NAFCU’s Comments to CFPB on Qualified Mortgages

July 9, 2012

Monica Jackson
Office of the Executive Secretary
Bureau of Consumer Financial Protection
1700 G St., NW
Washington, DC  20006

RE:  Docket No. CFPB–2012–0022

Dear Ms. Jackson:

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents federal credit unions, I write to you regarding the Consumer Financial Protection Bureau’s (CFPB) request for comment on qualified mortgages.  The request for comment, published in the Federal Register on June 5, 2012, is a follow-up on the Federal Reserve Board’s proposed rule regarding a consumer’s ability to repay mortgage loans.

The CFPB specifically requests comments on two areas: (1) mortgage loan data the CFPB received from the Federal Housing Finance Agency (FHFA); and (2) legal protections afforded to lenders under the ability-to-repay rule.

At the outset, we would like to emphasize that credit unions are very prudent lenders, and as member-owned cooperative institutions seek to meet their members’ needs by offering safe products and services.  Further, each credit union has a unique membership with unique characteristics.  Accordingly, the CFPB’s ability-to-repay rule should not be one-size-fits-all; instead, it should provide credit unions and small institutions with the flexibility necessary to continue to meet their members’ needs.

General Comments

First, NAFCU would like to reiterate some concerns already discussed in our comment letter to the Federal Reserve Board, dated July 22, 2011.

Generally, NAFCU supports efforts to ensure that consumers are not placed in mortgages they cannot afford; however, we are concerned that the proposal will create yet more regulatory burden on credit unions.  We believe: (1) credit unions that make qualified mortgages should have a clear safe harbor; (2) disclosure of compensation arrangements are counterproductive to providing consumers with meaningful information; and (3) the 2011 proposal is overly complex.  Further, we urge the CFPB to consider that the proposal would require some credit unions with narrowly tailored programs that require limited verification of income to significantly overhaul these programs, thus incurring inordinate costs, even though there will be little benefit to their members.
     
As the CFPB develops the ability-to-repay rule, we ask that our July 22, 2011 comment letter be given full consideration.  We have attached the comment letter as Appendix A herein.

Utility of FHFA’s Mortgage Loan Data in Defining a “Qualified Mortgage”

The first area addressed in the request for comment concerns the CFPB’s use of mortgage loan data it received from the FHFA, as well as commercially available data on mortgages securitized into private-label mortgage securities.  The FHFA data contains loan-level information on characteristics and performance of single-family mortgages purchased by Fannie Mae and Freddie Mac (Enterprises), including information on payment-to-income and debt-to-income (PTI/DTI) ratios, initial loan-to-value (LTV) ratios based on the property purchase price or appraisal value and the lien balance, and credit scores.  The CFPB is proposing to use these data for defining loans that would be presumed to comply with the ability-to-repay requirements.  For example, the CFPB may use data on loan performance as measured by delinquency rate, such as 60 days or more delinquent, as a metric to evaluate whether consumers had the ability to repay those loans at the time the loan was made.

NAFCU is skeptical about the use of narrow and specific measurements and thresholds for defining loans that would be presumed to comply with the ability-to-repay requirements.  Generally, it has been our members’ experience that a one-size-fits-all approach to regulation is counterproductive, often unworkable and frequently leads to unwanted results.  For example, DTI ratios that consider a narrow definition of income could foreseeably exclude many otherwise qualified consumers with non-traditional sources of income from receiving a qualified mortgage.

Should the CFPB decide to use the FHFA and other data to craft a definition of a loan that would be considered a qualified mortgage, and consumers’ DTI ratio is a measure included in that definition, we urge that income from a broad range of sources be included in the DTI calculation.  Income should include, at a minimum, traditional sources of income such as wages, tips and fees for services, but also residual income such as rental income, dividends, and child support and alimony.  
     
NAFCU further believes that should the CFPB determine that DTI should be part of the definition of “qualified mortgage,” the agency should afford flexibility to lenders, consumers and investors alike by providing either exceptions to the ratio requirement or allowing different ratios if certain other factors exist in conjunction with a higher DTI ratio.  For example, a loan to a borrower with a large amount of liquid financial reserves or assets, but limited income, should not automatically be disqualified from being a “qualified mortgage.”  Excluding such loans from the definition would not further the purpose and objectives that Congress sought to address in Dodd-Frank; rather, it arguably runs afoul of such objectives.

NAFCU also believes that the definition of “qualified mortgages” for purposes of loans insured by the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), the Department of Agriculture and the Rural Housing Service (RHS), should not apply to loans purchased or insured by the Enterprises or securitized into private mortgage securities.  FHA, VA and RHS loans are made pursuant to and consistent with particular public policy objectives.  For example, FHA loans are often the only, or more economically sound, option for first-time homebuyers for whom conventional loans are unavailable.  Similarly, VA loans are targeted to our nation’s servicemen and servicewomen, who are often in fundamentally unique economic situations.  The CFPB should, thus, either exempt FHA, VA and RHS loans from the ability-to-repay rule, or issue a broader definition of “qualified mortgage” for such loans that would encompass and take into account the roles of these programs in the overall mortgage market.

Litigation Cost Estimates

The proposal also addresses litigation issues associated with the ability-to-repay rule.  As discussed in the proposal, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 creates special remedies and defenses associated with the ability-to-repay rule.  The CFPB’s June 2011 proposed rule sought comments on how to implement this aspect of the law.  Specifically, the CFPB is contemplating whether to adopt a legal safe harbor and a rebuttable presumption that a qualified mortgage meets the ability-to-pay rule.

As stated in our July 2011 letter, NAFCU believes that the ability-to-repay rule should contain a clear legal safe harbor for qualified mortgages.  The criteria to meet the safe harbor should be broadly crafted so that credit unions can continue to meet their members’ needs, and with consideration given to how the regulations would impact innovation and product development.  NAFCU strongly believes that the safe harbor approach is preferable for all parties involved in a mortgage loan transaction as it provides parties clarity and certainty, and consequently discourages frivolous lawsuits, claims or defenses.  A presumption of compliance approach, conversely, would have the opposite effect – parties would be more encouraged to expend resources to overcome the presumption, thus increasing all parties’ litigation costs.

NAFCU appreciates the opportunity to share our thoughts on the request for comments.  If you have any questions or concerns, please feel free to contact me at ttefferi@nafcu.org or (703) 842-2268.

Sincerely,

Tessema Tefferi
Regulatory Affairs Counsel

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