The Consumer Financial Protection Bureau's (CFPB) "ability-to-repay" rule, that went into effect in January of 2014, implements provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding a borrower's ability to repay a residential mortgage loan and established requirements for a "qualified mortgage" under the Truth in Lending Act, Regulation Z.
Under the rule, creditors must consider eight underwriting factors for a residential mortgage loan to assess the borrower's ability to repay the loan:
Creditors must use reliable third-party records to verify the information they use to evaluate these factors in consideration of a loan.
While credit unions have always had strong underwriting requirements, the stringent requirements contained in this rule will require credit unions to make investments and incur significant expenses while determining what mortgages count as "qualified mortgages" (QM) therefore carrying less legal liability. As indicated by NAFCU member credit unions in a recent survey, nearly 44% of respondents said they will cease originations of non-qualified mortgages. Another 44% indicated they will reduce originations that fall outside of the QM guidelines.
In January 2014, Daniel Weickenand, CEO of Orion FCU, testified on NAFCU's behalf before the House Financial Services Committee on "How Prospective and Current Homeowners Will Be Harmed by the CFPB's Qualified Mortgage Rule."
While the CFPB has made several changes to the rule in response to concerns we have raised, we continue to have several issues with the rule. NAFCU has taken advantage of every opportunity to discuss with the CFPB aspects of the ability-to-repay rule that are likely to be problematic for credit unions and their members. While credit unions understand the intention of the rule and importance of hindering unscrupulous mortgage lenders from entering the marketplace, we cannot support the ability-to-repay rule in its current form. NAFCU continues to have a dialogue with the CFPB and Congress with hopes to address our outstanding concerns.
For a loan to be considered a "qualified mortgage", the consumer's total monthly debt-to-income ratio at the time the loan is made cannot exceed 43%. We believe this ratio is too low. Credit unions often write quality mortgage loans for members that have a 45% or in limited circumstances as high as a 50% debt-to-income ratio. It is important for a credit union to be able to take other factors into consideration in determining whether or not a borrower will be able to repay. NAFCU believes this arbitrary threshold will prevent otherwise healthy borrowers from obtaining mortgage loans and will have a particularly serious impact in rural and underserved areas where consumers have a limited number of financial service options.
For a mortgage to be considered a "qualified mortgage", total points and fees may not exceed 3% of a loan of $100,000 or more. This limitation is problematic for many credit unions. As the loan amount decreases, certain fees cannot decrease as they may be fixed and not dependent on the size of the loan. Accordingly, the smaller the loan amount, the easier it is for fees to constitute a higher percentage of the loan total. As defined, "points and fees" includes, among other charges, fees paid to affiliated title companies, salaries paid to loan originators, amounts of insurance and taxes held in escrow, loan level prices adjustments, and payments by lenders to correspondent banks, credit unions and mortgage brokers in wholesale transactions. As a result of this troublesome definition many affiliated loans, including some made to low- and moderate-income borrowers, would not qualify as QMs and may not be made or would only be available at higher rates due to heightened liability risk.
On February 3, 2015, Rep. Bill Huizenga (R-MI)
reintroduced the Mortgage Choice Act
(H.R. 685) with nine original cosponsors - four Republicans and five Democrats, showing
the bill’s strong bipartisan support.
The legislation would adjust the Truth
in Lending Act mortgage rules by exempting from the qualified mortgage cap
on points and fees any affiliated title charges and escrow charges for taxes
and insurance. In March, this bill passed the Financial Services Committee and awaits action by the full House. NAFCU expects that this bill will pass the House again as it did during the 113th Congress. Similar legislation was introduced in the Senate during the 113th Congress but it has not yet been reintroduced this legislative session.
Also in the 114th Congress, the House Financial
Services Committee passed NAFCU-backed legislation (H.R. 1259) introduced by Rep. Andy Barr (R-KY) that
would be helpful to small creditors, including credit unions, as they deal with CFPB's definition of "rural areas" particularly as it is related to the ability-to-repay rule and QM definition. Similar legislation has been introduced in the Senate (S. 871) by Senators McConnell, Heller, Capito and Paul.
NAFCU also supports other bipartisan initiatives to improve the CFPB's ability-to-repay rule including ensuring mortgages held in portfolio are automatically considered QMs.
Credit unions should be allowed to continue
writing non-qualified mortgage loans where necessary and appropriate for their
members, without the fear of retribution from examiners. NAFCU will continue to
work with Congress and the CFPB to reduce the burden this rule places on credit
NAFCU has stayed at the forefront of this issue and continued to champion credit unions in major media nationwide.
House Passes Mortgage Choice Act (Credit Union Times, April 15, 2015)
Bill Would Give Mortgages Safe Harbor Under CFPB Rules (CUtoday.info, March 3, 2015)
Mortgage Choice Act reintroduced in Congress (HousingWire, February 3, 2015)
Mortgage Choice Act Re-introduced in House (Credit Union Times, February 3, 2015)
NAFCU Statement on Rep. Huizenga’s Introduction of Points-and-Fees Bill
(February 3, 2015)
CFPB Proposes Easing Rules for Small Mortgage Lenders (Wall Street Journal, January 29, 2015)
CFPB offers changes to mortgage rules for smaller lenders (The Hill, January 29, 2015)
CFPB wants more mortgages in "underserved" areas (HousingWire, January 29, 2015)
CFPB Mortgage Proposal Offers Reg Relief (Credit Union Times, January 29, 2015)
NAFCU Statement on CFPB’s Proposed 2,000 Loan-Limit for QM Small Creditors
(January 29, 2015)
Read recent letters from NAFCU to members of Congress on CFPB's Qualified Mortgage Definition and it's affect on credit unions and their members.
6-12-2014 NAFCU Letter to the Senate in Support of the Mortgage Choice Act of 2013
6-9-2014 NAFCU Letter to the House in Support of the Mortgage Choice Act of 2013 (H.R. 3211)
12-17-2013 NAFCU letter on S. 1577, The Mortgage Choice Act of 2013
11-13-2013 Joint industry letter regarding QM
10-22-2013 NAFCU letter on H.R. 3211, The Mortgage Choice Act of 2013
View all NAFCU Policy Letters
Updated June 2015