The Federal Reserve Board announced last week that it was launching a new article series, Consumer & Community Context, that features original analysis about the financial conditions and experiences of consumers and communities, including traditionally underserved and economically vulnerable households and neighborhoods.

According to the Fed, the series is intended “to increase public understanding of the financial conditions and concerns of consumers and communities” and will be published periodically.  Through the series, the Fed seeks “to share insights and provide context for the complex economic and financial issues that affect individuals, communities, and the broader economy.”  Each issue will have a theme, with student loans the theme of the first issue.  The authors are described as employees of the Federal Reserve Board or the Federal Reserve System.

The title of the first article is “Can Student Loan Debt Explain Low Homeownership Rates for Young Adults?”  Its authors “estimate that roughly 20 percent of the decline in homeownership among young adults can be attributed to their increased student loan debts since 2005.”  Thus, the authors observe that although their estimates “suggest that increases in student loan debt are an important factor” in explaining the lower homeownership rates, such increases are “not the central cause of the decline.”

The authors also reference a forthcoming paper in which they find that “all else equal, increased student loan debt causes borrowers to be more likely to default on their student loan debt, which has a major adverse effect on their credit scores, thereby impacting their ability to qualify for a mortgage.”  They observe that this finding “has implications beyond home ownership” and call on policymakers to consider policies “that reduce the cost of tuition, such as greater state government investment in public institutions, and ease the burden of student loan payments, such as more expansive use  of income-drive repayment.”

The second article is titled “‘Rural Brain Drain’: Examining Millennial Migration Patterns and Student Loan Debt,” and looks at the relationship between student loan debt and individuals’ decisions to live in rural or urban areas.  The authors found that “individuals with student loan debt are less likely to remain in rural areas than those without it” and that “rural individuals who move to metro areas fare better than those who stay in rural areas across several financial and economic measures, including student loan delinquency rates and balance reduction.”  They observe that higher rates and amounts of student borrowing may be causing student loan debt to “play an increased role in the dynamics of urban-rural migration” in that “factors that previously drew individuals to rural areas may be outweighed by the desire or need for greater economic opportunity in urban centers.”  They suggest that researchers “could explore community development strategies that might create conditions that lead to more college graduates living in rural areas.”

 

Earlier this week, Governor Andrew Cuomo again advanced controversial legislation that would establish a state licensing regime for student loan servicers.  The proposal, which is packaged as Part L of the governor’s proposed Transportation, Economic Development and Environmental Conservation Bill for fiscal year 2020, would require companies that service student loans held by New Yorkers to obtain a state license from the New York Department of Financial Services (NYDFS) and submit to onerous reporting and examination requirements.  The proposal also would authorize NYDFS to seek—in addition to remedies already available to other New York and federal regulators—substantial penalties for enumerated categories of loan servicing misconduct.

Similar legislation has repeatedly failed in the past.  Last year’s proposal, despite having support from the office of former New York Attorney General Eric Schneiderman, was “intentionally omitted” from the amended budget bill passed by the New York legislature; the same thing happened in 2017.  Efforts to codify a “student loan borrower bill of rights” died in the Higher Education committees of the New York Assembly and Senate during the 2017-18 legislative session.

This year’s proposed licensing scheme differs significantly from previous efforts in several respects.  First, it expressly includes a limited carve-out for entities that service federal student loans (i.e., those issued under the William D. Ford Federal Direct Loan Program, or issued under the Federal Family Education Loan Program and later purchased by the federal government).  That provision was most likely included in response to the recent federal court opinion holding that federal law partially preempted the District of Columbia’s like-minded attempt to license student loan servicers.  The New York proposal would still, however, leave servicers of federal student loans subject to penalty for failure to satisfy certain notice obligations or adhere to the aforementioned substantive standards of operation.  Those provisions are likely to continue to present preemption issues.

Also unlike previous efforts, the FY 2020 proposal provides for substantial penalties for violations of the proposed licensing scheme.  Proposed penalties are capped at the greater of (1) $10,000 per offense; (2) double the actual damages caused by the violation; or (3) double the “aggregate economic gain” attributable to the violation.  The new proposal drops calls for a student loan ombudsman within NYDFS.  It also abandons provisions from the prior year’s draft that would have imposed restrictions on student debt consultants and prevented certain state licensing boards from denying a professional license because of an applicant’s student debt.

Whether these changes will be enough to persuade the New York legislature to adopt a measure that it has repeatedly rejected, and that is all but certain to face additional challenges in federal court, remains to be seen.

 

 

 

 

The CFPB announced yesterday that it has transmitted a proposal to Congress that would give it clear authority to conduct supervisory examinations for compliance with the Military Lending Act (MLA).

Last summer, former CFPB Acting Director Mulvaney reportedly announced that he planned to end routine examinations for MLA compliance because the Dodd-Frank Act did not give the CFPB the authority to conduct such examinations.  For the reasons we detailed, we agreed with Acting Director Mulvaney’s reading of Dodd-Frank.  As we observed, while the MLA gives the CFPB authority to enforce the MLA, nothing in the plain language of the MLA or Dodd-Frank currently gives the CFPB authority to conduct MLA examinations.  As might be expected, Mr. Mulvaney’s plan met with strong criticism from Democratic lawmakers and state attorneys general, who asserted that the CFPB did possess the requisite examination authority.

The CFPB’s legislative proposal would amend Sections 1024 and 1025 of Dodd-Frank which establish the CFPB’s supervisory authority as to, respectively, non-banks and banks with more than $10 billion in total assets.  It would add a substantially similar provision to each section that would provide that the CFPB has “nonexclusive authority to require reports and conduct examinations on a periodic basis…for the purposes of—”

  • assessing compliance with the MLA
  • obtaining information about the non-bank or bank’s activities and compliance systems or procedures
  • detecting and assessing risks to consumers and to markets for consumer financial products and services.

The proposal would also add language to Section 1026 of Dodd-Frank which addresses the CFPB’s supervisory authority as to banks with $10 billion or less in total assets to provide that the CFPB (1) can include its examiners in examinations performed by a bank’s prudential regulator to assess not only the bank’s compliance with “Federal consumer financial law” but also MLA compliance, and (2) the requirement for the CFPB to notify a bank’s prudential regulator and recommend appropriate action when it has reason to believe the bank has engaged in potential violations includes not only material violations of a “Federal consumer financial law” but also material violations of the MLA.

According to a report issued earlier this month, the Maryland Financial Consumer Protection Commission is considering the adoption of the “Model State Consumer and Employee Justice Enforcement Act” developed several years ago by the National Consumer Law Center.

The Model Act proposes a number of “state interventions” aimed at preventing the alleged harms caused by “forced arbitration.”  Based upon the Model Act and the U.S. Consumer Financial Protection Bureau’s since-repealed final arbitration rule, the Commission’s report concludes that “forced arbitration clauses lessen consumer protection.”  It assigns three reasons for this: “(1) many clauses require consumers to pursue what are often small dollar claims individually, without the benefit of a class or group; (2) arbitration can be very expensive due to mandatory fees or requirements to use arbitration in another geographic location; and (3) businesses’ greater familiarity with the process may allow them to prolong the duration of arbitration.”

Fortunately, based on strong opposition by the Maryland Bankers Association and other industry groups, the Commission stopped short of recommending adoption of the model act.  Instead, it has recommended “further study to identify remedies which may serve to establish increased fairness for consumers.”  That is a good thing – for consumers – because individual arbitration has been proven to be cheaper, faster and more beneficial to consumers than class action litigation.

The CFPB’s own statistics prove that arbitration is a far superior choice for consumers (though not for the lawyers who represent them in class actions).  After exhaustively studying arbitration and class actions for several years, the CFPB came to these empirical conclusions:

  • Arbitration was found to be faster and less costly than class action litigation.  Disputes were resolved in two to five months instead of two years or more, and consumers paid just $200 in fees or, in many cases, nothing.  By contrast, it cost consumers $400 just to file a complaint in federal court.
  • The average consumer recovery in arbitration was nearly $5,400.  But the average class member received a mere $32 (166 times less).  Most class members did not even get that paltry sum.  According to the CFPB, 87% of class members got no benefits at all.  The lawyers for the class, by contrast, made a whopping $424,495,451 in attorneys’ fees.
  • Moreover, disputes actually get resolved in arbitration.  None of the 562 class actions studied by the CFPB went to trial.  By contrast, of 341 cases resolved by arbitrator, in-person hearings were held in 34% of the cases, and arbitrator reached merits of the claims in 146 cases.  Arbitration produces results, not foot-dragging.

The Commission’s report also suggests that companies win more often in arbitration than consumers.  Not so.  A 2009 Northwestern University School of Law study of more than 300 arbitrations showed that consumers won relief in 53.3% of the cases and recovered their attorneys’ fees in 63.1% of them.  And, a 2005 Harris Interactive poll of 609 consumers who participated in arbitrations found that arbitration was seen by most of the participants as faster, simpler and cheaper than going to court, and two-thirds of them said they would be likely to use arbitration again.

Facts such as these lead to one inexorable conclusion: consumers will be harmed if arbitration is replaced by class action litigation as a way to resolve disputes.  A study by the U.S. Chamber of Commerce showed that 90% of the claims that consumers bring against financial services companies are not even suitable for class action treatment because they involve unique, individualized facts that do not apply to others.  The Commission should consider how these consumers will resolve their disputes if arbitration is eliminated.

The Commission’s report also notes that relatively few consumers avail themselves of arbitration when they have disputes with companies.  But that is due, in large part, to the fact that consumers have not been educated in any systematic fashion on the benefits that arbitration has to offer.  Unfortunately, the CFPB did not take the opportunity to do so.  But consumers who experience arbitration like it.  We strongly suggest that the Commission consider the implementation of a consumer arbitration education program as one of the “remedies which may serve to establish increased fairness for consumers.”

The pendency of three cases in circuit courts challenging the CFPB’s constitutionality has given rise to speculation as to whether the CFPB will continue to defend its constitutionality under Director Kraninger’s leadership.  The CFPB continued to defend its constitutionality in these cases while under former Acting Director Mulvaney’s leadership.  It did so, however, as a fallback to its primary argument that because Mr. Mulvaney was removable at will by the President and had ratified the CFPB’s decision to bring the lawsuit in question, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured.

On January 9, a Ninth Circuit panel heard oral argument in CFPB v. Seila Law LLC, one of the three pending circuit court cases.  The appellant in Seila Law is asking the Ninth Circuit to overturn the district court’s refusal to set aside a Bureau civil investigative demand, arguing that the CID is invalid because the CFPB’s structure is unconstitutional.  In its answering brief filed with the Ninth Circuit, the CFPB relied on the ratification argument and its fallback constitutionality argument. (Mr. Mulvaney was Acting Director at the time of briefing.)

At the oral argument, the CFPB maintained the positions taken in its brief, namely that Mr. Mulvaney’s ratification cured any constitutional defect and, in any event, the Bureau’s structure is constitutional under U.S. Supreme Court precedent and the D.C. Circuit’s en banc PHH decision.  This would suggest that Director Kraninger, like former Acting Director Mulvaney, will continue to defend the CFPB’s constitutionality in the other pending cases.

Should she do so, however, Ms. Kraninger will be at odds with the position of the Department of Justice.  In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied this week), DOJ argued that while it agreed with the bank that the CFPB’s structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank Act’s for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue.  It also noted that its position “is that of the United States, not the position of the Bureau to date.”  The DOJ had asked the Supreme Court to allow the CFPB to weigh in should it grant the petition for certiorari.  (The DOJ’s position could have added significance because of the Dodd-Frank provision that requires the Bureau to seek the Attorney General’s consent before it can represent itself in the Supreme Court.)

If Director Kraninger does have a change of heart, she will be following in the shoes of Joseph Otting, who was appointed Acting FHFA Director by President Trump (and also serves as Comptroller of the Currency).  Next week, the Fifth Circuit is scheduled to hold oral argument in the en banc rehearing of Collins v. Mnuchin, in which a Fifth Circuit panel found that the FHFA is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  The plaintiffs, shareholders of two of the housing government services enterprises (GSEs), are seeking to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs.

The Fifth Circuit panel had determined that the appropriate remedy for the constitutional violation was to sever the provision of the Housing and Economic Recovery Act of 2008 (HERA) that only allows the President to remove the FHFA Director “for cause” while “leav[ing] intact the remainder of HERA and the FHFA’s past actions.”  The plaintiffs sought a rehearing en banc to overturn the panel’s rulings that the FHFA acted within its statutory authority in entering into the agreement and that the FHFA’s unconstitutional structure did not impact the agreement’s validity.  The FHFA also sought a rehearing en banc but with the goal of overturning the panel’s determination that the plaintiffs had Article III standing to bring a constitutional challenge.

Despite having argued in its petition for rehearing that the panel’s constitutionality ruling was incorrect, the FHFA has now announced that it will not defend the FHFA’s constitutionality to the en banc court.  In the En Banc Supplement Brief of the FHFA and Mr. Otting, the FHFA states that Mr. Otting “has reconsidered the issues presented in this case.”  It further states that while it remains the FHFA’s position that the plaintiffs’ lack of standing makes it unnecessary for the en banc court to reach the constitutionality issue, to the extent the court concludes it is necessary to do so “FHFA will not defend the constitutionality of HERA’s for cause removal provision and agrees with the analysis in Section II.A of the Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.”

The two other pending circuit court cases challenging the CFPB’s constitutionality are the All American Check Cashing case pending in the Fifth Circuit and the RD Legal Funding case pending in the Second Circuit.  Oral argument is tentatively calendared for the week of March 11, 2019 in the All American Check Cashing case and briefing is scheduled to begin next month in the RD Legal Funding case.

 

 

The CFPB and New York Attorney General have agreed to a settlement with Sterling Jewelers Inc. of a lawsuit they filed jointly in a New York federal district court alleging federal and state law violations in connection with credit cards issued by Sterling that could only be used to finance purchases made in the company’s stores.  The proposed Stipulated Final Order and Judgment, which requires Sterling to pay a $10 million civil money penalty to the CFPB and a $1 million civil money penalty to the State of New York, represents the second settlement of an enforcement matter announced by the CFPB under Kathy Kraninger’s leadership as CFPB Director.  (In addition to a civil money penalty, the other settlement required the payment of consumer restitution.)

The complaint contains three counts asserted by the CFPB and NYAG alleging unfair or deceptive acts or practices in violation of the Consumer Financial Protection Act based on the following alleged conduct by Sterling:

  • Representing to consumers that they were completing a survey, enrolling in a rewards program, or checking on the amount of credit for which the consumer would qualify when, in fact, either the consumer or a Sterling employee was completing a credit application for the consumer without his or her knowledge or consent
  • Misrepresenting financing terms to consumers, including interest rates, monthly payment amounts, and eligibility for promotional financing
  • Enrolling consumers for payment protection plan insurance (PPPI) without informing them that they were being enrolled or misleading them about what they were signing up for

This alleged conduct is also the basis of two counts alleging state law violations asserted only by the NYAG.

In another count asserted only by the CFPB, Sterling is alleged to have violated TILA and Regulation Z by issuing credit cards to consumers without their knowledge or consent and not in response to an oral or written request for the card.  This alleged TILA/Reg Z violation is also the basis for a count alleging a state law violation asserted only by the NYAG as well as a count alleging a CFPA violation asserted by both the CFPB and NYAG.

In addition to requiring payment of the civil money penalties, the settlement prohibits Sterling from continuing to engage in the alleged unlawful practices and to “maintain policies and procedures related to sales of credit cards and any related add-on products, such as [PPPI], that are reasonably designed to ensure consumer consent is obtained before any such product is sold or issued to a consumer.  Such policies and procedures must include provisions for capturing and retaining consumer signatures and other evidence of consent for such products and services.”  By not requiring consumer restitution, the settlement differs from consent orders entered into by the CFPB under the leadership of former Director Cordray that required restitution by companies that had allegedly enrolled consumers in a product without their consent.

A Minnesota federal district court recently ruled that lead generators for a payday lender could be liable for punitive damages in a class action filed on behalf of all Minnesota residents who used the lender’s website to obtain a payday loan during a specified time period.  An important takeaway from the decision is that a company receiving a letter from a regulator or state attorney general that asserts the company’s conduct violates or may violate state law should consult with outside counsel as to the applicability of such law and whether a response is required or would be beneficial.

The amended complaint names a payday lender and two lead generators as defendants and includes claims for violating Minnesota’s payday lending statute, Consumer Fraud Act, and Uniform Deceptive Trade Practices Act.  Under Minnesota law, a plaintiff may not seek punitive damages in its initial complaint but must move to amend the complaint to add a punitive damages claim.  State law provides that punitive damages are allowed in civil actions “only upon clear and convincing evidence that the acts of the defendants show deliberate disregard for the rights or safety of others.”

In support of their motion seeking leave to amend their complaint to add a punitive damages claim, the named plaintiffs relied on the following letters sent to the defendants by the Minnesota Attorney General’s office:

  • An initial letter stating that Minnesota laws regulating payday loans had been amended to clarify that such laws apply to online lenders when lending to Minnesota residents and to make clear that such laws apply to online lead generators that “arrange for” payday loans to Minnesota residents.”  The letter informed the defendants that, as a result, such laws applied to them when they arranged for payday loans extended to Minnesota residents.
  • A second letter sent two years later informing the defendants that the AG’s office had been contacted by a Minnesota resident regarding a loan she received through the defendants and that claimed she had been charged more interest on the law than permitted by Minnesota law.  The letter informed the defendants that the AG had not received a response to the first letter.
  • A third letter sent a month later following up on the second letter and requesting a response, followed by a fourth letter sent a few weeks later also following up on the second letter and requesting a response.

The district court granted plaintiffs leave to amend, finding that the court record contained “clear and convincing prima facie evidence…that Defendants know that its lead-generating activities in Minnesota with unlicensed payday lenders were harming the rights of Minnesota Plaintiffs, and that Defendants continued to engage in that conduct despite that knowledge.”  The court also ruled that for purposes of the plaintiffs’ motion, there was clear and convincing evidence that the three defendants were “sufficiently indistinguishable from each other so that a claim for punitive damages would apply to all three Defendants.”  The court found that the defendants’ receipt of the letters was “clear and convincing evidence that Defendants ‘knew or should have known’ that their conduct violated Minnesota law.”  It also found that evidence showing that despite receiving the AG’s letters, the defendants did not make any changes and “continued to engage in lead-generating activities in Minnesota with unlicensed payday lenders,” was “clear and convincing evidence that shows that Defendants acted with the “requisite disregard for the safety” of Plaintiffs.”

The court rejected the defendants’ argument that they could not be held liable for punitive damages because they had acted in good-faith when not acknowledging the AG’s letters.  In support of that argument, the defendants pointed to a Minnesota Supreme Court case that held punitive damages under the UCC were not recoverable where there was a split of authority regarding how the UCC provision at issue should be interpreted.  The district court found that case “clearly distinguishable from the present case because it involved a split in authority between multiple jurisdictions regarding the interpretation of a statute.  While this jurisdiction has not previously interpreted the applicability of [Minnesota’s payday loan laws] to lead-generators, neither has any other jurisdiction.  Thus there is no split in authority for the Defendants to rely on in good faith and [the case cited] does not apply to the present case.  Instead, only Defendants interpret [Minnesota’s payday loan laws] differently and therefore their argument fails.”

Also rejected by the court was the defendants’ argument that there was “an innocent and equally viable explanation for their decision not to respond or take other actions in response to the [AG’s] letters.”  More specifically, the defendants claimed that their decision “was based on their good faith belief and reliance on their own unilateral company policy that that they were not subject to the jurisdiction of the Minnesota Attorney General or the Minnesota payday lending laws because their company policy only required them to respond to the State of Nevada.”

The court found that the defendants’ evidence did not show either that there was an equally viable innocent explanation for their failure to respond or change their conduct after receiving the letters or that they had acted in good faith reliance on the advice of legal counsel.  The court pointed to evidence in the record indicating that the defendants were involved in lawsuits with states other than Nevada, some of which had resulted in consent judgments.  According to the court, that evidence “clearly show[ed] that Defendants were aware that they were in fact subject to the laws of states other than Nevada despite their unilateral, internal company policy.”

 

 

 

Having declared the CFPB eviscerated by President Trump, Colorado’s newly elected Democratic Attorney General, Phil Weiser, is expected to take an active approach to consumer protection.  In this week’s podcast, Ballard Spahr Partner Matt Morr, based in the firm’s Denver office, discusses Mr. Weiser’s background, key appointees, and likely areas of focus.

To listen to the podcast, click here.

 

 

A coalition of 14 state Attorneys General and the D.C. Attorney General have filed an amicus brief with the U.S. Court of Appeals for the Fourth Circuit in Williams v. Big Picture Loans in which a tribal lender and its tribal service provider have appealed from the district court’s denial of their motion to dismiss the complaint filed by consumers who alleged that the interest rate charged by the lender violated Virginia law.

The defendants argued that the complaint should be dismissed because, as “arms of the tribe,” the lawsuit was barred by sovereign immunity.   In denying the motion to dismiss, the district court ruled that the defendants had the burden of proving that they were shielded by sovereign immunity and had not met that burden.

In their amicus brief, the Attorneys General argue that the district court correctly placed on the defendants the burden of providing their entitlement to sovereign immunity (rather than on the plaintiffs to negate a claim of sovereign immunity).  They also argue that in determining whether the defendants acted as “arms of the tribe,” it was proper for the district court to look beyond the defendants’ official actions (meaning their legal or organizational relationship to the tribe) and consider their practical operation in relation to the tribe.

 

On January 10, the CFPB published a report containing the results of its assessment of the Ability-to-Repay and Qualified Mortgage Rule (“ATR/QM Rule”) issued in 2013. The assessment was conducted pursuant to the Dodd-Frank Act, which requires the Bureau to review each significant rule it issues and evaluate whether the rule is effective in achieving its intended objectives, and the purposes and objectives of Title X of the Dodd-Frank Act, or whether it is having unintended consequences. The Bureau based the report on information gathered from a variety of sources, including:

  1. Loan origination and performance data from the National Mortgage Database (NMDB), Black Knight, CoreLogic, and HMDA
  2. Desktop Underwriter and Loan Prospector submissions and acquisitions data provided by Fannie Mae and Freddie Mac
  3. Application-level data from nine lenders covering over 9 million applicants
  4. Survey results from 190 lenders
  5. Supervision Data
  6. Residential mortgage backed securities (RMBS) data from IMF, Bloomberg, L.P., and SEC
  7. Cost data from the Mortgage Bankers Association’s (MBA) Annual Mortgage Bankers Performance Reports between 2009 and 2018
  8. Conference of State Bank Supervisors’ (CSBS) 2015 Public Survey data
  9. Evidence from comments received in response to the 2017 RFI concerning the ATR/QM assessmentThe ATR/QM Rule, which came into effect in January 2014, prohibits a lender from making a closed-end residential mortgage loan unless before closing the lender makes a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay (ATR). Qualified Mortgage (QM) loans are presumed to comply with the ATR requirement, except in the case of “higher priced” mortgage loans, where this presumption is rebuttable.Based on its survey of lenders, the Bureau found that a majority of respondents changed their business model due to the ATR/QM Rule in the form of increased income documentation, increased staffing, or adopting of a policy of not originating non-QM loans. The Bureau concluded that among the nine lenders that provided data, the changes resulted in lost profits of between $20 and 26 million per year. The Bureau also found that over the period of 2014 to 2016 the ATR/QM Rule eliminated between 63-70% of non-GSE eligible home purchase loans with debt-to-income (DTI) ratios above 43%. This impact did not carry over to refinance transactions, where lenders are more likely to extend credit due to a demonstrated ability to repay. The Bureau admits that because credit standards were already tight when the ATR/QM Rule took effect, “it is possible that the impacts would be different during times when credit is more abundant.”We note that the mortgage industry did not believe that a robust non-QM market would develop, and that the temporary GSE QM would be relied on heavily by lenders. And this is no surprise. The potential liability for violating the rule is significant, and based on the general standards for a non-QM loan there is no way for a lender, a due diligence firm or other party to conclusively determine if a given non-QM loan complies with the rule. As a result, a robust QM market did not develop, and it will never develop based on the current statute and rule. Based on the presumption of compliance with the rule, which is conclusive for non-higher priced loans, mortgage lenders mainly will originate a QM loan when possible. And based on the familiarity of the industry with Fannie Mae and Freddie Mac underwriting requirements, and the relative inflexibility of the standard QM based on the strict 43% DTI ratio limit and Appendix Q, the temporary GSE QM is favored by the industry. While the Bureau noted that the temporary GSE QM will expire no later than January 10, 2021, it did not address the fact that should the QM expire, mortgage lending would be severely constrained. Congress and/or the Bureau must act to prevent another mortgage crisis.The Bureau further concludes that the ATR/QM Rule does not appear to be constraining the activities of smaller lenders, who may originate QM loans that have DTI ratios above 43% without following Appendix Q, and may also originate QM loans that have balloon payments if various conditions are met, as long as such loans are held in portfolio for at least two years after the origination. In March 2016, the definition of a small creditor was amended to increase the loan threshold from 500 to 2,000 loans per year. According to the Bureau, this amendment had ameliorative effects – (1) the geographic market coverage of small creditors increased substantially with the new threshold, increasing access to credit for borrowers in rural and underserved areas who have DTIs above 43%; and (2) the share of loans made by depository institutions that were small creditors almost doubled.
  10. We note that in May 2018, Senate Bill 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, was signed into law, creating a new QM category for insured depository institutions and insured credit unions that have, together with their affiliates, less than $10 billion in total consolidated assets. The Act provides that the new QM loan is deemed to comply with the ATR requirements if the loan: (1) is originated by and retained by the institution, (2) complies with requirements regarding prepayment penalties and points and fees, and (3) does not have negative amortization or interest-only terms. Furthermore, the institution must consider and verify the debt, income, and financial resources of the consumer. Beyond a minor footnote, the Bureau does not address this amendment in its report, likely because it still needs to implement the law.
  11. The Bureau also notes that innovation is occurring in the Temporary GSE QM space in the area of income verification and calculation, because compliance with Appendix Q is not required (loans made under the standard QM that is based on the strict 43% DTI ratio limit must follow Appendix Q). While the innovation is positive, it does not address the underlying need to continue, or find a suitable alternative, for the Temporary GSE QM.
  12. Although the rule includes a standard QM that is based on a strict DTI ratio limit of 43%, the Bureau created a temporary QM for loans eligible for sale to Fannie Mae or Freddie Mac “to preserve access to credit for consumers with debt-to-income ratios above 43 percent during a transition period in which the market was fragile and the mortgage industry was adjusting to the final rule.” The Bureau notes that it “expected that there would be a robust and sizable market for non-QM loans beyond the 43 percent threshold and structured the Rule to try to ensure that this market would develop.”
  13. In its assessment, the Bureau found that the introduction of the ATR/QM Rule was generally not correlated with an improvement in loan performance (as measured by the percentage of loans becoming 60 or more days delinquent within two years of origination). Rather, the Bureau concludes that delinquency rates on mortgages originated in the years immediately prior to the effective date of the ATR/QM Rule were historically low, “as credit was already tight at that time.” Moreover, although the performance of non-QM loans did not improve in absolute terms under the ATR/QM Rule, it has improved relative to the performance of comparable QM loans.
  14. The CFPB states that the report does not include a cost-benefit analysis of the ATR/QM Rule or its provisions, but that “each report does address matters relating to the costs and benefits.” The CFPB indicated that going forward, it will reconsider whether to include such an analysis in its assessment.

The Bureau did not announce any further action relative to the ATR/QM Rule but did indicate that reactions from stakeholders to the reports’ findings and conclusions would help inform future policy decisions. The Bureau concurrently released a report assessing the RESPA Mortgage Servicing Rule, which we will analyze separately.