Mortgages

Subscribe to Mortgages

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.

As previously reported, in September 2017 the CFPB proposed policy guidance regarding what application-level Home Mortgage Disclosure Act (HMDA) data would be disclosed to the public based on the significant expansion to the HMDA data reporting items that the CFPB adopted in October 2015. Calendar year 2018 was the first year that reporting institutions collected data under the expanded requirements, and that data must be reported to the government by March 1, 2019. Not long after Kathy Kraninger became the new CFPB Director, the CFPB announced the final policy guidance regarding the application-level HMDA data that will be made available to the public. Unfortunately, by adopting final guidance that is very similar to the proposed guidance, the CFPB is emphasizing public disclosure over consumer privacy concerns.

HMDA requires the modification of data released to the public “for the purpose of protecting the privacy interests of mortgage applicants”. Under the prior HMDA requirements, the application or loan number, the date the application was received and the date the institution took final action on the application were removed from the application-level data that was released to the public. However, even under the prior HMDA requirements, there were concerns that by combining the publicly available HMDA data with other data sources, the identity of each applicant can be determined. With the significant expansion of the HMDA data items, as well as the overall increase in data on consumers that is available in the marketplace, the privacy concerns are even greater. For example, the revised HMDA data items include, among other items, the applicant’s age, income (which is currently reported), credit score, and debt-to-income ratio; the automated underwriting results; the property address; loan cost information; and, for denied applications, the principal denial reasons.

When the CFPB adopted the October 2015 revisions it deferred making a decision on which elements of the expanded HMDA data would be reported on an application-level basis. However, the CFPB indicated that it would use a balancing test to decide what information to disclose publicly, and would allow public input on the information that it proposed to disclose. At that time the CFPB advised that
“[c]‍‍‍onsidering the public disclosure of HMDA data as a whole, applicant and borrower privacy interests arise under the balancing test only where the disclosure of HMDA data may both substantially facilitate the identification of an applicant or borrower in the data and disclose information about the applicant or borrower that is not otherwise public and may be harmful or sensitive.” The CFPB echoed the balancing test approach in adopting the final guidance. However, the approach is off balance, as it sides too much on the side of public disclosure, ignoring valid consumer privacy concerns.

Under the final policy guidance, the CFPB will make all of the HMDA data available to the public on an application-level basis, except as follows:

  • The following information would not be disclosed to the public (the non-disclosure of the first three items is consistent with prior public disclosure practices):
    • The universal loan identifier.
    • The date the application was received or the date shown on the application form (whichever was reported).
    • The date of the action taken on the application.
    • The property address.
    • The credit score(s) relied on.
    • The NMLS identifier for the mortgage loan originator.
    • The automated underwriting system result.
    • The free form text fields for the following (the standard fields reported would be disclosed):
      • The applicant’s race and ethnicity.
      • The name and version of the credit scoring model.
      • The principal reason(s) for denial.
      • The automated underwriting system name.
  • The CFPB will disclose in a modified format the loan amount, age of the applicant, the applicant’s debt-to-income ratio, the property value, the total individual dwelling units in the property, and for a multi-family dwelling the individual dwelling units that are income-restricted.
    • For the loan amount, the CFPB will disclose:
      • The midpoint for the $10,000 interval into which the reported value falls, such as $115,000 for amounts of $110,000 to less than $120,000. (Under prior requirements the loan amount was reported to the nearest $1,000, and the reported amount was disclosed to the public.)
      • Whether the reported loan amount exceeds the Fannie Mae and Freddie Mac conforming loan limit.
    • For the age of the applicant, the CFPB will disclose:
      • Ages of applicants in the following ranges: Under 25, 25 to 34, 35 to 44, 45 to 54, 55 to 64, 65 to 74, and over 74.
      • Whether the reported age is 62 or over. For purposes of the Equal Credit Opportunity Act, a person is considered elderly if they are age 62 or over.
    • For the debt-to-income ratio, the CFPB will disclose:
      • The reported debt-to-income ratio for reported values of 36% to less than 50%, and other debt-to-income ratios in the following ranges: under 20%, 20% to less than 30%, 30% to less than 36%, 50% to less than 60% and 60% or higher. As proposed, the reported debt-to-income level would have been disclosed for reported values of 40% to less than 50%.
    • For the property value, the CFPB will disclose the midpoint for the $10,000 interval into which the reported value falls, such as $115,000 for amounts of $110,000 to less than $120,000.
    • For the total individual dwelling units in the property, the CFPB will disclose:
      • The reported number of units for reported values below 5, and other unit numbers in the following ranges: 5 to 24, 25 to 49, 50 to 99, 100 to 149 and over 149. The CFPB had proposed to disclose the actual number of units reported.
    • For the individual dwelling units in a multifamily property that are income-restricted, the CFPB will disclose the reported value as a percentage, rounded to the nearest whole number, of the value reported for the total individual dwelling units. The CFPB had proposed to disclose the actual number of units reported.

Although the loan amount will now be reported in the applicable $10,000 interval and not to the nearest $1,000, the concern is that the totality of the information that is publicly available will make it easier than it is today to determine the identity of the applicant. Thus, based on the final policy guidance, there is a risk that a significant amount of information that consumers view as being confidential will become publicly available. The CFPB essentially dismissed most privacy concerns raised by parties commenting on the proposed policy guidance.

While the final policy guidance favors public disclosure over consumer privacy concerns, the final policy guidance may have a limited life. As previously reported, the CFPB has indicated that it plans to reopen HMDA rulemaking to reconsider various aspects of the revised HMDA rule, including the discretionary data points that were added by the CFPB. We noted previously that the CFPB’s Fall Rulemaking Agenda has a target of May 2019 for the issuance of a notice of proposed rulemaking. Potentially, the CFPB may eliminate entirely, or modify, one or more data categories that are included in the information disclosed publicly. The CFPB states as follows in the supplementary information to the final policy guidance: “The Bureau intends to commence a rulemaking in the spring of 2019 that will enable it to identify more definitively modifications to the data that the Bureau determines to be appropriate under the balancing test and incorporate these modifications into a legislative rule. The rulemaking will reconsider the determinations reflected in this final policy guidance based upon the Bureau’s experience administering the final policy guidance in 2019 and on a new rulemaking record, including data concerning the privacy risks posed by the disclosure of the HMDA data and the benefits of such disclosure in light of HMDA’s purposes.” Thus, in addition to reconsidering the HMDA rule itself, the CFPB already plans to reconsider the approach to public disclosure taken in the final policy guidance.

The adoption of policy guidance that favors public disclosure over consumer privacy appears contrary to the approach of former Acting Director Mulvaney. Perhaps the action reflects that Director Kraninger will take a different approach. Or perhaps Director Kraninger simply decided to initially punt on the issue. The guidance needed to be adopted in view the impending March 1 filing deadline for HMDA data. But as noted above, the CFPB intends to revisit both the HMDA rule itself and the policy guidance. Perhaps Director Kraninger will reassess the approach during the upcoming rulemaking.

Note that while the approach to the public disclosure of HMDA data is adopted in the form of public guidance and not a formal rule, the CFPB advises in the supplementary information to the guidance that pursuant to the Congressional Review Act it will file the guidance with Congress. As we previously reported, the Government Accountability Office determined that the CFPB bulletin on “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” was a rule subject to the Congressional Review Act, and subsequently under the Act Congress passed, and President Trump signed, legislation disapproving the bulletin. Presumably, this result influenced the decision of the CFPB to file the policy guidance with Congress under the Act.

As previously reported, late in 2018 the CFPB announced the availability of a beta version of a Home Mortgage Disclosure Act (HMDA) data platform for companies to test the filing of 2018 data. The CFPB has now announced that the beta testing period is closed and the HMDA data platform is open for the filing of 2018 data. The HMDA data platform can be accessed here.

All test data that companies uploaded during the beta testing period has been removed from the data platform. However, all user accounts created during the 2018 beta testing period, and also for the filing of 2017 data, will be maintained for the 2018 filing period. The reporting deadline for 2018 HMDA data is March 1, 2019.

As previously reported, in early December 2018 Congress passed another short-term extension of the National Flood Insurance Program that was scheduled to expire on December 21, 2018. On December 21, the US House of Representatives agreed to a bill adopted by the US Senate in November 2018 to extend the Program until May 31, 2019, and President Trump signed the extension on December 21. Earlier that day, an effort in the House to both extend the Program until May 31, 2018 and make additional changes, failed.

But the drama was not over. Based on the partial government shutdown, the Federal Emergency Management Agency (FEMA) announced on December 27, 2018 that it had sent a message to its industry partners providing guidance to suspend flood insurance sales operations as a result of the lapse of funding. The announcement drew criticism from various parties, and on December 28, 2018 FEMA announced it was rescinding the prior guidance and was resuming the sale of new flood insurance policies and the renewal of expiring policies.

The CFPB has made available a beta version of its 2018 HMDA data platform. The platform is for the reporting of data collected in 2018 that must be reported in 2019.

During the beta period, reporting institutions can test and retest 2018 HMDA data files as often as desired to assess if their Loan Application Register (LAR) data complies with the reporting requirements outlined in the Filing Instructions Guide for HMDA data collected in 2018.

No 2018 data can actually be submitted through the platform until January 2019. Based on the substantial changes to HMDA data for 2018, testing whether LAR data complies with the reporting requirements will likely be beneficial for many reporting institutions.

The CFPB recently filed a complaint and a proposed stipulated final judgment and order to address claims that Village Capital & Investments LLC (Village) engaged in deceptive acts and practices in the solicitation of veterans for mortgage refinance loans to be guaranteed by the Department of Veterans Affairs (VA).

The CFPB asserts that between March 2017 and August 2018 Village employed loan officers in its San Antonio, Texas office who were responsible for making in-home sales presentations to veterans for VA Interest Rate Reduction Refinancing Loans to be made by Village. This type of loan is the VA version of a streamlined refinance loan that is primarily intended to provide a veteran borrower with a lower interest rate and monthly payment. The CFPB states that Village provided the loan officers with marketing materials for the in-home presentations, including a worksheet that would be used to compare the veteran’s current loan with a proposed refinance loan.

The CFPB asserts that that the worksheets were deceptive because they misrepresented the cost savings to the consumer of the refinanced loan by:

  • Inflating the future amount of principal owed under the veteran’s existing mortgage loan by underestimating the proportion of the consumer’s existing monthly payment that is applied to principal.
  • Underestimating the future amount of the monthly payments on the proposed refinance loan by overestimating the term of the loan.
  • Overestimating the total monthly benefit of the proposed refinance loan after the first month.

Without the adjudication of any issue of fact or law, to settle the matter Village agreed to pay $268,869 for the purpose of providing redress to affected consumers, and also agreed to pay a civil penalty of $260,000. Village further agreed not to misrepresent to consumers in connection with the offering of refinance loans (1) the future principal or future monthly payments owed on the consumer’s existing mortgage loan, or (2) the future principal or future monthly payments a consumer would owe on a refinance mortgage loan. Additionally, Village must develop a compliance plan that includes training for loan officers.

As previously reported, the National Flood Insurance Program was scheduled to expire on November 30, 2018 and Congress extended the Program to December 7, 2018. The US House of Representatives and US Senate have once again voted to temporarily extend the Program, this time until December 21, 2018. Perhaps Congress is hoping that someone will come down the chimney and deliver a long-term, sensible reform of the Program.

The FDIC, Federal Reserve Board and Comptroller of the Currency are proposing a rule to implement a rural property appraisal exemption under the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) and also increase the appraisal exemption based on transaction value from $250,000 to $400,000.

As we reported previously, the Act amends the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) to exclude a loan made by a bank or credit union from the FIRREA requirement to obtain an appraisal if certain conditions are met. The conditions are that the property is located in a rural area; the transaction value is less than $400,000; the institution retains the loan in portfolio, subject to exceptions, and; not later than three days after the Closing Disclosure is given to the consumer, the mortgage originator or its agent has contacted not fewer than three state-licensed or state-certified appraisers, as applicable, and documented that no such appraiser, as applicable, was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments, as documented by the mortgage originator or its agent.

The federal banking agencies propose to implement the exemption under the Act by simply adding to the list of exempted transactions in their respective appraisal regulations a transaction that “is exempted from the appraisal requirement pursuant to the rural residential exemption under 12 U.S.C. 3356.”  In short, the agencies will implement the exemption by simply referencing the statutory provision.

Significantly, the agencies also propose to increase the exemption based on the value of a transaction from $250,000 to $400,000.  The agencies advise that the decision to propose an increase in the transaction value exemption is based on consideration of available information on real estate transactions secured by single 1-to-4 family residential property, supervisory experience, comments received from the public in connection with the Act, and rulemaking to increase the appraisal threshold for commercial real estate appraisals.  If this proposed exemption is adopted, it will significantly reduce the importance of the rural property exemption added by the Act.

With both proposed exemptions, banks still would need to obtain an appropriate evaluation of the real property collateral that is consistent with safe and sound banking practices.

The comment period will run 60 days from the publication of the proposal in the Federal Register.

With the November 30, 2018 expiration date for the National Flood Insurance Program (Program) looming, industry trade groups sent a letter to Congressional leaders urging Congress to extend the Program.

As we reported previously, the Program was set to expire on July 31, 2018 and Congress voted on that date to extend the Program until November 30, 2018.  Basically Congress kicked the can down the road until after the midterm elections.

As noted by the trade groups in their letter “Congress has yet to pass a long-term extension of the NFIP, as debate continues regarding options for reforming the program. This has already resulted in a series of seven stop-gap extensions and two brief lapses in 2017 and 2018. The NFIP is currently the main source of flood insurance in the United States, and Americans deserve certainty and stability in the flood insurance marketplace to be able to protect their homes and loved ones.”

A long-term, sensible reform of the Program is long overdue.  The continued kicking of the can down the road by Congress through temporary extensions of the Program is not good policy for communities at risk or taxpayers.