Published April 26, 2012
Mortgage lenders and consumer groups have launched at frenzied round of lobbying over one of the major issues financial regulators face from the 2008 financial crisis -- the new legal definition of a "safe," desirable mortgage.
The new standard for a “qualified” mortgage will determine which customers banks approve for a home loan more easily at the lowest cost, and will establish future legal rights of borrowers who may lose their homes to foreclosure.
For banks and other lenders, billions of dollars in loans and revenues are on the line; they warn stricter rules will limit mortgage lending, potentially by millions of loans, jeopardizing the fragile housing market.
"This is critical because these (standards) will set the terms of residential mortgages for at least the next generation," said Diane Thompson of the National Consumer Law Center. "There's a lot at stake."
The lobbying activity has intensified ahead of a decision on new “QM” regulations expected in June from the Consumer Financial Protection Bureau. Mandated by the 2010 Dodd-Frank financial reform law, the rules are designed to prevent the kind of reckless lending practices—such as “subprime” loans with little or no documentation—that helped create the housing bubble, the subsequent housing market collapse and the financial crisis.
Last Thursday, about 20 top executives from mortgage companies met with the director of the CFPB, Richard Cordray, and also met separately at the White House with President Obama's top deputies and housing advisors, according to sources with knowledge of the sessions.
A legislative alert from the Mortgage Bankers Association confirms the meetings and some participants, including White House Chief of Staff Jack Lew and Housing Secretary Shaun Donovan, but it did not disclose details of the discussions. It said representatives of the association also met with "the entire Board of Governors of the Federal Reserve System, including Chairman Ben Bernanke" on April 16.
The alert, provided to FOX Business by an MBA spokesperson, said more than 400 MBA members visited Washington last week as part of the group’s annual National Advocacy Conference.
Sources close to the discussions said that about three weeks ago, MBA president David Stevens and Michael Heid, president of Wells Fargo's mortgage division, the nation's largest home loan underwriter, met with Cordray's top deputy, Raj Date, and one of President Obama's top housing counselors, James Parrott, and warned them that Wells Fargo could withdraw from portions of the mortgage market if the CFPB issues rules the bank considers too strict.
Dodd-Frank requires lenders to start determining and verifying a consumer’s “ability to repay” before approving a mortgage. Regulators issued several options for complying with the legislation, including two QM definitions with different legal standards, which are the focus of the lobbying battle now.
One approach favored by consumer groups would give homeowners stronger rights to sue lenders if they someday cannot make their payments and face foreclosure--they could fight to keep their homes by proving a lender did not do its documentation and verification work correctly.
That approach would discipline lenders to make good loans by making them “dot their ‘I’s and cross their ‘T’s,” said Barry Zigas, director of housing policy for the Consumer Federation of America.
But many lenders support an option with stronger protections for them from future legal action – a “safe harbor” – if they take strong steps with borrowers to make a loan less risky and costly, such as capping fees and excluding interest-only payments.
Without a broad safe harbor, combined with a clear definition of the terms of a QM, lenders could face costly government and homeowner legal proceedings, judgments and penalties in the future, industry officials said. Because of such legal risks, lenders could quit underwriting an estimated one in five home loans or more—or at least charge more for loans and tighten lending standards for them—according to one industry official who has surveyed lenders on the issue.
Lenders underwrote more than six million new or refinanced mortgages last year, according to Inside Mortgage Finance—a year lending standards were already very strict and banks approved few “unconventional” loans. That compares to about 15 million home loans made at the peak of the housing bubble in 2006. In a “normal” housing market, Inside Mortgage Finance said, lenders might make eight million to nine million home loans.
Borrowers with more debt or lower credit scores, those that cannot afford a big down payment, and lower-income home buyers might pay the price for a QM rule without a safe harbor, industry officials said.
Stevens declined to confirm or comment on the meeting with Heid, Date and Parrott and declined to detail discussions with officials last week. Until last year, Stevens was the commissioner of the Federal Housing Administration, a position he was appointed to by the President.
But an April 12 letter sent to Cordray by the MBA and 32 other groups, including some community activists concerned about access to credit by lower-income homebuyers, said that certain loans are "unlikely to be made" if lenders face higher legal risks--and "in the unlikely event they are made, they will be far costlier, burdening families least likely to bear the expense."
Industry sources said the CFPB could delay its rulemaking to buy time to research and process the latest round of comments from lenders and consumer groups.
CFPB spokesperson Jennifer Howard said the agency is “still weighing the options and no decisions have been made."
She added, "The ability to repay rule will have a significant impact on the mortgage market and we want to get it right for consumers. Striking the right balance will depend on a careful analysis of the facts and the data.”
In a statement, Vickee Adams, vice president of communications for Wells Fargo (WFC) Home Mortgage, said that “as the nation’s leading mortgage lender, Wells Fargo has a strong interest in the definition of a ‘qualified mortgage’ and we are actively discussing our views. In defining a qualified mortgage, we believe it is important to strike the appropriate balance between ensuring consumer protections while continuing to make affordable mortgage credit accessible.”
“The best way to achieve this is through a broad qualified mortgage definition that provides clear, objective standards for determining qualified mortgage status and compliance with the ability-to-repay requirements,” Adams said. “This path is most likely to lead to a competitive mortgage market characterized by access to safe and transparent products for consumers.”
In a comment letter last year, Wells Fargo supported a safe harbor provision in QM regulations.
White House spokespeople did not respond to request for comment.
Deliberations have been roiled by a March 7 “discussion draft” of QM rules drawn up by a leading banking group, The Clearinghouse, and three consumer groups -- Center for Responsible Lending, the Consumer Federation of America and the Leadership Conference on Civil and Human Rights. While advocating “a broad definition of QM…to support access to credit,” it would protect a borrower’s ability to sue a lender.
Stevens noted that the proposal was a draft and said it did not reflect disagreement among lenders over the need for a safe harbor.
“Safe harbor is the clearest path to providing the broadest credit terms at the lowest cost” to borrowers, he said.
But some consumer advocates charged lenders are bluffing about cutting back on underwriting or increasing charges and standards if faced with legal risks.
“That’s a useful negotiation position but that seems unlikely to me,” Thompson said. “Safe harbor means that the lender can do whatever they want and the homeowner has no recourse.”
A 2011 report on QM rulemaking by the Government Accountability Office suggested some requirements – such as limiting loans to homebuyers with lower debt levels or improving verification of a homebuyer’s finances -- could limit some mortgage lending.
The GAO analysis found that if five QM requirements in Dodd-Frank were applied to home loans made from 2001 to 2010, “most mortgages would likely have met the individual criteria,” though the GAO acknowledged its data might be incomplete and “not…fully representative of the mortgage market as a whole.”
Still, the GAO reported, 25% to 42% of loans underwritten from 2003 to 2010 would not have met an illustrative QM standard requiring a lower debt burden, a 41% “debt to income” ratio for the homebuyer.
Restrictions on balloon payments, loans of longer than 30 years and “negative amortization” would have prevented about 8% to 15% of borrowers from qualifying for a likely QM loan in some years.