Considering the QM Cap
A proposed CFPB rule could help credit unions and other mortgage lenders make more loans, but mortgage lending executives say it's only the first of what needs to be many such changes.
The rule, which the CFPB released for public comment on May 1, would allow credit unions and other mortgage loan originators to “fix” or “cure” previous miscalculations around the cap in closing points and fees when making Qualified Mortgages.
Currently, closing costs and fees on mortgage loans of more than $100,000 in face value are capped at no more than 3% of the loans’ value minus closing costs and fees. Costs and fees also are capped for smaller loans, but according to a schedule which often comes in at around 5%.
Under the CFPB's current regulations, if a mortgage lender closes a QM loan and finds that, inadvertently, it had charged the borrower 3.25% in closing costs and fees instead of 3% it can no longer consider the loan a QM loan. This increases the lender's expenses with the loan and makes it harder to sell on the secondary market.
But under the CFPB's proposed rule, the same lender would be able to reimburse the borrower for the 250 basis point overcharge in closing costs and fees and still consider the loan a QM loan, thus both reducing the expense of the loan and making it easier to sell.
David Motley, president of Colonial Savings and CU Members Mortgage, a Dallas-based originator for more than 1,000 credit unions, said the rule could significantly impact how many mortgage loans credit unions make.
Allowing such a fix, Motley explained, would help mortgage originators feel more confident about lending to borrowers whose loans might approach the cap which, he said, cautious lenders have effectively lowered to as little as 2.7% to stay clear of the cap.
He also argued that a similar cure is needed for the 43% debt-to-income ratio which he estimated had effectively become 39% because so few lenders wanted to mistakenly go over the 43% limit.
“This in particular would mean a great deal to borrowers with high student loan debt or who are buying in a very expensive housing market,” Motley noted. He added that he believed other factors, such as a sluggish job market, had also been cutting demand.
“But every little bit of relief would help,” he said.
Motley also tied the current rules to the current sluggishness in overall housing finance, arguing the debt-to-income limit and points and fee cap helped depress mortgage lending.
“One way an originator might make sure they remain under the cap might be to eat some of those closing costs it would otherwise charge for,” he said. “But if they do that they will likely just recapture some of those costs in an interest that might be slightly higher than it would otherwise need to be,”
Tracy Ashfield, EVP at Strategic Mortgage Solutions, agreed with Motley that every bit of relief is good, but she doubted whether the change would make as much difference at most credit unions.
She said many credit unions are already committed to having some percentage of loans not be QMs and so may not be as concerned about going over the points-and-fees cap. She also suggested that this cap fix pales compared with the potential impact of taking money paid to CUSOs out of the points-and-fees calculation.
Currently, if a credit union owns at least 25% of a CUSO that it uses for part of its mortgage loan underwriting, any fees the borrower pays to that CUSO must be counted against the cap.
Ashfield said this hurts the member because while a credit union title CUSO might be significantly less expensive than others available, using the CUSO might take the loan over the 3% cap. That could require the credit union to send the member to a more expensive alternate provider.
A credit union title CUSO might be $500 less expensive than a title firm across town, but using the CUSO could add $700 to the points-and-fees calculation, she pointed out, so the credit union might have to send the member to the $1,200 title firm that money would not go against the cap.
“Changing that would be huge,” she said.
But she also observed that this new rule indicated the agency has been listening to mortgage industry stakeholders about their concerns and that the industry, including credit unions, should make sure the agency understood that its efforts were appreciated.
“It's too easy sometimes to just complain,” she said. “We should also speak up when they are trying to make things better.”
NAFCU Director of Regulatory Affairs Michael Coleman agreed with Ashfield, but also noted that CUSO change is actually statutory and not just in regulation.
“More work needs to be done regarding the rules’ treatment of points and fees and other areas of the mortgage rules,” he said.
Dennis Hardiman, CEO of Embrace Home Loans, a Newport, R.I., independent mortgage firm which has started offering mortgage services to credit unions, also praised the agency for listening to the mortgage industry. But called for additional changes.
“A real change in the cap,” he said, “would raise the face value of the loans that are subject to it. Make it at least $150,000 or even $200,000. That would be a lot closer to where you could keep excessive fees from creeping in but still not depress the ability to make loans at a reasonable profit.”