fewer first 

lien mortgages per year. The Bureau estimates that approximately 9,200 small institutions, such 

as community banks and credit unions, would likely be affected by the proposed del1nition. The 

Bureau expects to issue 3 final rule on this aspect of the proposal shortly. 

The Bureau has also made an agency-wide commitment to provide implementation support, in 

pmt because we realize that such cnoels arc particularly impoltant to small creditors that do not 

have large legal and compliance teams. We recognize that smooth, efficient process will 

ultimately benefit consumers and the market as a whole. For example, at the same time we 

issued the final rule, we published summary of the rule on our website. We have 

also published a compliance guide particularly for smaller institutions who will need to 

update their policies and and provide training for staff on the ability-to-rcpay rule. 

We arc also publishing to the rule as needed to respond to questions and inquiries 

from variolls stakeholders in an effort to ease implementation hurdens. We are coordinating with 

other agencies to develop examination procedures and are developing videos, checklists. and 

otber tools that may be useful to creditors as they prepare jor the date. 

4 
53 


81757.006

Policy Considerations 

As outlined above, several policy considerations helped to shape development ofthe ability-torepay rule, and in particular the ddinition of qualified mortgage. That definition was the most 

complex part of the in part because the crealion of a general ability-to-rcpay 

requirement that carries potential liability for both creditors and has caused some 

anxiety in the market Although we found no evidence that the ability-to-repay 

under the 2008 F ednal Reserve Board rule has caused a signilicant increase in 

we recognized that concerns about the liability regime in the Dodd-Frank Act might 

cause creditors (0 tend to constrain their lending, particularly in the first few years after the rule 

takes dfect. 

The first consideration was to consumers by cnsnring that certain practices such as 

doc" loans and underwriting solely on initial "teaser" rates would not return in future 

credit cycles. The general requirements are designed as common sense measures 

to ensure that creditors nse reliable their undenvriting process and calculate 

appropriately, while leaving flexibilily as to how variolls factors are 

COIIL"ueIXU in the process. We also considered consumer protections carefully in 

the context of qualilied mortgages, where the statute left tlcxibility for the Bureau to determine 

appropriate documentation and underwriting requirements. We believed it was to 

ensure that creditors consider consumers individual financial situations with to debts, 

income, and assets before extending qualified mortgages, too. 

The second consideration was how to ensure access to respollsible credit in all pmts oftbc 

market. particularly given anxiety levels regarding litigation risk. Several features ofthc rule are 

designed to address this concern, including calibrating the strength oflhe presumption of 

compliance with the requirements based on whether a qualified mortgage 

exceeds the threshold for believe the safe harbor will help to provide 

market, and that the rebuttable presumption 

will create strong incentives more lending the non-prime space as well. At the 

same lime, the rebuttable presumption also preserves certain consumer remedies in the unlikely 

event that a qualified mortgage loan did not leave the consumer with suffkient residual income 

to meet monthly living expenses. 

The general delinition of qualified mortgage is also structured in a way to encourage responsible 

credit in parts of the market over time. We do not believe that it is possible by rule to dellne 

every instance in which a mortgage affordable, given that underwriting is a highly complex 

and individualized process. We were also concerned that an overly broad definition of qualified 

mOltgage could stigmatize non-qualilied mortgages or leave insuflicient liquidity for such loans, 

which would curtail access to responsible credit for consumers. 

Accordingly, we defined the general category of qualified m0l1gages, including the bright-line 

43 percent debt-to-income ratio, in order to greater protection to consumers and certainty 

to creditors, while also allowing room for the market to grow for non-qualified mortgages. We 

also created the temporary definition of qualified mortgage based on eligibility for purchase or 

guarantee by the GSEs and several federal agencies, primarily to make it easier for creditworthy 

5 
54 


81757.007

consumers with debt-tn-income ratios above 43 percent to access credit over the next several 

while the industry adjusts to the new rulcmaking requirements. Our changes to the 

balloon-payment qualified mortgage provisions and several elements of (he COllCUlTem proposal 

that we issued in January. particularly the proposal to extend qualified mortgage status (0 certain 

portfolio loans by small creditors, are also designed (0 address access to credit concerns. 

third major consideration was to attempt to balance the desire for short-term certainty with 

the need for long-term flexibility that can benefit consumers and responsible creditors alike. 

Because we do not believe is possible to define by rule every instance in which a mortgage is 

aHordable, we sought to structure the rule in a way that allows room for a range ofreasonablc 

underwriting models used by different types of creditors in today's market. We were concerned 

that as the mortgage market strengthens, the rule should function to provide appropriate 

safeguards without becoming a straightjacket. We balanced these considerations in many places. 

both leaving flexibility t()[ reasonable underwriting practices under the 

standard and in crafting difl'erent types of qualified mortgages that usc different sets of 

safeguards to ensure that affordability being appropriately considered. 

Conclusion 

In carrying out our statutory requirement to issue Ahility-to-RepayIQualified Mortgage rule" 

we worked hard to strike the appropriate balance between ensuring more 

lending, certainty to the mortgage market enhancing access to 

preserving for the mOltgage market to evolve and innovate over We have been 

encouraged by the largely positive feedback to rule. While we are proud of the work tbat we 

have done, we understand that much work remains illr the market to adjust to our rule, other 

regulatory initiatives" and changes in economic conditions. For that reason. we are committed to 

continuing to observe the health of the mortgage market to ensure that our rules are working to 

help speed the recovery li'om the financial crisis while preserving access to credit. 

Thank you f()r asking us to testi fy today. We would be happy to answer your questions. 

6 
55 


81757.008

The Honorable Shelley Moore Capito 

Chairman 

Subcommittee on Financial Institutions 

and Consumer Credit 

House Financial Services Committee 

US, House of Representatives 

Washington, DC 20515 

RE: Statement forthe Record 

May 21, 2013 

Dear Chairman Capito and Ranking Member Meeks: 

!\l\U;;RH}/\ 

IJz\ I) TJTLI~ 

ASSOCIATION 

The Honorable Gregory W, Meeks 

Ranking Member 

Subcommittee on Financial Institutions 

and Consumer Credit 

House Financial Services Committee 

U,S, House of Representatives 

Washington, DC 20515 

On behalf of the American Land Title Association thank you for holding this important 

hearing entitled "Qualified Mortgages: Examining the Impact of the to Repay Rule," The importance 

of getting the ability to repay/Qualified Mortgage (QM) rule right cannot be understated for the future 

health and success of our mortgage markeL This hearing should give the subcommittee important 

information to measure the success of the Consumer Financial Protections Bureau's final rule and help 

the subcommittee determine whether amendments to the relevant sections of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act are necessary, 

ALTA is eager to serve as a resource on issues related to litle insurance and real estate closings 

As the subcommittee considers proposals to amend the QM provisions of Dodd-Frank, including the 

Consumer Mortgage Choice Act (HR and other proposals title insurance, we thought it 

would be helpful to provide the with an overview insurance including how title 

insurance and real estate closings are regulated by state and federal laws, 

What is Title Insurance? 

Title insurance plays a fundamental and essential role in facilitating ownership and investment in 

real estate in the United States, Real estate is the largest asset class in the United States, For most 

Americans their home is their single largest investment Title insurance protects the American dream of 

homeownership, 

Title insurance is an indemnity against financial loss from defects in title to real property and from 

!he invalidity, unenforceability or lack of priority of mortgage liens, Title insurance is a fundamental 

consumer protection that shields consumers from the risk that they don't own their property, 

In any real estate transaction, the buyer wants to be certain that he or she will 

acquiring ownership title) of the property subject only to those liens and encumbrances they 

about and are accept The seller wants to be certain that he or she will not be contractually liable 

to the buyer if the conveyed is subject to any claims of title, The mortgage lender wants to be certain 

1 The American Land Title Association, founded in 1907, is a national trade association and VOice of the real estate settlement 

services, abstract and title insurance industry. ALTA more than 4,300 member companies. ALTA members !n 

in the United States to search, review land titles to home and mortgage lenders invest 

in ALTA members include title insurance title agents, tltIe searchers and attorneys. 

ranging from small. one-county operations to large 

1828 L 
56 


81757.009

that the financed, will have title to the property and that the mortgage 

lender will a valid and mortgage lien that is not subject to any other lien or claim that 

could adversely affect the priority of their mortgage interest In the United States" all of this is done 

through title insurance, 

In general, there are two main types of title insurance policies, both of which are issued 

after the closing of a real estate or mortgage refinance transaction: an owner's policy a loan policy, 

The owner's policy insures the buyer's ownership interest in the real property while the loan policy 

protects the lender's interest In virtually all areas of the country, if an owner's policy is issued in the 

transaction, the cost of a loan policy that is issued" with the owner's policy involves a 

relatively small additional charge to the cost of the owner's 

Both types of policies protect against defects that may be found in public records but were not 

discovered during the search of those records or their significance was not appreciated, and also against 

those non-record defects that even the most comprehensive search of the records would not reveal, 

These risks include, among others: 

fraud or forgery in the execution of documents in the chain of title (in deeds, mortgages, mortgage 

satisfaction pieces, etc): 

mistakes in interpretation of wills, divorce decrees, bankruptcy court directives and other legal 

documents; 

the execution of documents by minors or incompetent persons who could not legally convey 

property interests; 

the existence of undisclosed heirs who did not consent to a prior transfer; 

deeds executed under an expired power of attorney or on behalf of someone who has died; and 

mistakes in the recording or indexing of documents in the public records, 

A key feature of both policies is the duty to defend, Under the policy, the title insurer is obligated 

to pay for the costs of defending the title as insured against any covered claim, In addition, the title insurer 

also has the right to cure any claim that is presented, 

How Does Title Insurance Work? 

Title insurance is fundamentally different from other types of insurance, such as homeowners or 

life insurance, Understanding these differences can help correct some of the misconceptions about the 

product 

Indemnification against past events instead of future events 

Homeowners, auto, life, health and professional lines of insurance indemnify the policyholder 

against events that occur the policy has been issued such as a fire, an accident, a death, a trip to 

the doctor or a professional claim, Title insurance protects against existing title defects that arose 

before the policy is issued, While claim may not be asserted until after the policy is issued, it has to be 

based on legal rights established before the policy was issued, 

One-time cost VS, yearly renewals 

Most other forms of insurance provide protection for a limited period of time on a prospective 

basis, and the policy must be periodically renewed, With other forms of insurance, if the policy is not 

renewed and the premiums are not continued to be paid, the lapses, Title insurance is issued for a 

one-time premium, There are no renewals, The owner's protection extends for as long as the 

owner or their heirs own the property or has liability in connection with the property, The insured lender's 

protection extends as long as there is a balance due on the loan secured by the mortgage, 

- 2-
57 


81757.010

Underwriting 

and casualty companies which underwrite their policies based actuarial data, the 

underwriting operates almost on the basis of evaluating, and 

addressing title problems before tile policy is issued. demonstrates two of insuring title. 

On the one hand, an insurer could use revenue from a one-time premium primarily to identify and, if 

possible, eliminate title risks prior to the issuance of the policy and therefore reduce the likelihood of 

having to pay claims. Alternatively, an insurer could perform little or no search, examination and 

correction and use the revenue from a one-lime premium to pay claims that will ineVitably arise. 

Consumers and lenders benefit when a risk is identified and to provide a certain, secure, and 

peaceful use of the property they acquire. 

This curative action includes obtaining releases or pay-offs for discovered liens (e.g., prior 

mortgage liens, child and spousal support liens, judgment liens, tax liens, homeowner's association 

debts, mechanic liens); obtaining releases for deeds and mortgages; and typographical 

recording and indexing errors that could create problems (misspelled names, incorrect descriptions). 

On the basis of the title examination, a commitment to insure is then sent to the OrC1S[leC:lIve 

policyholder. It sets forth the conditions that must be met for a title insurance policy to be such as 

documents to be produced (e.g., the execution of a deed, the execution of a new mortgage in favor of the 

buyer's lender), items to be removed (payoff of mortgages, judgments, liens, taxes, municipal bills), and 

exceptions to be taken from policy coverage found during the title search and examination process. 

Losses and expenses 

Tille insurance losses are considerably lower than other forms of insurance and title insurance 

operating expenses are considerably higher than other forms of insurance. When title insurance losses 

are combined wilh operating expenses, the overall of title insurance and property & casualty 

insurance is similar. In title insurance, operating expenses the cost of lhe title search, examination 

and curative work performed before a policy is issued to prevent potential claims. 

Unlike other lines of insurance, it is possible (and from the consumer and 

desirable) for the title company to discover and correct all potential claims before 

spending a high proportion of their revenue on the title search, examination, and curative 

result in fewer losses and claims, title insurance helps promotes certainty in the ownership of real estate. 

This makes title insurance unique. low claims are good for consumers. 

How is Title Insurance Regulated 

Title insurance is state insurance law. However, federal law and state real 

property statutes and govern 

different from state to state, title insurance practices also 

Since real property and mortgage laws are 

from one state to the next. 

State departments of insurance regulate both title insurance practices and rates. Virtually all 

states regulate title insurance rates by making sure that rates they are not excessive, inadequate or 

unfairly discriminatory. In addition. most states require that rates be filed with or set by the state insurance 

department. 

lien or claim it knows to exist and to be enforceable 

commitment that the matter wiH be 

to decide vvtlether defect as a limitation on the title, 

decline to go ahead with the transaction if the defect is serious enough {e.g., it could 

3 -
58 


81757.011

State coordinate together through the National Association of Insurance 

Commissioners Title Insurance Task Force, The NAIC explains the purpose and structure of 

insurance regulation to include: cDmpany licensing, producer licensing, product regulation, financial 

regulation, market regulation and consumer services, 

With the long loss nature of the policy there are an array of solvency requirements 

imposed on title insurers including heightened and reserve requirements, Title insurance is 

one of the few lines of insurance that is required to be monoline, With a monoline statute, a licensed title 

insurer is not permitted to offer any other line of insurance, Monoline restrictions prevent insurance 

companies from mixing title insurance risks with other kinds of insurance risks, These restrictions were 

imposed for the benelit of policyholders to ensure the solvency of title insurers whose policies remain in 

effect for indefinite periods of time, This structure served as an effective backstop during the housing 

crisis, Finally, it is important to note that rates and solvency are interrelated, When rates are increased, 

the risk of insolvency decreases, When rates are decreased, the risk of insolvency increases, 

Title insurance and real estate closings are also governed by the Real Estate Settlement 

Procedures Act (RESPA), which is a federal consumer linanciallaw regulated the Consumer Financial 

Protection Bureau (CFPB) under the Dodd-Frank Act RESPA requires consumers receive 

disclosures at various times in a real estate or mortgage refinance transaction and outlaws kickbacks that 

increase the cost of settlement services, 

ALTA looks forward to continuing to serve as a resource to Financial Services Committee 

members, staff and any other interested party regarding title insurance and real estate closings, We 

welcorne the to inform public policy, respond to questions and correct rnisconceptions about 

title insurance, have any questions about this statement or would like further information, please 

contact Justin Vice President of Government and Regulatory Affairs at (202) 261-2937 or 

iustin@alta.OI}1, 

Chief Executive Officer 

- 4-
59 


81757.012

t~~ CUNA 

CttdkU!llo~N.II(>1'laA.!l~ 601 Pennsylvania Ave., NW I South Bunding, Suite 600 I Washington, DC 20004-2601 t PHONE: 202-508·6745 I FAX: 202-638-3389 

cuna.org 

BIUCHENEY 

President & CEO 

May 21, 2013 

The Honorable Shelley Moore Capito 

Chainnan 

Subcommittee on Financial Institutions and Consumer Credit 

Committee on Financial Services 

U.S. House of Representatives 

Washington, D.C. 20515 

Dear Chainnan Capito: 

On behalf of the Credit Union National Association (CUNA), thank you for holding a 

hearing entitled: "Qualified Mortgages: Examining the Impact of the Ability to Repay 

Rule." CUNA is the largest credit union advocacy organization in the United States, 

representing nearly 90% of America's 7,000 state and federally chartered credit unions 

and their 96 million members. 

Earlier this year, the Consumer Financial Protection Bureau (CFPB) issued a final 

"Ability to Repay" rule to implement provisions of the Dodd-Frank Wall Street 

Refonn and Consumer Protection Act regarding a borrower's ability to repay a 

residential mortgage loan and establishing requirements for "qualified mortgage" 

under the Truth in Lending Ac~ Regulation Z. 

Under the rule, creditors generally must consider eight underwriting factors for a 

residential mortgage loan to assess the borrower's ability to repay the loan: current or 

reasonably expected income or assets; current employment status; the monthly 

payment on the covered transaction; the monthly payment on any simultaneous loan; 

the monthly payment for mortgage-related obligations; current debt obligations, 

alimony and child support; the monthly debt-to-income ratio or residual income; and, 

credit history. Creditors must generally use reliable third-party records to verify the 

infonnation they use to evaluate the factors. These are factors that credit unions 

generally consider in granting loans. 

It is important to note that credit unions also make every effort to tailor a loan product 

that meets our member's needs, and do so in a way that minimizes risk and default. 

While the CFPB has made several changes to the rule in response to our concerns, we 

continue to have several issues with the rule. These are concerns that we have already 

raised with the CFPB. 

First, for a loan to be considered a "qualified mortgage" the consumer's total monthly 

debt to total monthly income at the time the loan is made cannot be higher than 43%. 

P"ONE: 
60 


81757.013

We believe this ratio should be expanded. Credit unions often write mortgage loans 

for members that have a 45% debt-ta-income ratio and may even go as high as a 50% 

debt~to-income ratio under certain limited circumstances. Even so, our mortgage 

losses remain very low. 

Second, for a mortgage to be considered a "qualified mortgage" total points and fees 

generally may not exceed 3% on a loan of $1 00,000 or greater. While these amounts 

are indexed for inflation, these limitations may be problematic for some credit unions. 

As the loan amount decreases, certain fees cannot decrease alongside of it - some fees 

are fixed and are not dependent upon the size of the loan. Therefore, the smaller the 

loan amount, the easier it is for fees to constitute a higher percentage of the total loan. 

This is especially true as the fees are currently defined as including loan originator 

compensation, and affiliate and non-affiliate fees. 

Finally, credit unions should be allowed to continue writing non-qualified mortgage 

loans where necessary and appropriate for their members, without retribution from 

examiners In order that creditworthy borrowers with debt-ta-income ratios somewhat 

above 43% can still have access to mortgage credit. CFPB Director Richard Cordray 

has recently indicated that he agrees with this position. 

However, CUNA understands that there may be little interest on the investment side 

for non-qualified mortgage loans. Also, examiners may be critical of credit unions and 

assess their CAMEL ratings accordingly if credit unions do not make mortgages that 

meet the Qualified Mortgage standards. We believe credit unions should retain the 

flexibility they currently have to either hold a loan in portfolio or sell it on the second 

mortgage market based on the needs of the credit union (0 manage its assets and 

obligations. 

On behalf of America's 7,000 credit unions and their 96 million members, thank you 

again for holding today's hearing. 

Best 

~ 

regards, 

Bill Cheney 

President & CEO 
61 


81757.014

M~ry 21, 1013 

Qualified Mortgage Rule Will 

Jeopardize Access to Credit 

On bellalforthc 7,000 community banks the Independem Community Bankers of 

America (ICBA), thank titled: "Qualilicd IV"lrU!il,'es: 

Examining the Ability to Repay Rule." Wc appreciate this 

this statemcnt record. Reform of the qualified lllllW","'CIIHl lllv-lO-rerray 

key plank of leBA '5 Plan for Pmsperity: /\ Regulatory 

Communities. 

Balloon }v/o/'tgage,'i' Pla.l' Essential Role in Rural Communities 

Community banks are responsible mortgage lenders that did not patticipate in the abuses that 

contributed to the financial crisis. Community- banks help horro\vers in rural communities where 

non-trnditional loans such as halloon mortgages are prevalent due to the uniqu~ nature of rural 

These loans are not eligible to he sold into the market and arc kept in 

\vhich gives community banks vested interest in 1he of these loans and allo\\ts 

them to work out a solution directly with the borrower ifrepayment problems arise. In addition, 

these loans often meet the definition priced loans." Because the 

mllst be funded relail inciuJe higher cost 

interest regulatory definition is 

!'vIae and Frcddic Mac set based nn their ability 

10 access capital and funding that are not available to community banks. In addition, in 

historically-low interest rate environment is morc likely that a reasonably-priced loan 

meet the Federal Reserve's definition of ""higher priced:' 

Q;\If Rule Does }\"ot Adequafe~v Protect C'ommuni(JI Bank Balloon A40rtgages 

While the CrpD's QM rule allows balloon loans made small creditors that operate 

in rural or undcrscrvcd areas to be rnortgages, the Bureau's definition of 

either rural or non-rural, which is 

inherently inaccurate. As result, too many communities are denied rural status and 

uoneccs.c;arily cut off from access to credit. \Vhcn halloon loan does not receive sate harbor protection, the lender is to undue litigation risk. 1'V1any community are not 

willing to assume that risk and the mortgage lending business. 

Bank Qualified .liar/gage 

Because of the significance oflhe QM rule to community bank ICBA recently 

conducted the Community Bank Qualified Survey to gather on impact of the 

CFPB's new rule. The survey, which is to this statement in full. found that 

for balloon-payment mortgage loans and rural community banks in the new rule 

20036 \11 202-659-8111 fi 
62 


81757.015

further to adequatciy protect the customers ofrmmy Main Street community bank !enders. 

par1kular: 

Among the 75 percent of respondent community banks that currently make balloonmortgage loans. Jess lhan half(46 percent) v'iould qualify for the ru!e~s provision 

balloon 

For respondent community banks that consider themselves to be rural banks, 44 percent 

do not qualifY "rural" under the rule's deflnition, 

for the bal loon cxccpti()n~ most arc 

primarily on the basis of the of''rural'' (43 percent). 

Respondent banks hold an of 64 percent residential 

mortgage loans in portfolio for the life loan. The hanks 

(52 percent) hold at least 80 percent or more ofll1e loans originated 

loan. 

make higher-priced mortgage loans and 

by federal regulation). 

Attached 10 this statement is a state-by-state map of rural 

committee may be surprised at the rural county designations 

concerned that many areas orthe state arc not covered. 

designations. iv1embcrs of this 

their own states and 

leBA is the Bureau to expand the definition of rural to include all counties outside 

metropolitan areas and all towns with fewer than 50.000 rcsidents. lCBA also 

the Bureau 10 extend the safe harbor conclusive of compliance for 

up to the 

3.5 percent or the cost of tlmds plus 

U"'llI'CS,IlIP and Equity Protection Act threshold. 

A Clean Fix Needed 

for a clean solution, rather than complex and unbalanced rural 

CFPR Our preferred solution relics on the natural 

incentive portfolio arc alTordablc to the bOITower and to 

work with 1he horf()\ver t,.hould they encounter difficulty in rcpo),'n1enL 

every incentive to ensure borrower's 

condition and to \vork \Vlth the borrovv'cr to structure the loan and make sur~ 

is affordable. Withholding harbor status for loans held in portfolio, exposing the lender 

to litigation risk, will nor make the loans safer, nor will it make underwriting more conservative, 

1615 L Street I\';\>V, Suite 900, \-\/.Jshingtoo, DC .20036 Ii 
63 


81757.016

it will 

mortgages," 

deter community banks from making such loans in the 

of rural and \ivhere a hank's cost of funds results in 

rhe CLE1R fiche/Act 

counties that do not 

priccu 

ICBA thanks Representative Blaine a former community bankeL for inclnding a 

provision in the CLEAR Relief Act (H.R. that would accord qualified status to 

mortgages originated and held in portfolio for at !east three than $10 

hillion assets. leBA supports the 

and n01Hl1orjP""C 

to suhmit this statement for the record. ICBA looks forward 

(0 to reform the QM rule to 

our rural ecollornies and housing market of balloon loans 

held in porti(llio. 

Attachments 

Community Bank Qualit1cd Mortgage Survey 

Statc-By-State Rural Counly Designation Maps (blue counties are rural; yellow 

non-rural) 
64 


81757.017
65 


81757.018

ICBA conducted a survey to gather data on the impact orthe accommodations for community 

banks in the CFPB's Qualified Mortgage/Ability to rule. leBA requested intonllation on 

community banks' residential first-lien mortgage activities for 2012. 

leBA distributed the survey to its membership between February 7 and February J 4.20 J and 

that the survey he directed to the member of bank staff prepared to answer 

questions on the topic. ICBA received 380 responses, a response rate of approximately 8'Y(), 

For the 

Key 

of our analysis, respondent community banks were selected lor peer groups 

responses to questions on their asset size and the geographic areas served. 

Among the 75%. of respondent community banks that cllrrently make balloon 

mc,rl!m~'cs.less than half (46%.) wOllld qllalify for the balloon mortgage exception to 

the Mortgage/Ability to Repay rille, 

For respondent commllnity banks that consider themselves to be rural banks, 44% 

do not qllalify as "rllral" uuder the rule's definition. 

Among the community banks that do Hot qualify for the balloon exceptio II, most are 

disqllalified primarily on the basis of the definition of "rural" (43% overall) or 

limited by a combination of the 500 loan illlnnal originations CilP and the definition 

of "rural" (9% ovemll), 

Among respondent community banks, an overall average of 64'% of originated 

residential mortgage loans are held in the bank's portfolio for the life of the lmm, 

The majority of respondent banks (52%) hold at least 80'% or more of the loans 

originated for the life of the IOIlIl. 

Only 33'% of the respondents 

community banks arc less likely 

portfolio. 

ami hold ARMs ill portfolio, Smaller 

average to origillate and hold ARMs in 

Most respondents (M'Yo) indicate they make higher-priced mortgage loans and 

provide escrow accounts for them (as required by federal reglliation), 

May 9, 20t3 
66 


81757.019

Originations 

responding banks (90%) originated fewer than 500 

all responding banks with less than $100 million in assets did so 

$250 million in assets originated fewer than SOO mortgages (95%). 

loans 2012. Almost 

Most banks with $10!-

While the balloon exception is for hanks wilh to $2 billion assets, larger community banks 

fInd more difficult to qualify lor the exception on the number of mortgages originated. 

Nearly one-fourth (24%) of respondent banks wilh $251-500 million assets will be unable to 

use the balloon exception because they originate more than 500 mortgages. Only 55% of bunks 

with more than $500 million in assets originate fewer 500 loans, so 45% of banks in this 

category will be unable to qualify for the balloon exception based on the number of originations 

(Figure I). 

thc 

l!! Under $100 million I!!I $101-$250 million Ell $251-$500 million $501 million or More 

Less than 500 

500-1000 

More than 1000 

Loans Held ill Portfolio 

Among respondent banks an overall average of 64% of residential mortgage loans 

are beld the bank's for the life orthe loan. The of respondent banks (52%) 

hold at !cast 80% or more of the Joaos originated for the life loan (Figure 2). 

Larger community banks hold a smaller 

Among respondent banks with more than 

of loans portfolio for the life of the loan. 

million in assets, 46% of originated loans are 

May 9, 2013 
67 


81757.020

BANKfRS cfAMER1CAIlt 

held in portfolio for the life of the loan, compared to 65% for banks with $101-250 million and 

72% for banks with less than $100 million in assets. Also, rural banks hold a higher percentage 

of originated loans in portfolio (68%) compared to suburban (53%) or urban (43%) banks 

(Figure 2). When we examine the data as the percentage ofr,'spondenls that fDI! within 

percentage ranges, the same trends are apparent (Figure 3 & 4). 

Figure 1: pC'rt'c-ntagc 

liff ofthe - )lean 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

2012 10 he 

O?[; 10% 20% 30% 40% 50% 60% }O}/U 80% 

to he retained the 

Iii Under $100 million iii! $101-$250 million Iii $251-$500 million $501 million or more 

0-20% 

20-40% 

40-60% 

60-80% 

62% 

80-100% 

70% 

May 9. 20!3 
68 


81757.021

I>lUrban IIiI Suburban Iil flural 

0-20% 

20-40% 

40-60% 

60-80% 

80-100% 

Adjustable Rate 

Asset size makes lillie to tbe percentage of adjustable rate mortgages (ARMs) with all 

peer groups close to the overall average of 36%. I lowever. banks tbat report serving urban 

markets made fewer ARMs as a percentage of overall loans than other banks (29%. Figure 5). 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

flural 

held 

May 9, 20J 
69 


81757.022

BANKfRS OfAM[R1Cl'<:; 

One-third (33%) of respondent banks they have no ARMs in their portfolio and 

institutions with less than $250 million in assets arc even less likely to have ARMS in their 

portt()iio (Figorc 6 & 7). 

ill 

!!II Under $100 million !III $101-$250 million !'iI $251-$500 million III $501 million or more 

III Urban III Suburban iii Rural 

0% 

1-20% 40% 

20-40% 

40-60% 

60-80% 

80-100% 

May 2013 
70 


81757.023

Loans 

asset has a more substantial impact on loan respondent banks less 

than $100 million in assets, most loans (74%) have an APR exceeds the APOR by more than 

1.5 percentage points. For banks serving rural areas. 62% of loans exceed the APOR 1.5 

percentage points and 22.5% exceed the APOR by more than 3.5 percentage points 8). 

This reflects the higher cost of funds and operations for smaller banks and rural banks. 

Under $100 million !II $101·$250 million a $251·$500 million 

1.5 3.4 percentage points 

greater than the APOR 

3.5 percentage points or more 

greater than the APOR 

$501 million or More 

Most respondents (64%) indicate they make higher-priced mortgage loans and provide escrow 

accounts for them (as required by federal regulation, 9). Fewer banks with less than $100 

million in assets provide escrow accounts, with (33%) indicating they do not provide 

higher-priced loans because they cannot or choose not to satisfy the csct'ow requirements. 

May 9, 2013 
71 


81757.024

CC)MMUNI1Y 

!ill Under $100 million iii $101-$250 million Iii $251-$500 million $501 million or more 

YES, we provide escrow accounts for these 

loans and maint()in the accounts in-house. 

YES, we provide escrow aCCDunts for these 

loans but outsaurce the servicing for the 

escrow aCCGu nts. 

NO, we don't provide higher-priced loans 

because we cannot or choose not to satisfy 

the escrow requirements. 

NO, we don't provide higher-priced loans 

regardless afthe escrow requirements. 

0% lOiXl 20% 30% 40% 50% 60% 70% 80% 90% 

Most respondents (62%) have had a borrower an escrow account. with institutions with 

more than $250 million in assets being more to have had such a request (more (han 80%). 

The majority of respondents (55%) provided at least one escrow account at the borrower's 

request during 2012, but most often less than five (24%). 

May 9, 2013 
72 


81757.025

BANKeRS ofAI'v\ER1CA'" 

Balloon Mortgages 

!Vlost re,;pondcnlS (73%), including a majority of banks in all 

balloon mortgages. Many that do not currently make balloon do so in the future (5°/\)). 

Smaller banks are more likely to currently make balloon mortgages (Figure 10). 

Iii! Make balloon mortgages II May in future 

Under $100 million 

$101·$250 million 

$251·$500 million 

$501 million or More 

Urban 

Suburban 

Rural 

100% 

Among survey respondents that currently make balloon mortgages less than half(46%) of 

community banks would qualify for the balloon mortgage exception. halfof 

community banks with less than $100 million in assets, between million assets and 

indicating that they serve rural areas would qualify (Figure 11). Few larger community banks 

would qualify, including only onc-in·thrcc (33%) of community banks \Vith $251·$500 million 

in assets and one-in·t\Vc]ve (8%) community banks with more than $50 I million in assets would 

qualify. 

May 9, 2013 
73 


81757.026

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

Community banks that do not qualify for the cxceptioo are disqualified 

the defInition of "rurar' (43% overall) or a combination of the number and the 

defInition of rum I (9% overall). Only 1% of bunks are disqualitlcd based solely on the number of 

originations. 

Most banks with less than $250 million in assets that currently make balloon mortgages but 

would be unable to qualify for the exception arc disqualified by the definition of rural. Larger 

banks with more than $250 million in assets are likely to be disqualified by both the number of 

originations and the definition of rum I (Figure 12). Given the impact of these filCtors the $2 

billion asset cut-olThus meaning, and few community banks with $501 million $2 hillion 

in assets will qualify for the balloon exception. 

May9, 
74 


81757.027

Originations only Rural definition only Both originations and H rura !!! definition 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

under the Rural Definition 

and rural banks originate loans in only one a handful of counties, with 92% of 

banks with less than $100 million in assets serving 5 or fewer counties and 98% of banks this 

size category serving 10 or fewer counties. rural banks, 72% serve .5 or fewer counties and 

90.5% serve 10 or fewer counties. 

Overall. fewer than banks (47%) indicate they make more thall 50% of 

mortgage originations counties in neither a statistical area (MSA) nor 

an adjacent micropoiitan statistical area under defInition in the Ability-toRcpay/Qualillcd Mortgage mle. 

Significantly, among banks that indicate they serve rural areas, 56%) make more than 50% of 

their mortgage loans in qualifying counties that means 44% of respondent rural banks will not 

meet the standard of "rural" in the QM rule. Only 5% of res pOll dent banks with more than $500 

million in assets indicate that they wii! meet this requirement (Figure 13). 

May 9. 201 
75 


81757.028

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

54% 

60% 

[rthe definition of rural were expanded to include all counties outside MSAs, more banks would 

qualify as rural, including 21 % of banks with more than $500 million in assets. However, banks 

serving urban and suburban in addition to rural markets will continue to find it difficult 

to qualify for the And 36% of banks that characterize themselves as rural still 

would not meet the QM of rural (Figure 14). 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

also serve urban areas and 19(~'G indicate 

than previous ieBA survevs. 

respectively) and the 2011 Comn;unity Bank 

in counties 

70% 

Survey 

May 9, 2013 
76 


81757.029

The majority of banks ofal! asset groups except those with less than $100 million in 

have most of the branches located inside an MSA (Figure 15). 

less than $100 million 

$501 million-$l billion 

0-25% 

25-50% 

50-75% 

75-100% 

~lSA 

Ii $101-$250 million 

$1.1-$2 billion 

$251-$500 million 

72% 

80% 

May 9. 2013 
77 


81757.030

Detailcd Data on Lcnding in Rural Areas 

Banks with under $100 and $101-250 million in assets originate an average or half of 

their m0l1gage loans in qualifying counties that arc neither an MSA nor an adjacent 

Micropolitan Statistical Area (52% and 50% respectively, Figure 16). 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

8anks with less than $500 million in assets originate an average ofmure than 50~·j) urtheir 

mortgage loans outside of MSAs (Figure 7). 

Figure 

Under $100 million 

$101-$250 million 

$251-$500 million 

$501 million or more 

Urban 

Suburban 

Rural 

However, 47% of banks with less than $100 million in assets and 48% of those with $l01-250 

million assets originate fewer than 40% of their loans in 

$251-500 million in assets, 60% originate less than 40% 

counties. For banks with 

loans in qualifying counties 

May 2013 
78 


81757.031

than $250 million in assets will qualify under the 

threshold is shifted significantly, 

Iiii Under $100 million I!!I $101,$250 million I!i $251,$500 million $501 million or more 

0,20% 

20,40% 

40,50% 

50,60% 

60,100% 

60% 70% 80% 

Few community banks with more than $SOO million in assets will meet the 50% standard, with 

only 5% making more than 50% of mortgage loans in qualifying counties, An additional 14% 

banks with more than $500 million in assets make between 40,50% oflheir mOltgage loans in 

qualifying counties, 

Micropolitan Statistical Areas adjacent to MSAs in the definition of rum I 

to increase the number of banks that qualify jc)r the however. the 

While tbe average percentage of mOltgages originated MSAs below 

all assets size peer groups under $500 million in assets, when respondents are grouped into 

ranges, few banks fall ncar the threshold (Figure 19), 

May 9, 2013 
79 


81757.032

Figure 

for:\teu 

!l! Under $100 million III $101-$250 million l1li $251-$500 million $501 million or more 

0-20% 

20-40% 

40-50% 

50-60% 

60-80% 

80-100% 

50% 60% 

Balloon 

Some hanks consider providing ARMs as an alternative to balloon loans (36%) or 

increasing ARM lending (29%). However J 9% of respondents indicate would greatly limit 

mortgage lending or exit the business altogether if restrictions on balloon lending become too 

burdensome, with the impact greatest among banks with less than $100 million in assets (34%) 

and those serving rural arcas (21 %, Figure 20-21)_ 

May 9, 2013 
80 


81757.033

DEPtNDt NT COMMUNITY 

BANKERS 11} AMERiCA""-

III Under $100 million !II $101-$250 million IJlI $251-$500 million iii $501 million or more 

YES, our bank would consider providing ARM 

loans 

NO, Our bank would not offer ARM loans 

YES, our bank would increase ARM loans 

NO, our bank would not increase ARM loans 

NO, we will greatly limit or exit the mortgage 

business 

!II Urban !II Suburban 

YES, our bank would consider providing ARM 

loans 

NO, our bank would not offer ARM loans 

YES, our bank would increase ARM loans 

NO, our bank would not increase ARM loans 

NO, we will greatly limit or exit the mortgage 

business 

hurdc-osom(' ,"ould 

iii Rural 

May 9_ 2013 
81 


81757.034

llf::: li.:; i\.:r·:: 
82 


81757.035

The current HPML regulations are extremely burdeusome on our staff & confusing 

customer. Most customers do not understand \\/hy we have to escrow, why \VC 

disclosures. or \vhy they have to wait so long to close their loan. As we are forced to 

more loau5, it may become necessary for our bank to hire one or two more employees to 

this regulation alone. That's a huge expense for a bank our size! 

May 9, 2013 
83 


81757.036

loan that would be ciassilled as higher-priced mortgage due to the addi1ional 

by these mortgages including escrow requirements. Requests that would 

~h'''-l;rj(""i i\1ortgagc are either modified or we simply refuse to make the loan. 

May 9, 2013 
84 


81757.037

We are a small community bank located in Houston County, Minnesota with the City of LaCrosse, WI 

located across the river (the real MSA). We arc totally NOT a area. We have an ag 

concentration with 80% of om loan portfolio in loans. We do in-house balloon 

for a market due to a ding in their 

None of the loans arc over 30 days delinquent. We 

offering in-house loans if\ve cannot oiler halloon loans. We nre considering discontinuing 

loans not qualifying for the secondary market already, due to required escrow accounts, which we do not 

offer. Rates on this type of loan do not rellcet risk, due to limiting the interest by not olfering escrow 

Our bank has oftices located in the cast ern, rural IA (which is part of 

the Omaha/CB MSA), so. even though we arc in a "rural" farming area, the population of 

our communities is less than 1.400 people, ere explicitly excluded from the "rural" exemption due 

20 mi away. Our bank has 10 2 offkes. 

our only mortgage loan officer in words. we 

staQuerinc regulatory burden placed on community banks during the 

to stop offering consumer owner-occupied loans. Recent 

and mortgage lending nO! only impractical, but impossible 

May 9, 2013 
85 


81757.038

We currently do nOl fall in the exception because 

de11nition of rura1lunderserved. Many of these 

clearly should be considered rural or undcrscrvcd. 

re-examined. 

43% of our loan originated fail within the 

arc located adjacent to a metro however, 

think the rural underserved classificalion should be 

Most loans are HI'ML and balloon. We olTer llO ARM's now and only star1ed escrow to try 10 service the 

mortgage need in our community for those loans not qualifying for the secondary market because of 

issues. acreages. sole proprietorship income verification, time in job. dc. We want to 

mortgage loans to OUf customer base. but is extremely difficult and expensive 10 be 

\Vc have a strong hi~tory and virtually no delinquencies but are being overpowered by 

regulation. 

May 9, 2013 
86 


81757.039
87 


81757.040
88 


81757.041
89 


81757.042

ro 

c 

o 

N 

';:: 

<r: 
90 


81757.043
91 


81757.044

ro 

c 

'-

o 

~ 

ro 

U 
92 


81757.045

o 

-0 

ro 

'-

o 

o 

u 
93 


81757.046
94 


81757.047
95 


81757.048
96 


81757.049
97 


81757.050
98 


81757.051

o 

...c 

ro 

-0 
99 


81757.052

.~ 

o 

c 
100 


81757.053

ro 

c 

.~ 

u 

c 
101 


81757.054
102 


81757.055

Vl 

ro 

Vl 

c 

ro 

~ 
103 


81757.056

• 
104 


81757.057

• 
105 


81757.058

ro 

c 

ro 

.!:!:' 

::l 

o 

-' 
106 


81757.059

C!J 

c 

ro 

~ 
107 


81757.060
108 


81757.061
109 


81757.062

C 

<1l 

.~ 

..c 

u 

~ 
110 


81757.063
111 


81757.064
112 


81757.065
113 


81757.066
114 


81757.067
115 


81757.068

ro 

-a 

ro 

> 

()) 

z 
116 


81757.069
117 


81757.070

>-

(lJ 

Vl 

'-

(lJ 

$ 

(lJ 

Z 
118 


81757.071

x 

(JJ 

2 

::;: 

(JJ 

z 
119 


81757.072
120 


81757.073
121 


81757.074

ro £: ...... 

t~ o ro ZO 
122 


81757.075

o 

..c 

o 
123 


81757.076

ro 

E 

o 

..c 

ro 

32 

o 
124 


81757.077
125 


81757.078
126 


81757.079

Q) 

-0 

o 

s: 

a:: 
127 


81757.080
128 


81757.081

ro ..c.+-> 

..... 0 :l~ 

o ro U'lO 
129 


81757.082

OJ 

OJ 

VI 

V) 

OJ 

C 

C 

~ 
130 


81757.083
131 


81757.084
132 


81757.085

..... 

c 

o 

E 

'-

(J) 

> 
133 


81757.086
134 


81757.087
135 


81757.088
136 


81757.089

c 

VJ 

C 

o 

u 

.~ 

5: 
137 


81757.090

bJJ 

C 

E 

o 

} 
138 


81757.091

3138 10th Slreet North 

VA 2220P149 

I 800.336.4 644 

F: 703.524.1082 

naku@naicll,lJrg 

National Association of federal Credit Unions I www.llafcu.org 

May 20, 2013 

The Honorable Shelley Moore Capito 

Chairman 

Subcommittee on Financial Institutions 

and Consumer Credit 

House Financial Services Committee 

United States House of Representatives 

Washington, D.C. 20515 

The Honorable Gregory Meeks 

Ranking Member 

Subcommittee on Financial Institutions 

and Consumer Credit 

House Financial Services Committee 

United States HOllse of Representatives 

Washington, D.C. 20515 

Re: Credit Union COllce!'llS with the CIWB's Ability-to-Repay Rule 

Dear Chairman Capito and Ranking Member Meeks: 

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade 

association that exclusively represents the interests of our nation's federal credit unions, I write 

today in coqjUl1ctiOIl with tomorrow's hearing, Examining the Impact of 

the Ability- to-Repay Rule." NAFCU member <miulls and 95 million member-owners 

appreciate the subcommittee's timely focus on this complex final rule scheduled to take effect in 

January of20l4. 

As members of the subcommittee are aware, a host of mOltgage related rules have been 

promulgated and taken individually or ill their cumulative effect, will undoubtedly alter the 

mortgage market in unintended ways. The rule is of concern moving 

forward as the stringent requirements contained in rule require credit unions to 

make major investments and incur According!y, as indicated NAFCU 

member credit unions in our recent Credit Union Jvfonilor Survey, 

respondents said they will cease originations of mortgages (QM). 44% 

indicated they will reduce originations that fall outside QM guidelines. 

NAFCU has taken advantage of every opportunity available to discuss with the Consumer 

Financial Protection Bureau (CFPB) aspects of the ability-lo-repay mle that are IikeJy to be 

nf1Jblenlatiie for credit unions and their members. While credit unions understand the intention of 

rule and importance of hindering unscrupulous mortgage lenders from entering the 

marketplaee, we callnot support the ability-lo-repay rule in its current form. A major issue, for 

example, is the criteria that dictates a consumer have a total debt-lo-income ratio 

that is less than or to 43 in order for that loan to be considered a NAFCU 

will prevent otherwise healthy borrowers obtaining 

NAFCU I Your Direct Connection to Education, Advocacy & Advancement 
139 


81757.092

obtaining mortgage loans and will have serious impact in rural and tmderserved 

areas where conslimers have a limited of financial service In as the 

subcommittee is aware, the rule excludes from the definition of QJ,,1 loans with 

terms exceeding 30 definition this credit unions and 

longer-term product under a set of certain circumstances. 

Before the rule goes into effect, we also urge the subcommittee to review and 

address the of "points and fees" contained in the rule. As cllrrently defined, "points 

and fees" will include, among other charges, fees to affiliated title salaries paid 

to loan amounts of insurance and taxes escrow, loan 

and payments by lenders to correspondent banks, credit unions and mortgage 

wholesale transactions. As a result of this troublesome definition many aHiliated loans, 

particularly those made to low- and moderate-income borrowers, would not qualify as QMs and 

would be unlikely (0 be made or would only be available at higher rates due to heightened 

liability risk. NAFCU supports Rep. Huizenga's bipartisan lcgislation- the Consumer Mort,gage 

Choice Ael (ll.R. 1077) -- that would address this important aspect of the 

repay rule. 

Thank you l'Or holding this important hearing and for us with the ojlportunity to 

comment Oll the rule on behalf of our member credit unions. If you have any 

or would about any of these issues, do not hesitate 10 

contact me or NAFCU's Vice President of Legislative Affairs Brad by telephone at (703) 

842-2204 or by e··mail at Y-'1.~"!..~ill!!!.Y-'l,,!!l.g,. 

Vice President of Regulatory Affairs General Counsel 

cc: Members of the Subcommittee on Financial Institutions and Consumer Credit 
140 


81757.093

[B NATIONAL 

ASSOCIATION of 

REALTORS· REALTOR' 

500 New Jersey An:rmc, N.W. 

Washington, DC 20001-2020 

STATEMENT OF THE 

NATIONAL OF 

SUBMITTED FOR THE RECORD TO 

THE UNITED STATES HOUSE OF 

GOYlmNl\IENT AFFAIRS 

ON FINANCIAL 

ON 

INSTITUTIONS AND CONSUMER CREDIT 

HEARING REGARDING 

MORTGAGES: EXAMINING THE IMPACT 

OF TO REPAY RULE 

MAY 2013 

REALTOR~ IS a registered collective membership mark whIch may be used only by teal estate 

profeSSIOnals who are members of the NATIONAL ASSOCIATION OF REAL TORS~ 

and subscribe to its strict Code of Eth!cs 
141 


81757.094

INTRODUCTION 

On behalf of the j million members of the National !\ssociatioll of FE \];J'( lRS" 

il1Yoh"cd in all types of rcal ('stare tGH1s8ctions, thank you 1;·)1' holding this ,"cry 

dw Qualified \[ortgage to Repa\' (,\TF) rule, 

The Dodd Frank \'\;all Street Reform !\ct established the Ql\l as the 

lenders to satisfy its "ability to repay" requirements, NAR has been 

Consumer Financial Protection Bureau's eff(lrts to cfal1 a QM rule that not unduly 

on 

restrictive and pro-vide,,, safe harbor fot tnaking (~j\f loan~. NAR has had policy supporting 

the idea that IcnJcrs !l1CasutC consurncr's ability to repay loan 200::;, 

llowc,,('[, Dodd,Frank abo Qualified (QM) mal' not have 

in excess of,) percent of the amount b\ Dodd and 

Consurncr Financial Protectio1l (C.FPB) final regulation to ilnplclt1Cnt the 

requlfCHw11ts, and fees" (arnong other charges): (1) paid to affiliated not 

unaffiliated) companics~ (ii) salaries paid to loan (iii) arnounts of insurance and taxes 

held in escrow, loan ievel price :adjustnlcnts (\') by lenders to 

and mortgage brokers in 

,\s remIt of this problematic definition, loans made 

lo\v" and 1110{Jeratc-incornc borro\,vcrs, \vonld not as 

be unlikely to be made or would only be available at rates due to heightened 

COnSUt11CrS '\vould lose the of the co!wcnicncc and 

efficiencies offered by one,s!op 

It has been argued tbat CFPB has the authority to 

CFPB constrained hy 

with regard to affiliates, !\s the January 2013 

bllf rI'lIl1n1licreri aJ § 1026, 32(b)(1 )(iii}, nL,j 

malitia!"" a!ld J'eiaimd II)' a/fiililtl'J (red dol' be 

BlIrt'flu aotiul!l'j"til'eJ thai 

2 
142 


81757.095

this rC,json, N.AR bclic\TS lh~lt only Cot}g;rcss can 

affiliates, small and mid· size lenders, community banks, and 

and points. 

the law\ discrin1inatlol1 

uninns in the ullen]"liofl of fees 

H.R. 1077 - THE CONSUMER MORTGAGE CHOICE ACT 

Rel'reSl'lltalivcs lluizenga (RMI), Bachus (K·/\L), Royce (RC\), 

Scott (D-G;\). Clav (I). MO), and Peters (D-"!!), addresses this 

against smaller lenders, brokers, and lenders with affiliates in the calcubtion of 

and points for the 3% on fees and points in the /\bili11' to 

!\fortgagc provisions of bill helps nl~lintain ConSUi11Cr choicc 

the type of t110rlgagc originator best able to 01CCt their rnortgagc credit needs" 

Key Components of H.R 1077 

The key components of I LR 1077 include: 

The bill removes affiliate title charges from the calculation of fees and The title indnstr), 

is hCilyily and It Joes nol olake sense to against 

the basis To so would only reduce competition and cboice in title services and 

insllrance providers. 

Furthermore, o\vncrs of affiliated businesses can earn no 1not(: than a proportionak return on 

their im-cstment under RESPA RESP:\ also prohibits referral fccs or any compensation all 

the referral of settlement' setyices. As a result, there is no steering 111c(,1.1ti\'(' possible 

indiyidual settienlt'tlt s(,l.TICe pro\Tidcrs such as tDorfgage brokers, 10a11 officers or fcal estate 

prokssionals. 

$ 'fhe bill ren10n~::l a n1-anner of counting fces and that \vould discrirninatc against 

and l\lortgage Brokerage by only counting and points lTIonics 

consurner to the originator~ be they broker or a 1110ngagc bank loan officer. 

The bill remo"cs from the calculation of fces and points Fannie Mae and Freddie l\lac Loan 

LCI-ci Price Adjw:tmcnts (LLPl\S). This mone), not rc,"enue to the lender. Thesc adjustments 

are essentially risk based pricing established by the eSE, and can somcrimes exceed :1 points in 

1 Federal Register /\'01. 

33 of rhe pdf ycrsion-lD:l.[LL~2C:'0~!2l2o)W:;:Lj!J.":H_i'b;Jl.'&dlJLii!llc,ill",¥UL!illllm::2J2,l2ill 

3 
143 


81757.096

and of thcrnsckcs. Including these LLP,\s would hrnit aCCeSS to affordable 1110rtgage credit to 

tllany b01TO\\TrS or forcc borrowers into 1;1 L\ or Non-())\llo:1ns unnecessarily. 

The bill removes [i'om t.he calcubtion of fecs and escrows held for and insurance. 

The tax portion is J clarification of poor language l)odd-Fr:lnlc in the case of insurance. 

these cscro\"\'s ;lfC held lO third hOlneO\\,-ncr's insurance, They not retained and 

cannot be retained under RFSP~\ require;:; excess .escrows 10 be refunded. 

This bill essential to .lnaintain cOll)pctilioll and (On;;111n('r choicc in 1110rtgage originarion, \\'ithout 

tbis legislalion, one-'juartcr to as much '" oue-half of loans being would likely 

not bc for tbe QM safc barbor would likely not be or concentrated 

fClalllcnders whose business 1110dds are fron1 the fees :tnt! point 

1110St since their retail cll1ployces arc not on (\ 

are, the :l1nonnt is not as significant. Thcrefore, Nl\R that 

be [ore Ihe "ability to provisions take effect inJanumy 20]·t. 

OTHER AREAS OF CONCERN 

43 Percenl Debt to Income Limit (D1'I) - ot concern with regard to the 

underwriting standards for QM will be DTI in exccss of 43% and other loans 

particularly when the exception for Joans For lower loan amounts, Fl L\ and otlwr 

go\'{:rnment backed loans will be the only loans will salisfv the QM safe harbor when UTl 

exceeds b'('n if the C;SE exccplion is maintained, jumbo loans and non-C;SE or government 

backed loans will be subject to the ·n(,'o DTl cap making them more costlv or less likely to he made. 

QM and Qualified Residential Morlgage N;\R believes [hat concerns 

abewe addressed, the QRt\! (which docs nOl risk retention by should be 

constructed to match the Ql\!. Dodd-Frank that the QRM can be no broader than the 

QM, but it docs not say it cannot be sllbstantial.ly the same. NAR has conducted 

and has determined that the further imposition down payment rcquirc:rnents and 

income and credit standards "\viH greaily decrease access to credit '\vtthout creating substantial 

i1TlproVC111cnts in loan quality. I'-or this reason, Congr('ss should support, and regulator:=; shOUld 

establish, a QR\! that substantially mirrors the QI\L 

CONCLUSION 

National l\ssociation of RE.-\J ;rORS" broad QM nile that docs not discriminate 

affiliates, smaller lenders, community or credit union. Furthermore, NJ\R supports a 

consumers maximum choice in service providers. Finally, NAR supports a QM 

that does not needlessly cause credit be n101'e cosdy or uoobtainable. 

\\'e arc already in a tight credit em·ironment. 

and processes that led to the 

rule to ensure that consumers "\vbo hayc 

affordable credit they 

The QI\I and other rules effecti\'cly ban the trpcs of 

crisis. Congress the CFPB should improyc the 

ability to repay their loans will ha\"c the access to 

4 
144 


81757.097

Mr. Aaron Sporck 

Honorable Shelley Moore Capito 

Subcorrunittee on Financial Institutions 

and Consumer Credit 

2129 Rayburn House Office Bldg. 

Washington, D.C. 20515 

Dear Aaron and Chairman 

May 24, 2013 

Thank you very much for the to submit additional comments the 

Ability to and Qualified Mortgage Standards. In 

rpoHwlinothese by other we have 

Identltled a couple ~rl{litirm."1 which are worthy of discussion. We also generally agree 

with the comments and concerns about the new rules and share in the concerns 

nre,virl11Qllv communicated to the We would offer these additional commellts for 

Subcommittee's consideration. We have utilized summaries of the regulations by 

the American Bankers ("ABA") in this material to ensure a consistent of 

the requirements. 

On January 10,2012, the Consumer Financial Protection Bureau ("CFPB") oftlcially 

issued the fInal and Mortgage Standards under tlle Truth in Lending 

Act. This final rule 1411,1412, and 1414 of the Dodd-Frank Act and 

creatoo new TILA seetion 129C, which establishes, among 

requirements, alternative metllods to ensure with such "'lIUH.\;11IC,,"', 

limits penalties. The rule is 10,2014. 

final rule the most important mortgage related reform 

Act, and is expected to real estate finance activities going forward. The 

objective ofthe law is to ensure and good faith determinations in loan undenVTiting. 

Pursuant to tm.s the rule sets forth standards to govern the 

, ABA Staff Analysis: Ability-Io-Repay and Qualified Mortgage Standards Under TILA, January 20 !3. 

{POl:N3S2I} 

WesBanoo, Inc. 

I Bank Pl.za 

WV 26003·3562 
145 


81757.098

Mr, Aaron Sporck 

May 24, 2013 

PageZ 

underwriting of residential mortgage loans, requiring creditors to follow precise guidelines 

regarding the consideration and evaluation of a borrower's repayment capacity. 

Under the rules issued by the CFPB, a lender extending a residential ft",rt<yo"e> 

make a reasonable and good faith determination of a borrower's ability to or 

otherwise face very significant monetary This rule first sets the regulatory 

clements dctlning this to repay Second, the rule implements legislative 

provisions that that crcditors originating qualified mortgagcs CQM") would have 

protection from under the Ability to Rcpay requirements. The rule defines the 

qualification criteria for a QM, and the standards that lenders must foHow to access its 

The rule also describes an exemption for non-standard mortgages, and 

other additional and temporary protections for certain mortgages, 

We are aware that the CFPB solicitcd comments on revisions to the final rules 

that would extend QM defined of community banks and 

credit unions, We are also aware subsequent comment by numerous 

organizations, including the comments provided by the ABA in its letter of February 25, 2013 

and we join in their comments that the defmition of small lender is too narrow, as therein 

defined, Both the $2 biUion limit and the 500 loan limits are simply too low. As the ABA 

suggested, to have a meaningful impact on credit availability for borrowers served by small 

portfolio lenders, the limit should be expanded to cover a more accurdte representation of a small 

lender, Lenders with up to $10 billion in assets and with loan limits of at least 2,000 

should be used as the applicable bench marks. As noted the ABA, setting the assct size 

lower will have the impact of nnnecessarily credit for many community 

banks, WesBanco, Perhaps even more harmful will be setting the loan limit cut off too 

low. Ifa lender based with the cutoffofthcir ability to gain the QM lfthey exceed the 500 

loan limit, will likely limit the number of loans tbey are willing to make, low 

dollar loaus. could have the unintended of making it more difficult for 

and underserved borrowers who arc seeking small or less) which are not 

generally by the secondary market. A more reasonable loan limit number for banks in 

the $10 asset range is 2,000 loans per year. This is still a modest number, but allows 

enougb breathing room for small lenders to scrve aU of their commuIlity without the risk of 

losing thc protcction ofthe QM safe harbor. 

Supplemental Comments 

There are several sections of these proposed rules which pose particular conccms for 

West banks. Though West Virginia has a non-judicial foreclosure process, Courts in 

West ente.rtained a broader array of tort claims in defense to foreclosure 

in the form of tort cases either in a direct response to the initiation of a trustee sale 

(P{)1393112.1) 
146 


81757.099

Mr. Aaron Sporck 

May 24, 2013 

Page 3 

tmder a deed oftmsl Of as an adversary in bankruptcy as a counter attack to the 

enforcement of a secured lien by a lien creditor. relative explosion of these cases in the last 

two years in stale and federal courts in West a significant increase in 

to secured creditors in their legal remedies, delaying the transfer 

LV'''''Lvo'M"pr()eel~diJllgS thereby reducing the of homos through and 

slg;mllc<mtlly illen::asmg the expenses for financial institutions pursuing 

routine default claims. rules have several troubling provisions which will 

exacerbate this litigation and create further uncertainty and delay in the process of 

collection of pas! duc loans and cnforcement of credit instnmnents. 

The new to Repay nn",,,,,,,,,, 

secured a dwelling, as currently 

final rule not contain descriptions or elaborations of the 

applicable to the Ability to Repay These provisions are, 

assessment of the impact of these 11l1es. The legislation sets out the following 

i. Section 1416 of the Dodd-Frank Act amended TTLA section130(a) to 

that consumers who bring timely action against creditors for 

violahons of the Ability to may he able to recover 

statutory damages sum of all finance charges and fees 

by the consumer. 

ii. The statute oflimitations is three years from the dale of the occurrence ofthe 

violation. 

iii. Notwithstanding the statute oflimitations, TILA section that 

when a creditor, or other holder initiates a foreclosure action, a 

consumer may assert a violation of the to Repay requirements as a 

matter of defense by recoupment or setoff. is no time limit on the use 

of this defense, but the amount or setoff is limited with respect 

to the statutory damages to no more than three years of finance 

charges and fees. 

As noted above, there is no time limit on the use of the to Repay as a defense by 

recoupment or setoff even though the amOlmt of the recoupment or setoff is limited with respect 

to the special statutory to no more than three years of finance and fees. This 

provision to raise consumer damage claims in routine mortgage 

fF013lJ3&21} 
147 


81757.100

Mr. Aaron Sporck 

May 24, 2013 

Page 4 

foreclosure cases and will increase litigation in consumer loan enforcement actions. 

It is within the framework additional pcnally and provisions, with essentially no 

statute of limitations with respect to assertion as a mattcr of defense by recoupment or setoff, that 

we frame our comments which follow. 

The objective of this rule is to assure that consumers arc offered and receive residential 

m(,I1,mo'" loans on terms that reflect their abi!i(y (0 repay the loans and that are not 

Oec;ePllve or abusive. The basic of the Ability to Repay rule is that creditors 

may not a loan that is a covered transaction unless the creditor makes a reasonable and 

good faith determination at or before consmrunation that the consumer ",ill have reasonable 

to repay the loan according to its terms. The rule goes on to provide eight umierwriting 

factors that need to be met for non-QM loans. 

Our concern centers on the legal standard of "reasonable and in good faith". Thc DoddFrank Act and the final rule prohibit a creditor from making a covered transaction unless the 

creditor makes a reasonable and good faith determination, based on verified and documented 

intomlation, that the consumer has a reasonable ability to the loan according to its terms. 

V>1hether a to repay determination is and in good faith will depend 

on the adopted the creditor, and on the facts and circumstances of an 

individual extension of credit and how creditor's underwriting standards were to 

those facts and circumstances. 

stems from the filet that closing behavior is included 

as a criteria creditor's judgment bc measured. lists 

elements that may be evidence that a creditor's ability to repay determination was reasonable and 

in good faith. Included in those elements are whether the consumer demonstrated actual ability 

to the loan by making timcly payments, without modification or accommodation, for a 

of time after consummation Of, for an rate, interest only, or negative 

amortization mortgage, for a period oftime after recast. It is ludicrous to base an 

analysis upon a creditor's reasonable and good faith determination under a facts and 

circumstances standard by considering the payment history of the borrower after the time the 

determination is to be made and which is based in part on the volition of the bolTowcr to make 

the legally required of the borrower. An astute borrower, or a well coached borrower, 

can a loan, voluntarily default on the loan and then assert that the creditor breached the 

Ability to Repay standard and th.erefore is entitled to damages and attorney iees. 

The second problem with this rule is that any modification or accommodation of credit 

extended to a borrower who encounters difficulties after inception of the loan would create an 

\pOlJ.9JS2.l} 
148 


81757.101

Me Aaron Sporck 

May 24, 2013 

Page 5 

element of violation of the rule banks not to make modifications or 

accommodations in credit facilities date of the loan to avoid a claim that the 

creditor thereby breached its duties under the Ability to Repay rule. 

One additional problem arising from comment 43(c)(J)-2 deals with the of 

"reasonably anticipated" issues which could affect the consumer's ability to repay. The 

comment notes that creditors are required to make a at the time of 

consummation of the loan that a consumer is likely to have the to repay a loan in the 

future. A change in the consumer's circumstarlccS after consummation (for 

~~""_,,,~_,, reduction in income duc to a job loss or a significant ansmg a major 

that cannot be "reasonably anticipated" from the consumer's application or the 

to determine repayment ability" is not relcvant in determining a creditor's 

cOlnpllaJlce with the rule. The \'I71th this comment is that it is by the 

change in circumstances could not have been "reasonably by the creditor at 

the time of the consumer's application. 

The proviso permits a consumer to assert at a later time after closing the loan that the 

consllmer communicated to a creditor some potential change in circumstances slich as an 

lffilpenldulg layoff, the expiration of a labor agreement, futurc surgery, a medical condition for 

thc consumcr was treatment, an anticipated divorce or the illness of a family 

member, all of which could have an impact on the ability of the consumer (0 repay a loan in the 

future. As we ¥liHnot..: in thc following section, this issue is significant since the rule 

ami statements by the borrower to be used (0 demonstrate afthe creditor. 

The rule should require some type of disclosure by the COnSlUTICf of any anticipated futurc 

circumstances which might the borrower's ability to repay of which the borrower is 

aVW:lre at the time of application, Absent such a clarification, a creditor is completely at the 

mercy afthe imagination of the borrower, or the borrower's cowlSel, of "reasonably anlticipatedl" 

future circumstances of which the creditor should have been aware, Litigation cases are 

with filings that the party "knew or should have known" standard which puts creditors 

clearly in an position. 

This issue is exacerbated 

rules. Some background on the 

the two sections together. 

(¥QlJ93112l} 

the legal standards set forth under the 

mortgage rules follows with "","",eVil"" 

mortgage 
149 


81757.102

l\.1r. Am'on Sporck 

May 24, 2013 

Page 6 

Overview: 

The Dodd-Frank Act sets forth TILA section 129C(b), providing that loans that meet 

certain requirements shall be deemed "qualified mortgages, and entitled to a presumption of 

compliance with the to repay requirements. The of the QM provision is to defme 

a category ofloans with stmldards that eliminate terms and ensure safe 10005 for 

consumers. To this end, the final rule defines QM through three general categories. First, the 

QM focuses on eertain featnres and (such as negative lUllortization 

and interest-only or a loan without the consumer's 

Second, the QM establishes limits on certain loan costs. QM establishes 

underwriting criteria (verification and documentation of income and fully anlOrtizing schedules 

based on maximum rates ofthe loan) for covered loans. 

The final rule bifurcates the QM into two a safe harbor (where 

eOl:npllwl1ce is deemed conclusive) for loans that the of a QM mId are not 

·-hl!ohpr.nrJppn mortgage loans. Second, the final rule a rebuttable presumption 

I.OV!JlijJ!,aUl":; can be challenged in court) for loans that meet the QM conditions but 

priced mortgage loans," as described below. The tenn "higher priced m(1.rtu"op 

is generally defined by the Board's existing TILA regUlations, as sct 2 

Rebuttable Presumption: 

The final rule that consumers may show a violation with to a subprime 

qualified mortgage (HPML 10lUls) showing that, at the time the loan was originated, the 

consumer's income ood debt left insufficient residual income or asscts to meet living 

expenses. The mlalysis would consider the consumer's monthly on the loan, 1000 

related obligations, and any simultaneous loans of which the was aware, as well as any 

recurring, material living expenses of which the creditor was aware. 

In the Rule's premnble, the Bureau explains that under the rebuttable pn'SUmf'llO!n 

standard, a consumer ean rebut the by showing that, in fact, at the the 

loan was made the consumer did not income or assets (other than the value of the 

dwelling that secured the transaction), his or her mortgage ood other debts, to be 

able to meet his or her other the creditor was aware. In short, the 

mortgage loans are defined under Tll"A as loans with an 

Average Prime Offer Rate (APOR) by 1.5 points for 

for subordinate lien loans for a comparable trauBact:ion. 

IP013IlJ82 J} 

rate (APR) equal to or 

or 3.5 percelltage 
150 


81757.103

May 24, 

Page 7 

Burcau is limiting the ability to rebut the presumption to the specif1c issue of insufficient residual 

income or assets other than the dwelling. 

Guidance accompanying the rule notes that the longer the period oftime that the 

consumer has demonstrated actual ability to repay the loan by timely payments, without 

modification or accommodation, after consummation or, for an adjustable rate after 

recast, the less likely the consumer will be able to rebut the preslunption based on ... "~"~,,,,u, 

residual income. 

The tInal rule does not preclude the usc of oral evidence in rebuttable presumption cases, 

evidence contained in the loan file. The Bureau believes that courts will determine 

to be to such evidence on a case-by-case basis. 

The supplementary information that accompanies the Rule makcs clear that oral 

communications between a borrower and creditor may also factor into the underwriting analysis 

for purposes of determining QM status: 

A consumer 

of a qualified mortgage on information provided orally to the creditor 

or loan originator to establish that debt-lo-income ratio was miscalculated. 

a consumer may seek to show that the creditor should hayc known, 

disclosed to the creditor or loan originator, that the 

income to be able to afford the mortgage. 

As can sce, the rule again permits post loan behavior through voluntary 

payments the borrower to be considered the of the creditor to approve the 

loan und(;,'f the Ability to Rcpay rule. More importantly, it permits the use of oral evidence in 

rehuttahle presumption and QM cases to impeach evidence contained in the loan file. This is a 

serious flaw in the since the determination which would be made by a court 

subsequent to the loan specitIcally the court to consider matters of which the 

creditor was aware and the borrower to assert oral evidence to refute or assert matters 

which were not or considered by the creditor at the time of making the decision, 

This express provision oral evidence to modify ""rittcn documents and 

agreements is contrary to law and runs contrary to It makes 

indefensible in that an astutc borrower, or a borrower coached, 

he disclosed any number issues which could affect the 

and therefore that the should havc been aware and reasonably 

anllicipal.ectlhose issues the borrower's to repay. The combination of these 

niles together with the express commentary that it does not preclude the use of oral 

(POLWJ81.1) 
151 


81757.104

Mr. Aaron Sporek 

May 24, 2013 

Page 8 

legal environment in which federally insured financiaL 

institutions, or any faith creditors, would be deterred from pursuing enforcement of credit 

instruments. It also exposes them to damages and attorney's fees which are not otherwise 

available to borrowers. 

Yon also asked that we address the Bank's administration of the Laughlin Plan and our 

concerns about the impact upon that program of the ability to repay and qualified mortgage rules. 

The Laughlin Plan is actually a charitable trust created under the Will of George A. 

Laughlin and is administered by the Bank as Trustee of the Tmst. The general purpose ofthe 

Trust, as set forth in the Will, was to encourage the heads of large families to own their own 

homes by providing financial aid to the heads ofthose families in Ohio County, West 

who arc sober, industrious and have good general character. The fInancial aid is to be 

made available to those who, without the aid of such assistance, would find it difficult, if not 

impossible to acquire homes of their own. 

The Laughlin Plan provides interest free loans to heads of households and single parent 

families with at least 2 or more children during the term of the loan. The Tmst life and 

accident insurance on the borrower and fin:: and flood insurance, where at no cost to 

the borrower. The Bank has used the Laughlin Plan to assist in the construction of new homes 

under certain Habitat for programs, as well a~ existing homes for 

Plan. Bank currently has 100 loans in which such 

whieh it is interest free loans that made homes available to 

o,",'lled a homc but do not currently own a 

homc. Laughlin loans are not made to applieants who o''ln a family residence 

or have the ability to purehase a home through a conventional mortgage. The Trust pays all of 

the closing costs associated with the sale oCthe property. 

We have concerns about the administration ofthe program in ofthc proposed 

exemptions as the exemptions which are do not seem to be enough to cover the 

program. The proposed exemptions creditors is found in Section 

As deseribed in the eommentary, proposal exempts ereditors 

de~.igrlate:d as non-profit organizations under Section of the Internal Revenue 

that the extension of credit is to a eonsumer income that does not exceed the 

UW"UVlllclt limit for moderatc income families as is established pursuant to Section 8 onhe 

United States Housing Act of 1937, that during the calendar year of the 

consumer's application, the ,;reditor extended credit no more than 100 times, only to 

consumers with income that did not exceed the above qualifying limit, and that the creditor 

(POB938211 
152 


81757.105

Mr. Aaron Sporck 

May 24, 2013 

Pagc9 

determines, in accordance ",;jth the written that the consumer has the reasonable 

ability to repay the extension of credit. to the exemption limit its 

usefulness and, in our judgment, do not provide a clear exemption would pennit the Bank 

to safely continue the program without necessarily with the ability to repay rule 

which will preclude its to certain borrowers. Thus, we do not believe that the current 

proposed exemption will be to provide the Banle, in its capacity as Trustee oftile 

testamentary tmst, with the ability to continue to administer tl1e program as currently constituted. 

This is unfortunate as this has helped low and moderate income families in Ohio COUllty, West 

Virginia, obtain access to home ownership. 

Conclusion 

The impact of these rules will significantly narrow the willingness of financial 

institutions to extend credit outside of the mortgage standards and severely restrict 

consumers' access to credit. Jfbanks can only ofter QM loans, credit will be rcd.uced for 

low to moderate incomc !ending which will impact lending results and CRA perforrmmce 

under the lenders tcst. We are alamled at the erosion of established standards in the search 

for enhanced consumer protection and would ask Congre.<,g to addrcss rules in some 

meaningful manner. 

The number of exceptions being proposed by the CFPB serves as its own indictment of 

the regulations. Before the regulations can even go into effect, numerous have been 

created and, as noted in the CFPB's o\vn commentary, these have created to 

preclude a severe curtailment of credit. The and nature exceptions, and the 

eOlnplex.Ity and structurc of the rules are the cxercise of discretion community 

in tailoring to meet the needs of their cllstomers. This will 

reducing opportunities for consumers. 

another Internal Revenue Code replete with cOlnplex:ity and exceptions 

slg.mtlcantly increase the costs and greatly reduce consumer choices and 

opportunities. 

We would be 

of assistance to you. 

JCG/eab 

(P01J93S2.1j 

to meet and discuss thesc comments in further detail ifthat would be 

Yours very truly, 

C. GARDILL 
153 


81757.106

c 

'Vi 

c 

o 

u 

'" 

~ 
154 


81757.107

Written 

The Real Estate Services Providers Conncil, Inc. 

Before the 

U.S. Honse 

Subcommittee on Financial Institlltions and Consumer Credit 

Committee on Fillancial Services 

"ml'Tlllna the Rille" 

21,2013 

1 
155 


81757.108

Dear Chairwoman Capito, Ranking Member Meeks, and Members of the Subcommittee: 

The Real Estate Services Providers CounciL Inc. appreciates the opportunity to 

provide testimony on issues raised in the Subcommittee's May 2 2013 hearing entitled 

"'Qualified Mortgages: Examining the Impact of the Ability to Repay Rule". 

RESPROFJ is a national nOll-prollt trade association of providers from all segments of the 

residential home buying and financing industry. including real estate brokerage firms. 

homebuilders, mortgage lenders. IInancial institutions, and title agents/underwriters. The 

com mOil bond of RESPRO°t' members is that they olrer a diversilied mC'IlU of services 

(commonly referred to as "one-stop shopping") for home buyers and home owners through 

wholly-owned suhsidiaries or through joint ventures with other providers, both of which arc 

designated under the Real Estate Settlement Procedures Act (RESPA) as "afflliatcd business 

arrangenwnts. ··1 

During the May 2 hearing, certain Subcommittee Members asked witnesses from the Consumer 

Financial Protection Agency's (CFPB) why afmiatcd businesses are discriminated the "points 

and fees" definition used to determine which loans qualify as Qualified Mortgages (QMs). This 

unnecessary discrimination against at1iliated businesses and other inequities the Final Rule's 

"points and fees" cap would be rectified by the Consumer Mortgage Choice Act 1077), 

which was introduced in the U.S. House of Rcpresentalives on March 201 

I Recognizing the potential benefit,.; affiliated businesscs can olfer consumers, Congress amended 

RESPA in 1983 to exempt [rom the 1974 rclbTil! fce prohibition (12 U.S.c. S 2607(a)), the return 

of an ownership intcrest (e.g., a dividend hased on stock ownership) in an affiliated business long as 

the following conditions arc met: 

The person who relers business to an affiliated business discloses at or before the time of the referral 

the existence of the arrangement to the person being referred; 

The referred person is not required to use any particular provider of settlement services: and 

The only thing of value that rcceived ii'om the aITangemcnt, other than certain other payments 

permitted under RESPA Section 8(e}, is a return on the ownership interest or franchise relationship. 

See 12l!.S.C. § 2607(c)(4). tn 1996. the United States Department of Housing and Urban Development 

(HUD) issued a RESPA Policy Statement setting iorth certain guidelines on affiliated businesses. HUD 

stated that the anilialed business exemption was intended to apply \0 "sham" that are 

not "bona lide" providers of settlement services, and to provide guidance to 

businesses to what factors HUD considers when making determination. See HUD Statemenl of 

Policy 1996-2, Regarding Sham Controlled Business Arrangements. 61 Fed. Reg. 29.258 (.lune 7. J 996) 

("BUD Sham Joint Ventnre Guidelines"). 

, H.R. 1077 introduced as bipartisan legislation by the following sponsors: Representatives Huizenga 

(R-MI), Bachus (R·AL), Royce (R·CA). Stivers (R-OH). Meeks (D-NY), Scott (D-GA), Clay (D-GA). 

and Peters (R-Ml). II.R. lOT7 excludes from tbe dellnition of "points and fees "alllitJe ebarges, 

regardless of whether they arc charged by an aft1lialed company. provided they are bona fide and 

reasonable." It also addresses other inequities in the and fees" dellnition by (I) preventing doublecounting ofloan officer compensation; (2) c1ari(ying funds held in escrow for taxes and insurance arc 

excluded; (3) excluding loan level price adjustments (LLPAs) charged by Fannie Mae and Freddie Mac: 

2 
156 


81757.109

RESPRO" supports the Consumer Mortgage Choice Act because it will alleviate the negativc 

that tbe ""points and fees" definition in the Final Rule will havlC on mortgage affordability 

availability, particularly in low-income and moderate income marketplaces" without 

compromising the goals of the Dodd-Frank Act 

The Consumer Bellefits and Cost-Competitiveness of Affiliated Businesses 

The affiliated business model is not new in the home buying and tlnancing industry, 

Over the last several decades. real estate brokerage firms, homebuilders, and mortgage 

lenders increasingly have recognized the value of using affiliated companies to ensure 

that each transaction is completed quickly and as possible. According to 

economic study performed by CapAnalysis Group LLC, the national market share of 

affiliated title companies alone is 26.3'%. 

Consumer surveys have shown that consumers who use one-stop 

programs that affiliated businesses their bcncllts, In a 2010 

Interactive survey, home buyers said that affiliates saves them money (78%). 

makes the home buying process more and efficient (75%), prevent things 

from falling through the crack (73%), and is more convenient (73%) than using separate 

services,4 These results are consistent with a 2002 survey 01'2,052 recent and potential 

home buyers, which found that 64% of home buyers who had reccntly used 

shopping programs had a better overall experience with their home purchase "a'''''',''VH 

Economic studies over the last two decades have shown that affiliated title services are 

competitive in cost to unaftlliated title services, '['he CapAnalysis study 

referred to above title and title-related charges in more than 2200 HUD- j 

Settlement Statements in 2003 and 2005, It concluded that title and other titlerelated settlement charges were statistically the same whether by affiliated or 

unaffiliated businesses. 

The CapAnalysis Study reinforced an enrlier national economic study on the costs of 

aftlliated vs, unaffiliated title services, The economic researeh firm of Lexecol1, Inc. 

analyzed title and closing costs of over 1000 horne sales transactions for both affiliated 

and unaffiliated title agencies during a one-week period in September 1994. Like 

and (5) excluding lenders' compensation to correspondent banks. credit unions. and mortgage brokerage 

firms, 

3 Donald L Martin PhD. & Richard E, Ludwick, 11'. PhD" CapAnulysis Group LLC '"Affiliated Business 

Arrangements and Their Effects on Residential Real Estate Settlement Costs: an Economic Analysis" 

(Oct. 10.2006), 

" Harris Interactive, Shopping Consumer Preferences" (2010), performed by Harris Interactive 

and commissioned by the Association of Realtors (NAR). 

, Murray Consulting, "Consumer Perspectives on Realty-Based One-Stop Shopping" (2002), 

3 
157 


81757.110

CapAna!ysis. Lcxccon concluded that title services 

title companies were competitive with those 

The Department of! lousing and Urban 

findings and stated the following: 

transactions involving affiliated 

by unaffIliated title companics 6 

(HUD) reviewed the Lexecon 

association of controlled businesses. commissioned study by an 

m(icn,encJellt contractor. Lcxecol1. Inc .. [The study may be j biased in favor of the 

"u~C'-"""'," firms. There/ore, the [study J results might suggest that affiliated firms Oil 

average have lQ.'YCI than their competitors. Consumers may benefit additionally 

from reduced time and related hassles} (Emphasis added). 

The Negative Impact of the 3% "Points ami Fees" Cap on Mortgage Affonlability 

ami Availability 

Title XIV of the Dodd Frank Act provides that a mortgage loan 'would 1101 be a QM for 

purposes ofthc Act's Ability to Repay standards if the "points and fees"" paid by the 

consumer in the transaction exceed 3% of the loan amount. [n determining what "points 

and fees" arc included in the 3% cap, Congress adopted (with slight variations) the 

and fees" definitioll under the Home Owners Protection Act (HOEPA), 

counts fees retained by a mortgage lender's company towards the 3% 

cap, but not fees paid to an unaffiliated third party. 

Therefore, loans which a consumer uses a 

would much more likely exceed the 

6 Lexecoll. Inc .. Economic Analysis of Restrictions on Diversified Real Estate Services Providers (Jan. 0, 

1995). LexeCOll found that affiliated title services were 2% lower than unat11liated title services but 

concluded that this percentage was "statistically insignificant"". 

7 HUD Economic Analysis accompanying HUD's 1996 Sham Join! Venture Guidelines. BUD tound that 

because there the provider to convince the consumer to use the affiliated services 

Ihat consumers title providers likely had greater to shop 

to those who preferred the om-~-stop convenience an Thus, it 

rnnrlw'j,>d that the price ofunaffilialed title providers in the was likely biased downward below 

the actual average market price for unaffiliated title providers because those providers likely were 

patronized by "price shoppers" in the sample. 

R Dodd Frank, Pub. L. 11-203, §§ 1411,1412. ]24 Stat. 1376,2142-2148 (20W). 

9 See id (relying on the HOEPA definition anu fees." Section 103(aa)(4) ofIhe Truth in 

Lending Act (fiLA) (15 U.S.c § as amended by Dode! Frank. Pub. L. 1 § 1431 (c), 

124 Stat 1376.2159 (2010)). The Dodd-Frank House-Senate Conference Committee did not report oul 

the "Clay amendment"". provision Title XIV of the House-passed version of Dodd-Frank that would 

have corrected the discrimination against affiliated title fees by exclnding them from the 3% HOEPA 

"points and fees"" threshold to the same extent unaffiliated title fees. The House had passed the Clay 

amendment on two previous occasions as part oflegislatiol1 never acted upon by the Senate. 

4 
158 


81757.111

If not corrected the January 10,2014 ef1Cctive date oftlle final <)1\,1 rule, the inclusion 

of affiliated title - but not unaffiliated title - in the 3% <)1\,1 "points and fees" 

cap would decrease competition in the mortgage market that would negatively impact 

mortgage affordahility and availability, The impact would he greatest low, and 

moderate, income marketplaces and on first-time home buyers, 

To assess the potential impact of 3% QM cap, RESPRO" conducted a Memhcr 

Survey on October 2012, Collectively in201 ,respondents originated nearly 60,O()O 

closed-end loans and issued more than 255,000 title policies through affiliated title 

companies serving customers of affiliated and unaffiliated creditors. 

respondents would be impacted by the 3% QM cap because of the requirement that 

charges paid to amliated settlement service companies must be included in the "points 

and fees" calculation, Co!lective!y, they originated a total of 17,920 loans in 20 I lhat 

\vould have exceeded the 3% QM cap, B~[lL~1"ntirrg_;L4,';;2.2L<illJoans originatejl, by the 

respondents. 

Not surprisingly, RESPROIC Survey respondents reported that the percentage of loans in 

which lotal amount of fees exceeds the 3% cap increases with lower loan amounts, 

Survey data showed that the average loan amount that exceeded the 3% QM cap ranged 

from $80J 00 to $175,90 L 

2012 Survey also inquired how a 1l101tgage lender with an amliatcd title company 

would respond if faced with a loan that would the 3% QM "points and fees" cap 

due (0 its inclusion of affiliated title fees, specifically asked members whether 

they would choose to (1) continue offering mortgages but not offer alTilialed title services 

in conjunction with loans that would exceed 3% QM cap Cnon'qualifying 

mortgages"); or (2) offer title services but not mortgages, 

Many respondents were real estate brokerage firms and homebuilders that offer their 

customers mortgages and title services through affiliated companies. The majority of 

tbese respondents reported that they would discontinue offering non'qualifying 

mortgages through their affiliated mortgage company, but would continue (0 olTcr 

aniliated (itle services to consumers who their homes, Because of the negative 

consequences of originating a loan, they reported that it would be 

important to have certainty as to which loans would exceed the thresholds, 

The cost of mortgage origination services is highly dependent on customer's 

individual decisions and is more difficult to on an aggregate basis, while title fees 

can be more easily predicted since title either are regulated or must be filed 

the majority of states. 

Survey respondents that they would discontinue 

mortgages through their affiliated mortgage company collectively offered 19,977 

mortgages for $966,270 in 2011, These respondents collectively would have 

discontinued offering 6,750 mortgages (over 10% of the Survey sample) had the 

discriminatory QM threshold been in place, 

5 
159 


81757.112

Other RES PRO' members reported that would discontinue offering aftllialed title 

services on loans. believes that the potential reduction in the 

market share title companies alone would create an upward pressure on title 

fees that would reduce mortgage affordability. For when Kansas enacted a law 

in 1992 that caused realty-based affiliated title companies the state to shut down their 

the remaining title firms filed rates the following year were 50-60% 

Ill. Tile Exemption of Certain Affiliated Fees Wonld Not Undermine tile Goals of DoddFrallk 

Not only there compelling reasons to exempt certain amliated fees from the Q]'v! 

"points and fees" cap, tilere no justification for including them. 

The definition of "points and fees" already requires that any charge thaI is not 

"reasonable" shall be included in the respective thresholds under the Abilitv to Repav 

standard and HOEPA11 ' • 

There are numerous ways for federal regulators to enforce this "reasonableness" 

requirement for title charges. First. because RESPA prohibits a mortgage lender ii'om 

requiring a consumer to use amliated title company, federal regulators can compare 

dosing documents in which both affiliated and unamliated title providers are used by a 

mortgage lender. Second, 44 slates require til at title insurance rates be set by tile state, 

by the statc, or filed with the state, which enable federal regulators 10 detenlline 

affiliated title fees are reasonable. Of the states and the District of 

Columbia, one (Iowa) does not recognize title insurance, Third, web sites provide 

easily obtainable information on the costs of til Ie insurance and title searches for all 

slates. 

In summary, This unnecessary discrimination against amliated husinesses and other inequities in 

the Final Rule's "points and fees" cap would be rectified by the Consumer Mortgage Choice Act 

(H.R. l07n which was introduced in the U.S. House of Representatives on March 12.2013. 

'0 The economic firm of Anton Financial Economics researched title and rates in Wichita County, 

Kansas (the largest county in Kansas) hefore and after the effective date oftllc legislation. and 

found that the two largest unaffiliated title companies in Wichita (in which amliated businesses 

operated) raised their rates 50-60% in their first tilings the legislation took effec!. 

[note: I would the following in this footnote: Anton Economics, Inc .. Economic Issues Relating to 

the Title Insurance Industry in Minnesota: Would Further Regulation be Helpful'! (1992). Anton 

Financial Economics, Inc. researched the price of title services in the Minneapolis-S1. Paul marketpLace 

1992 by sampling 16 firms that 77 offices in the Twin Cities area (70% of the 

the marketplace) and concluded title companies in the Minneapolis-St. Paul marketplace 

charged approximately $]3 less for title services than unaffiliated title companies. 

TiLA sectioll ! 03(bb)( 4 )(C)(i). 

A.M. Best. Report to National Association of Insurance Commissioners (NAIC). 

6 
160 


81757.113

In view ofthe reasons stated above, RESPRO' urges members of the Subcommittee to SliPPOl1 

the Consumer Choice Act (HJC 1077) because alleviate the negative impact 

that the "points and definition in the Final Rule will have on mortgage affordahility and 

availability, particularly in low-income and moderate income marketplaces, without 

compromising the goals oCthe Dodd-Frank Act 

appreciates this opportunity to provide testimony. If you have any questions, feel tlTC 

to contact me at 202-862-2051. Ext 210 or at siohnsol1Q;respro~. 

Sincerely, 

Susan Johl15on, Esq, 

EXCCl!tive Director 

7 
161 


81757.114

Questions for the record from Rep. Keith Ellison 

C!'PB Staff: Peter Carrol! and Kelly Cochran 

May .2013 

Questioll: Using Unemployment Insurance databases to verify income ami employment 

• How do fenders verif); thai informal ion such as tax returns and pay sllIhs lhal arc 

provided frY' borrowers IIrc accurale:' 

A. Lenders have various options. For example: 

Lenders can use one or more commereial services that arc repositories of employment 

and/or income information. Our understanding is that some of these services receive 

the data from private sector employers through the national payroll 

processors. Generally these databases do not cover the full population. 

Lenders can also request a verification of income through the IRS using the Income 

Veri flcati 0 n S crv i cc \!.!'c'jL'll",y ..!,."""' .. ' .. c' .. .5''01.'.'.'.''-.'':',,'.'''''''''.'.'!..'"'',,,'d"'.'."=.'..'...,",2.'"C;,,,-,,,,"'"'='.0·",",''''.'''''' 

.s~IyL<;."J The IRS 

iniormation. 

Are there 10 use existing databases to make it easier/i)/' borroll'ers /0 {ifmOnslrale 

their credit worthiness rafher than carrving in a shoehox/iill ofreceipls7 

A. There are some ways borrowers may demonstrate their credit worthiness using 

inloOllation not typically reported to the three national credit reporting It is 

our understanding that utility and telecommunications companies routinely 

from lenders, landlords, and other screening services to verify that a 

consumer has been paying bills. These companies' responses are often governed hy state 

utility regulators and sometimes require that the consumer also be on the phone to verify 

that the inquiry is valid. 

Many of the largest utility and telecommunications participate in a cooperative data 

repository called the National Consumer Telecommunications and Utility Exchange 

(NCTUE). This is a consumer reporting agency owned by its furnishers and that its 

members lise to identify when consumers have not paid bills. It is our underslanding 

the historically only collected negative information, but has recently begun 

collecting positive payment history from members tbat could be used to verify when a 

consumer has an open account in good standing. We do not know at present what 

services NCTUE is to provide with respect to reporting this information to nOI1-
162 


81757.115

Utilities and telecommunications companies arc able to report to the three national credit 

reporting (TransUnion. Equifax. and Expcrian); however. most do not. is 

for a variety reasons and. in some cases, state utility regulations may prohibit 

Thus there is very limited infixmation on consumers' utility and 

payment histories at the national credit rcpOliing companies at 

present. 

There arc a number of rental history databases. We understand that most collect negative 

information for tenant screening purposes but that a few coliect positive rental history as 

well. Coverage is generally limited to data reported from the largest properiy 

management companies. As most landlords arc very small husinesses. the rental markd 

quite fragmented and there arc no databases that can practically obtain positive rental 

history JI'om more than a small portion of landlords. 

Efel'cn states enacted laws alfowil1X third party consumer reportinx agencies access to 

state Unemployment Insurance dalabase.l' i(requested 10 do so by Ihe consumer. 

Has Ihis access to the Slate Ifork/llre£' Axcl1cies database been discussed within 

the CFI'13 and/or as pari olthe Smarl Disclos1IIY Task Force:' 

A. We are not aware that the Smart Disclosure Taskt()l'ce has discllssed this. However, we 

believe working groups or staff of federal agencies participating in the Smart Disclosure 

Taskforce may be assessing opportunities to develop databases that could provide real· 

time income verification using IRS data. The Smart Disclosure Taskforce an initiative 

llfthe White House. The CFPB. along with other independent agencies. been a 

in some task activities, but we may not be aware of all of the 

the Task Force has UUllenaKel 

o Would the CFPB be willing 10 work with Mr. Ellison oOice to make sure Ihal 

states Ihal enact legislation arc oMe 10 Iheir Unemployment Insurance 

databases to help consumers access aili)f'dable credil? 

A. Wewould pleased to provide technical support on these questions. 

Question: Kickbacks amI high paymellts 

• One olthe reasonsfin' placing a cap onfeesfor mortgages )iIIS the prevalcnce o( 

kick hacks, hixhfees and other costs Ihat harmful 10 borrowers many diflerenl 

areas including appraisals. privare mortgage and title Could you 

/)riefly detail some ollhe abuses Ihatlhe qualified mortxage intended /0 l'reven(l Are 

you satisfied that the limits within Ihe quali/ied mortgages wi!! make easier/vI' 

bo.rrrlw,?r.\' to avoid these high-priced and unnecc.\·sarr/ees? 
163 


81757.116

A. Seclion 1412 of lhe Dodd-Frank Act pmvides thaL in general. a qualified mortgage 

cannot have points and fees that exceed 3 percent of the Iota I loan amount and directs the 

Bureau to prescribe dilTcrenl limits for smaller loans. The statute also provides that 

certain private mortgage insurance premiums and charges paid to affiliates of creditors 

for items such as appraisals and title insurance are included ill points and fees. The final 

rule implemented these provisions. The Bureau expects that many creditors generally 

will prefer to make qualified mortgages. Accordingly. the general 3 percent limit on 

points and for qualified mortgages likely will exert some downward pressure on such 

To the extent that creditors prefer to originate qualified mortgages. til" 

underwriting requirements for qua!itled mortgages. in conjunction with the limits on 

points and fees, should help ensure that creditors are appropriately concerned about the 

long-term sustaillability ofloans and less able to impose excessive upfront charges as 

method of ensuring that their loans arc profitable. 

Question: Pedimnancc of Manufactured housing loalls. 

Some have asserted that bl\YeI"S ofmanujhelured homes should pay higher cosls than 

those ofsile-huill homes. What data do you have Ihal demonstrales the delinquency oncl 

filrec1o.l'ure rail'S o(buyers ofmanu(aclured homes? How does Ihat dala compare to 

those olsite-buiTl homes bv borrowers? Whv would manufactured home 

borrowers be entitled 10 less proteclion thall olher home huyers? 

A: Data reported under the Ilome Mortgage Disclosure Act (HMDA) indicate that loans 

for manufactured homes more likely than site-huilt homes to have relatively high 

interest rates. even after controlling for differences loan size, borrower income, and 

other factors reported in HMDA that may differ systematically hetween owners of 

manufactured homes and homeowners. This difference may reflect other factors 

that arc not captured in the IlMDA data. including not only differences in predicted loan 

performance of manufactured housing loans compared with other loans but also 

differences in credit scores and collateral value. Data on the performance of 

manufactured home loans quite limited. A recent study by the Corporation for 

Enterprise Development provides suggestive evidence that many manufactured home 

loans perf(xm similarly to general mortgage portt<.11ios (sec 

l~lmcs). but lhe Bureau has not reviewed thaI study in depth. 
164 


81757.117

[1'1 yow'final rule issued on Janl/an·· j O. 20! J. you noted that creditors lIlay. but arc 

not required {he interest rale charged 10 {he 10 oflvel Ihe 

impaci of the LL1'A instcad ofincreasing their IIp/ront 

«( /la creditor decides 10 increase the rate {o {hal cost a/so 

included in the poinls am/fees calculalion? Why or whv not? 

h. flnot, why the different (upf/'on! payment olcos{s V.I'. financing the 

costs).filr what appears 10 be the charge? 

c. Since indus/I:v concerned aboulthe inclusion oll/plj'on! LL1'A costs in the 

points and fees calculation, is recouping the cost via (In interest rate 

(i(iI 1701 included in the points amifees calcufafion) a I'iahle lind lor a 

practical alternalive to easing the pressure they claim they wilIfi,ef 011 points 

and fees? If)'£'s. please explain . 

.4.: If LLPAs are imposed as an interest mte increase, rather than additional discount 

points, the interest rate increase not counted toward the points and fees threshold under 

the Bureau's rule. The statutory definition of points and fees excludes interest. 

It bears that more traditional (less granular) forms pricing and other 

femns of upward pricing adjustment. which also arc manifested either as interest rate 

increases or as discount points, also arc counted toward the points and fees threshold only 

when imposed as discount points. Accordingly, the Bureau noted the final rule's 

preamble, imposing LLPAs in the form of interest rate increases often does offer 

creditors a means of limiting the impact of LLPAs on points and fees. The Bureau 

recognizes that interest rate increases result in greater periodic payments for consumers. 

Therefore, there necessarily an upper limit on the extent to which creditors can increase 

consumers' interest rates, whether to cover LLPAs or otherwise: Consumers who already 

are at or near their maximulll permissible debt-to-incomc ratios. beyond \vhich they 

cannot qualify for the credit, will have little to no room for the payment of LLPAs (or any 

other upward pricing adjustmcnts) through increased intercst rates. In those cases, the 

loans may not meet the qualified mortgage requirements, but the Bureau considers it 

appropriate that such loans be evaluated individually under the general ability-to-repay 

standards. 

3. indus/!'v participants have objected 10 the wav compensation/or m("rf(T(J''f' 

calculated under the ru!e. However, others concerned thai altering 

calculation mal' lead to the return ofvieid spread premiums and steering nellaviol's 

by lenders. 

a. Can you the way mortgage compensation is calculated in points and 

fees lest why the CFPB chose Ihatstruclure? 

h. Does counting such compensation put mortgage brokers a competitive 

flI''''''W,,"l''''''.> when compared to retail lending counterparts? 

please explain. 

c. Given Ihe Federal Reserve Board's 2U]O rule, which prohibits fendersfi'Ofl1 

basing compensation 011 Ihe interesl rate or olher loan terms (i,e., yield 
165 


81757.118

Hearing on "Qualified Morlgagt's: Examining the Impact ofthe Ability to Repay Rule" 

Suhcommittee 011 fillallcial Institutions alld Consumer Credit 

May 21, 2013 

Questions/in' the Record Submitted by Representative tvle/Fin L. Hiatt 

The Dodd-Frank Wall .)'Ireef and Consumer Protection 

residential mortgages, creditors make a determination that 

ahility to repay the loan. However, the Act presumes comr'U(!/1(,'e 

thatfor 

""f1JJW'" morlgages, One o/thefealli!,!?s o/lhe is a 

"floints (1m/fees" lesl, Under this lesl, a loan Call11ot points 

the exceed three percent (3%) o/lhe tolal loan {[mount. Some in 

ex,[}n'!s,\:eo concertls that the currenl "poin/s and 

the inclusion titlefce.\', Loan Level Price Adjustments (LLPAs) and 

loan originator compensation) will make originating loans/or some consumers una/fordable 

jilr the lender 

1. Loan Levell'rice Adjustments (LLPAs) charged by F'annie Mae and n'eddie Mac ore 

cllrrentl)! counted towards the am/fees" calculation. 

{J, Can you the rationale for their 

A: LLPAs art: essentially a very sophisticated form of risk-based that existed. 

first in the sub prime markel, well before the government-sponsored enterprises (GSEs) 

began them to conforming transactions. Historically, LLPAs may have been 

imposed by secondary market investors or directly by creditors themselves. With respect 

to GSEs, LLPAs are adjustments added to the baseline 

currently available from Fannie Mac or Freddie Mac to reflect risk factors 

attributable to an individual consumer's credit-risk (e,g" credit score) and the 

transaction's characteristics (e,g" loan-to-value ratio), In that sense. LLPAs 

function no from more traditional risk -based and other 

adjustments (whether risk-based or not), which always (:ntail either increasing the interest 

rate or charging additional discount points. When imposed as discount such 

charges have always been included in both the finance charge and points and fees. and 

this is true notwithstanding that more traditional discount points. like LLPAs, ultimately 

may have been '"charged" by a secondary market investor. The Bureau sees LLPAs no 

different in principle and therefore treats them just as any other component of overall 

103n The Bureau docs not consider it to treat LLPAs as a 

settlement such as an Of credit report fee, because LLPAs arc a key 

component of loan and should be reflected either in the interest rate or 

m and fees, Creditors can choose to build LLI' As into the interest rate if that 

makes easier to the and fees limit for mortgages, as discussed 
166 


81757.119

spread premiums) and also prohibirs loan receivinf; 

both the consumer and the lender, are Ihere sti!! 

opportunities within the mortf;af;c brokers and/or lenders' compensation 

structure thai could lead to the return amilar 

sleeting hehavior? 

A. Section 143J orlhe Dodd-Frank Act amended TILA to 

paid directly or indirectly by a consumer or creditor to a motigage originator from any 

source, including mortgage originator thal is also the creditor in a table-funded 

transaction:' be included in and fees. The Bureau this by 

a rule requiring thai all compensation paid directly or indirectly by a consumer 

or creditor to a loan originator that can be attributed to lhat transaction at the time the 

interest rate is set included in points and tces. lowever. to prevent double 

compensation that already is included in points and fees and to reduce the 

burden, the Bureau excluded cetiain types of compensation li'om and fees. 

under the regulation, points and floes do noi include loan originator by 

a consumer to a mortgage broker when that payment has been counted toward the 

points and fees threshold as part of the finance charge. Points and fees also do not 

include by mOligage broker to an of the mortgage broker 

because that compensatioll is already included in and fees as loan 

compensation paid by the consumer or the creditor to the mortgage broker. 

points and fees do not include by a creditor to its officers. With 

respect to the last exclusions. the Bureau concluded that there were significant 

to individual employee compensation accurately 

in the loan origination process, and that those challenges would lead to anomalous results 

for consumers. In addition, the Burean concluded that structural differences between the 

rctail and wholesale channels lessened risks to consumers. The Bureau therefore decided 

to exclude from and fees paid by retail creditors to thcir loan 

when the rule takes effect in January of 20 14, although it is still to 

study the issue. Points and fees do include compensation by a creditor to a loan 

originator other than an employee of a creditor (i.e., a mOligage broker), as well as 

compensation by consumer (though, as noted above, only onee). 

Counting points and Ices compensation paid by a creditor or consumer to mortgage 

broker may make it more diflicult for mortgage brokers (as to retail Joan 

officers) to originate loans with up-front charges and still remain under the 

mOligage and iees limits and the high-cost mortgage threshold. Nevertheless, even 

transactions which mortgage broker's compensation is two percentage points of 

the loan amount--which the Bureau understands to be at the end broker 

commissions-the creditor would still be able to charge up to point in 

lhat would count toward the mortgage points and fees limits, under 

certain circumstances. Moreover, the creditor may reduce the costs it needs to recover 

from origination or the interest ratc by having the consumer pay the 

mortgage broker In addition, creditors in the wholesale cbannel that to 

mortgages in many cases \vill have the to ft'COver more 
167 


81757.120

of their origination costs through the interest rate to ensure that their transactions remain 

below the points and fees limits. 

As by the Board, effective 2010. and as retained by the Bureau in 20 3, 

Regulation Z a loan originator fj'Oll1 influencing a consumer to accept a credit 

transaction available from a creditor. over those available from other creditors. 

to obtain greater compensation than the loan originator would receive ii'om the other 

creditors, where doing so is not in the consumer's interest. In because this rule 

loan originator "steering" a consumer to transact with Olle out of two or 

creditors, the rule affects mortgage brokers rather than 

loan originators by retail creditors. During the Bureau's rulcmakillg 

process to the January 2013 final rule, consumer advocates nevertheless 

expressed concern thal. particularly in the market, loan originators clluld 

in originating transactions with above-market interest rates (fr0111 al! creditors 

with which they do business), with the they could arrange to receive abovemarket for all of their transactions notwithstanding the rule's prohibition 

creditor to maximize their compensation. Including 

by creditors to mortgage brokers in and fees may reduce the 

from such practices by the 0 r creditors to 

and also pay high loan originator and still 

and fees limits to mortgages. 

o