CUNA letter to Congress on qualified mortgages

The Honorable Shelly Moore Capito
Subcommittee on Financial Institutions
and Consumer Credit
United States House of Representatives
Washington, D.C. 20515

The Honorable Gregory Meeks
Ranking Member
Subcommittee on Financial Institutions
and Consumer Credit
United States House of Representatives
Washington, D.C. 20515

Dear Chairman Capito and Ranking Member Meeks:

On behalf of the Credit Union National Association (CUNA), I am writing to thank you for holding a hearing on the likely impact on Americans trying to buy homes from the Dodd-Frank Act’s Ability to Repay/Qualified Mortgage Rule. CUNA is the largest credit union advocacy organization in the United States, representing America’s 6,700 state and federally chartered credit unions and their 99 million members.

The Dodd Frank Act’s ATR/QM Rule went into effect on January 10, 2014, so it is rather early to assess the impact it will have on the housing market other than to say that many of our members are concerned that it will have a negative impact on their mortgage lending and operations.  As Congress considers the impact the regulation will have, we urge you to examine two key issues:  (1) whether financial institutions need protection from lawsuits brought by private parties for a reasonable period of time after the effective date, and (2) whether credit unions ought to be subject to this regulation in the first place.

Congress Should Protect Lenders from Lawsuits Based on Early Noncompliance under the Rule 

Eight mortgage related rules, including the ATR rule, become effective this month.  Seven of these rules were finalized in October, and since then credit unions have been scrambling to come into compliance.

Finalization Dates for Mortgage Rules Effective January 2014

Rule Name

Date First Finalized

Date Last Amended

Number of Amendments/


Ability to Repay/Qualified Mortgage January 10, 2013 October 1, 2013


2013 HOEPA Rule January 10, 2013 October 23, 2013


Loan Originator Compensation January 20, 2013 October 1, 2013


ECOA Valuations January 18, 2013 October 1, 2013


TILA HPML Appraisals January 18, 2013 N/A


TILA HPML Escrows January 18, 2013 October 1, 2013


Servicing TILA January 17, 2013 October 23, 2013


Servicing RESPA January 17, 2013 October 23, 2013


These new rules, and the commentary that accompanies them, weigh in at approximately 5,000 pages of new regulations.  While we appreciate that the Consumer Financial Protection Bureau (CFPB) delayed finalization of many of these rules and included changes in an effort to be responsive to the concerns that we and others raised, the fact remains that a number of our members that make mortgage loans feel unduly burdened and that Congress, the CFPB and prudential regulators should not expect credit unions to be in compliance with these rules less than 100 days after final changes were adopted.  As expected, many credit unions have indicated they would not be able to comply with the regulations on time, despite their best efforts.

The CFPB and the National Credit Union Administration (NCUA) have recently made statements that the agencies will provide some compliance flexibility to credit unions that are making good faith efforts to meet their responsibilities under the new mortgage rules.  CUNA supports and appreciates these accommodations; however, credit unions that are not in compliance with these rules when they are effective are still vulnerable to lawsuits for up to several years because the Truth in Lending Act, under which the rules have been promulgated, carries a private right of action.

Only Congress can protect credit unions and other lenders from this threat, and we continue to urge you to take action on this matter as soon as possible.

Credit Unions’ Structure and Performance Demonstrate that a Full Exemption Is Warranted

During the rulemaking process, the CFPB was receptive to and somewhat responsive to the concerns that credit unions raised.  We appreciate the recent statements by the CFPB and the NCUA which emphasize to credit unions that not all mortgages need to be QMs.  Nevertheless, we remain concerned about the long-term effect this rule will have on credit unions and their members, and we question why credit unions ought to be subject to the rule in the first place.

As we have noted in previous testimony before the Subcommittee, credit unions agree that it is always in the best interest of the credit union to assess a member’s ability to repay when offering them a loan. That is what credit unions routinely did, even before the adoption of the rule.

Because credit unions are member-owned financial cooperatives and thus, the costs of compliance must be borne by all members, and in light of that fact that the rule was designed to address problems credit unions did not engage in, we believe there is a very strong statutory and public policy case to be made that credit unions ought to be fully exempt from the QM Rule.  That case is also based on how credit unions are structured, which produces a set of operational incentives that is different from for-profit financial institutions, and also on the historical performance of credit union mortgage loan portfolios. Moreover, the CFPB has the legal authority to provide such an exemption, and Congress should assure the agency it has such power. A recent letter to Director Corday, with an attached memorandum discussing the agency’s authority to exempt credit unions, is attached.

The not-for-profit, cooperative structure of credit unions presents incentives that are different from the incentives of for-profit, shareholder-owned financial institutions.  Because credit unions have no outside shareholders, they have no incentive to maximize profits, so they tend to be more conservative lenders than their for-profit brethren.  This important distinction engenders the tailoring of loan products to the needs of the borrower, as opposed to putting borrowers into a product that might not fit, but has a chance of having a positive impact on the institution’s bottom line.  Those who operate credit unions have no incentive to gamble on loans to members who do not have the ability to repay.

Credit unions have also historically been portfolio lenders, and continue to keep a significant percentage of mortgages on their books.  If a credit union makes a bad loan to a member, it has an impact not just on the borrower but also on the other member-owners of the credit union, who may find credit less available and more expensive as a result of the loss.

The importance of these structural differences between credit unions and for-profit lenders is reflected in the historical performance of credit union mortgage portfolios.  Prior to the financial crisis, annual net charge-off rates on residential mortgage loans at both banks and credit unions were negligible, less than 0.1%.  However, as the recession took hold, losses mounted.  At credit unions, the highest annual loss rate on residential mortgages was 0.4%.  At commercial banks, the similarly calculated loss rate exceeded 1% of loans for three years, reaching as high as 1.58% in 2009.[1]

According to the CFPB, “the Ability-to-Repay rule is intended to prevent consumers from getting trapped in mortgages that they cannot afford, and to prevent lenders from making loans that consumers do not have the ability to repay.”[2]  Credit unions have implemented those goals since they were established in the United States over 100 years ago.  They do not want their member-owners in mortgages they cannot afford.  Credit unions are already doing what the CFPB and Congress want them to do.  The overarching problem credit unions have with the Dodd-Frank ATR rule is that it makes it harder for them to achieve those goals for their members because the rule subjects credit unions to yet another layer of regulation that is appropriate for abusers of consumers.  When regulators make it more difficult for credit unions to serve their members, consumers, communities and the economy lose.

We appreciate that the CFPB has allowed loans to be eligible for sale to FNMA or FHLMC to be considered QMs for 7 years or until the GSEs are dissolved, and included a small lender exemption in the final rule.  However, as we have said to the CFPB and other policymakers, the exemption did not go far enough. Credit unions of all sizes should be exempt from the rule.

The rule currently exempts loans made by a financial institution with less than $2 billion in assets and that originates, together with affiliates, 500 or fewer first-lien mortgages in the prior year, and meets the following product features:

  • Points and fees less than or equal to 3 percent of the loan amount (for loan amounts less than $100,000, higher percentage thresholds are allowed);
  • No risky features such as negative amortization, interest-only, or balloon loans (balloon loans originated until January 10, 2016 that meet the other product features are QMs if originated and held in portfolio by small creditors);
  • Underwriting information must be documented;
  • The loan term does not exceed 30 years.

Furthermore, the lender must generally hold the loan in portfolio for at least three years and consider and verify a borrower’s debt-to-income ratio (DTI), regardless if the DTI exceeds 43 percent or the loan is government sponsored enterprise/agency-eligible.

We do not believe that asset size and number of mortgages are what guides the underwriting of credit union mortgages; the structure of credit unions, their historic mission to serve the best interests of their members and their very low default and delinquency rates are the significant distinguishing factors that support an exemption for credit unions.  We urge the Subcommittee to encourage the CFPB to provide all credit unions an exemption from the QM rule. Moreover, we believe other community based financial institutions should be considered for similar treatment under the QM rule.


As we have testified before, credit unions face an unprecedented regulatory burden.  With the implementation of these rules, impact of the burden has become even more severe.  We appreciate the subcommittee’s continued oversight of the ever mounting regulatory responsibilities and liabilities facing community financial institutions, and we look forward to continuing to work with you on legislative solutions to relieve credit unions of regulatory burden and enhance their ability to serve their members.

On behalf of America’s credit unions and their 99 million members, thank you for your consideration of our views.

Best regards,

Bill Cheney
President & CEO
[1] Based on FDIC and NCUA data.


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