Jerry Reed, chief lending officer from the $5.3billion Alaska USA FCU, told lawmakers during a June 18 hearing onthe Consumer Financial Protection Bureau's qualified mortgage rulethat products and product features were responsible for themortgage market meltdown, not underwriting standards.

In addressing a question from Rep. Patrick McHenry (R-N.C.), whoasked how credit unions can lend with high loan-to-value ratios yetsuffer few loan losses, Reed said borrowers defaulted during thefinancial crisis because they were steered into inappropriate loanproducts.

“I think the CFPB has done an excellent job in eliminatingproducts, but they're not doing us any good by restructuringunderwriting criteria for people who are creditworthy,” he toldMcHenry.

Reed, who represented CUNA at the hearing, also intrigued themembers of the financial institutions and consumer creditsubcommittee when he expressed concern that NCUA examiners woulddowngrade CAMEL ratings for credit unions that keep non-QMmortgages on their books.

Some members asked another witness, Kentucky Department of Financial Institutions CommissionerCharles Vice, if that would indeed be the case.

“That is a concern,” Vice told Rep. Blaine Luetkemeyer (R-Mo.) in response to his questionabout the effect the QM rule would have on examinations. “We don'tknow how it will be treated on exams going forward, and theindustry waiting with bated breath to see what will happen. My hopethat we don't treat it adversely and instead look at loans on anindividual credit basis.”

Reed also stated that lawmakers should create a permanentability to sell non-QM loans to Fannie Mae and Freddie Mac. TheFederal Housing Finance Agency announced last month that the twoGSEs would not purchase non-QM loans beginning in January 2014.

“I agree that spirit of [the Dodd-Frank Act] is where it needsto be,” he said. But he added that some of the guidelines need tobe changes to allow credit unions to retain flexibility. “That'swhat we're asking for here,” he said.

Vice added that if the CFPB is looking for a bright line todefine in its QM rule, it needs to include different rules fordifferent business models.

“There's a difference between originating a mortgage to sell,compared to originating and keeping it,” the Kentucky stateregulator said. “It's a much different lending atmosphere. And asMr. Reed said in his written testimony, there's a lot less creditrisk when loans are held in portfolio.”

Subcommittee Chairman Shelley Moore Capito (R-WV) noted that theCFPB has amended the rule in an attempt to addressconcerns that it would constrict credit, but serious problemsremain.

“Mortgage lending can be a highly subjectivebusiness, especially in rural and underserved areas. This elementof relationship-based decision-making is completely ignored by thepremise of the rule. It will be nearly impossible for theCFPB to endlessly amend the rule to accommodate the ability oflenders to make these relationship-based loans. Unfortunately, theend result will be some consumers losing access to credit and theability to own their own home,” Capito said.

James Gardill, chairman of the board of the $6 billion WesBancoInc., told the subcommittee that a charitable program administeredby his bank to help low-income families buy homes is threatened bythe Dodd-Frank rules. 

The Wheeling, W.V.-based banker testified that the QM rule wouldmake it difficult for community banks to comply with the CommunityReinvestment Act.

“It would be extremely difficult to meet CRA obligations if westay with only QM loans,” Gardill said. He added that none of theCRA mortgages his bank made last year would meet QMstandards. 

Witness Debra Still, chairman of the Mortgage BankersAssociation, talked up H.R. 1077, the Consumer Mortgage Choice Act,which would amend the Truth in Lending Act. The bill would excludecertain items from the points and fees calculation, including titlecharges, any loan-level pricing adjustments set by Fannie Mae,Freddie Mac or the FHA, loan officer compensation, mortgage brokercompensation and escrow charges–all items currently included in theQM rule.

In a May 3 letter to House ­Financial Services CommitteeChairman Jeb Hensarling (R-Texas) and Ranking Member Maxine Waters(D-Calif.), incoming NAFCU President/CEO Dan Berger said withoutthe changes outlined in the bill, many loans made to low-and moderate-income borrowers would not qualify as QMs and wouldeither only be available at higher rates due to liability risks ornot be offered at all.

“Consumers would lose the ability to choose to take advantage ofthe convenience and market efficiencies offered by one-stopshopping,” Berger said.

Still told Rep. Gregory Meeks (D-N.Y.) that the QM rule's pointsand fees restrictions as currently written will disproportionatelyhurt protected classes and first-time homebuyers. To make loansthese groups, lenders would be faced with a choice of making anon-QM loan that has little liquidity because it can't be sold tothe secondary market or make a rebuttable presumption loan thatwould have a small secondary market in addition to increased legalliabilities for the lender.

National Association of Realtors President Gary Thomas andCenter for Responsible Lending President Michael Calhoun alsotestified at the hearing. Calhoun said in general, the CRL supportsthe QM rule but does recognize that it could be improved. He addedthat the CFPB has been very responsive to the concerns of smalllenders and credit unions.