Jerry Reed, chief lending officer from the $5.3 billion Alaska USA FCU, told lawmakers during a June 18 hearing on the Consumer Financial Protection Bureau’s qualified mortgage rule that products and product features were responsible for the mortgage market meltdown, not underwriting standards.
In addressing a question from Rep. Patrick McHenry (R-N.C.), who asked how credit unions can lend with high loan-to-value ratios yet suffer few loan losses, Reed said borrowers defaulted during the financial crisis because they were steered into inappropriate loan products.
“I think the CFPB has done an excellent job in eliminating products, but they’re not doing us any good by restructuring underwriting criteria for people who are creditworthy,” he told McHenry.
Reed, who represented CUNA at the hearing, also intrigued the members of the financial institutions and consumer credit subcommittee when he expressed concern that NCUA examiners would downgrade CAMEL ratings for credit unions that keep non-QM mortgages on their books.
Some members asked another witness, Kentucky Department of Financial Institutions Commissioner Charles Vice, if that would indeed be the case.
“That is a concern,” Vice told Rep. Blaine Luetkemeyer (R-Mo.) in response to his question about the effect the QM rule would have on examinations. “We don’t know how it will be treated on exams going forward, and the industry waiting with bated breath to see what will happen. My hope that we don’t treat it adversely and instead look at loans on an individual credit basis.”
Reed also stated that lawmakers should create a permanent ability to sell non-QM loans to Fannie Mae and Freddie Mac. The Federal Housing Finance Agency announced last month that the two GSEs would not purchase non-QM loans beginning in January 2014.
“I agree that spirit of [the Dodd-Frank Act] is where it needs to be,” he said. But he added that some of the guidelines need to be changes to allow credit unions to retain flexibility. “That’s what we’re asking for here,” he said.
Vice added that if the CFPB is looking for a bright line to define in its QM rule, it needs to include different rules for different business models.
“There’s a difference between originating a mortgage to sell, compared to originating and keeping it,” the Kentucky state regulator said. “It’s a much different lending atmosphere. And as Mr. Reed said in his written testimony, there’s a lot less credit risk when loans are held in portfolio.”
Subcommittee Chairman Shelley Moore Capito (R-WV) noted that the CFPB has amended the rule in an attempt to address concerns that it would constrict credit, but serious problems remain.
“Mortgage lending can be a highly subjective business, especially in rural and underserved areas. This element of relationship-based decision-making is completely ignored by the premise of the rule. It will be nearly impossible for the CFPB to endlessly amend the rule to accommodate the ability of lenders to make these relationship-based loans. Unfortunately, the end result will be some consumers losing access to credit and the ability to own their own home,” Capito said.
James Gardill, chairman of the board of the $6 billion WesBanco Inc., told the subcommittee that a charitable program administered by his bank to help low-income families buy homes is threatened by the Dodd-Frank rules.
The Wheeling, W.V.-based banker testified that the QM rule would make it difficult for community banks to comply with the Community Reinvestment Act.
“It would be extremely difficult to meet CRA obligations if we stay with only QM loans,” Gardill said. He added that none of the CRA mortgages his bank made last year would meet QM standards.
Witness Debra Still, chairman of the Mortgage Bankers Association, talked up H.R. 1077, the Consumer Mortgage Choice Act, which would amend the Truth in Lending Act. The bill would exclude certain items from the points and fees calculation, including title charges, any loan-level pricing adjustments set by Fannie Mae, Freddie Mac or the FHA, loan officer compensation, mortgage broker compensation and escrow charges–all items currently included in the QM rule.
In a May 3 letter to House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and Ranking Member Maxine Waters (D-Calif.), incoming NAFCU President/CEO Dan Berger said without the changes outlined in the bill, many loans made to low- and moderate-income borrowers would not qualify as QMs and would either only be available at higher rates due to liability risks or not be offered at all.
“Consumers would lose the ability to choose to take advantage of the convenience and market efficiencies offered by one-stop shopping,” Berger said.
Still told Rep. Gregory Meeks (D-N.Y.) that the QM rule’s points and fees restrictions as currently written will disproportionately hurt protected classes and first-time homebuyers. To make loans these groups, lenders would be faced with a choice of making a non-QM loan that has little liquidity because it can’t be sold to the secondary market or make a rebuttable presumption loan that would have a small secondary market in addition to increased legal liabilities for the lender.
National Association of Realtors President Gary Thomas and Center for Responsible Lending President Michael Calhoun also testified at the hearing. Calhoun said in general, the CRL supports the QM rule but does recognize that it could be improved. He added that the CFPB has been very responsive to the concerns of small lenders and credit unions.