Tag Archives: CFPB

CFPB Mortgage Market Rules

Posted on by

woodleywonderworks

Law360 quoted me in Questions Remain Over CFPB Mortgage Rules’ Market Effects (behind a paywall). The story highlights the fact that the jury is still out on exactly what a mature, post-Dodd-Frank mortgage market will look like. As I blogged yesterday, it seems like the new regulatory regime is working, but we need more time to determine whether it is providing the optimal amount of sustainable credit to households of all income-levels. The story opens,

Despite fears that a set of Consumer Financial Protection Bureau mortgage rules that went into effect last year would cut off many black, Hispanic and other borrowers from the mortgage market, a recent government report showed that has not been the case.

Indeed, the numbers from the Federal Financial Institutions Examinations Council’s annual Home Mortgage Disclosure Act annual report showed that the percentage of black and Hispanic borrowers within the overall mortgage market actually ticked up in 2014, even as the percentage of loans those two communities got from government sources went down.

However, it may be too early to say how the CFPB’s ability-to-repay and qualified-mortgage rules are influencing decisions by lenders and potential borrowers as the housing market continues to recover from the 2008 financial crisis, experts say. 

“Clearly, there’s a story here, and clearly there’s a story from this 2014 data,” said David Reiss, a professor at Brooklyn Law School. “But I don’t know that it’s that QM and [ability to repay] work.”

The CFPB was tasked with writing rules to reshape the mortgage market and stop the subprime mortgage lending — including no-doc loans and other shoddy underwriting practices — that marked the period running up to the financial crisis.

Those rules included new ability-to-repay standards, governing the types of information lenders would have to collect to have a reasonable certainty that a borrower could repay, and the qualified mortgage standard, a class of mortgages with strict underwriting standards that would be considered the highest quality.

The rules took effect in 2014, after the CFPB made changes aimed at easing lenders’ worries over potential litigation by borrowers should their QMs falter.

Even with those changes, there were worries that black, Hispanic and low-income borrowers could be shut out of the market, as lenders focused only on making loans that met the QM standard or large loans, known as jumbo mortgages, issued primarily to the most affluent borrowers.

According to the HMDA report, that did not happen in the first year the rules were in effect.

Both black and Hispanic borrowers saw a small uptick in the percentage of overall mortgages issued in 2014.

Black borrowers made up 5.2 percent of the overall market in 2014 compared with 4.8 percent in 2013, when lenders were preparing to comply with the rule, and 5.1 percent in 2012, the report said. Latino borrowers made up 7.9 percent of the overall market in 2014 compared with 7.3 percent in 2013 and 7.7 percent in 2012, the federal statistics show.

And the percentage of the loans those borrowers got from government-backed sources like the Federal Housing Administration, a program run by the U.S. Department of Housing and Urban Development targeting first-time and low- to middle-income borrowers, the U.S. Department of Veterans Affairs and other agencies fell.

Overall, 68 percent of the loans issued to black borrowers came with that direct government support in 2014, down from 70.6 percent in 2013 and 77.2 percent in 2012, the HMDA report found. For Hispanic borrowers, 59.5 percent of the mortgages issued in 2014 had direct government support, down from 62.8 percent in 2013 and 70.7 percent in 2012.

For backers of the CFPB’s mortgage rules, those numbers came as a relief.

“We were definitely waiting with bated breath for this,” said Yana Miles, a policy counsel at the Center for Responsible Lending.

To supporters of the rules, the mortgage origination numbers reported by the federal government showed that black and Hispanic borrowers were not being shut out of the mortgage market.

“Not only did we not see lending from those groups go to zero, we’re seeing a very, very small baby step in the right direction,” Miles said. “We’re seeing opposite evidence as to what was predicted.”

And in some ways, the CFPB has written rules that met the goal of promoting safe lending following the poor practices of the housing bubble era while still giving space to lenders to get credit in the market.

“We have a functioning mortgage market,” Reiss said.

Tuesday’s Regulatory & Legislative Round-Up

Posted on by
  • The Consumer Financial Protection Bureau (CFPB) has finalized changes to Mortgage Rules as applied to small lenders that operate primarily in underserved and rural areas.  This change eliminates some of the prohibitions under the Ability- to-Repay Rule thereby allowing income to debt ratios as high and 43% and balloon payments, as long as the creditor holds the loan in their own portfolio. The Rule also allows more creditors to be considered small lenders because it increases the number of mortgages a small lender can hold from 500 to 2000.  It would also expand the number of geographic locations which can be considered rural.

Better to Be a Banker or a Non-Banker?

Posted on by

 

The Community Home Lenders Association (CHLA) has prepared an interesting chart, Comparison of Consumer and Financial Regulation of Non-bank Mortgage Lenders vs. Banks.  The CHLA is a trade association that represents non-bank lenders, so the chart has to be read in that context. The side-by side-chart compares the regulation of non-banks to banks under a variety of statutes and regulations.  By way of example, the chart leads off with the following (click on the chart to see it better):

CLHA Chart

The chart emphasizes all the ways that non-banks are regulated where banks are exempt as well as all of the ways that they are regulated in the identical manner. Given that this is an advocacy document, it only mentions in passing the ways that banks are governed by various little things like “generic bank capital standards” and safety and soundness regulators. That being said, it is still good to look through the chart to see how non-bank regulation has been increasing since the passage of Dodd-Frank.

Expanding the Credit Box

Posted on by

Tracy Rosen

DBRS has posted U.S. Residential Mortgage Servicing Mid-Year Review and 2015 Outlook. There is a lot of interest in it, including a table that demonstrates how “the underwriting box for prime mortgages slowly keeps getting wider.” (7) The report notes that

While most lenders continue to originate only QM [Qualified Mortgage] loans some have expanded their criteria to include Non-QM loans. The firms that are originating Non-QM loans typically ensure that they are designated as Ability-to-Repay (ATR) compliant and adhere to the standards set forth in the Consumer Financial Protection Bureau’s (CFPB) Reg Z, Section 1026.43(c). Additionally, most Non-QM lenders are targeting borrowers with high FICO scores (typically 700 and above), low loan to values (generally below 80%) and a substantial amount of liquid reserves (usually two to three years). Furthermore, most require that the borrower have no late mortgage payments in the last 24 months and no prior bankruptcy, foreclosure, deed-in-lieu or short sale. DBRS believes that for the remainder of 2015 the industry will continue to see only a few Non-QM loan originators with very conservative programs.

CFPB ATR And QM Rules

The ATR and QM rules (collectively, the Rules) issued by the CFPB require lenders to demonstrate they have made a reasonable and good faith determination, based on verified and documented information, that a borrower has a reasonable ability to repay his or her loan according to its terms. The Rules also give loans that follow the criteria a safe harbor from legal action. (8)

DBRS believes

that the issuance of the ATR and QM rules removed much of the ambiguity that caused many originators to sit on the sidelines for the last few years by setting underwriting standards that ensure lenders only make loans to borrowers who have the ability to repay them. In 2015, most of the loans that were originated were QM Safe Harbor. DBRS recognizes that the ATR and QM rules are still relatively new, having only been in effect for a little over a year, and believes that over time, QM Rebuttable Presumption and Non-QM loan originations will likely increase as court precedents are set and greater certainty around liabilities and damages is established. In the meantime, DBRS expects that most lenders who are still recovering from the massive fines they had to pay for making subprime loans will not be originating anything but QM loans in 2015 unless it is in an effort to accommodate a customer with significant liquid assets. As a result, DBRS expects the availability of credit to continue to be constrained in 2015 for borrowers with blemished credit and a limited amount of cash reserves. (8)

The DBRS analysis is reasonable, but I am not so sure that lenders are withholding credit because they “are still recovering from the massive fines they had to pay for making subprime loans . . ..” There may be a sense of caution that arises from new CFPB enforcement. But if there is money to be made, past missteps are unlikely to keep lenders from trying to make it.

Underwriting Sustainable Homeownership

Posted on by

Mesa-Mesa Journal-Tribune FHA Demonstration Home-1925" by Marine 69-71

I have posted Underwriting Sustainable Homeownership: The Federal Housing Administration and the Low Down Payment Loan to SSRN (and to BePress). It is forthcoming in the Georgia Law Review. The abstract reads,

The United States Federal Housing Administration (“FHA”) has been a versatile tool of government since it was created during the Great Depression. The FHA was created in large part to inject liquidity into a moribund mortgage market. It succeeded wonderfully, with rapid growth during the late 1930s. The federal government repositioned it a number of times over the following decades to achieve a variety of additional social goals. These goals included supporting civilian mobilization during World War II; helping veterans returning from the War; stabilizing urban housing markets during the 1960s; and expanding minority homeownership rates during the 1990s. It achieved success with some of its goals and had a terrible record with others. More recently, the FHA is in the worst financial shape it has ever been in.

Today’s FHA suffers from many of the same unrealistic underwriting assumptions that have done in so many other lenders during the 2000s. It has also been harmed, like other lenders, by a housing market as bad as any seen since the Great Depression. As a result, the federal government recently announced the first bailout of the FHA in its history. At the same time that it has faced these financial challenges, the FHA has also come under attack for the poor execution of some of its policies to expand homeownership. Leading commentators have called for the federal government to stop using the FHA to do anything other than provide liquidity to the low end of the mortgage market. These critics rely on a couple of examples of programs that were clearly failures but they do not address the FHA’s long history of undertaking comparable initiatives. This article takes the long view and demonstrates that the FHA has a history of successfully undertaking new homeownership programs. At the same time, the article identifies flaws in the FHA model that should be addressed in order to prevent them from occurring if the FHA were to undertake similar initiatives in the future.

In order to demonstrate this, the article first sets forth the dominant critique of the FHA. Relying on often overlooked primary sources, it then sets forth a history of the FHA and charts its constantly changing roles in the housing finance sector. In order to give a more detailed picture of the federal government’s role in housing finance, the article also incorporates the scholarly literature regarding (i) the intersection of race and housing policy and (ii) the economics and finance literature regarding the role that down payments play in the appropriate underwriting of mortgages for low- and moderate-income households. The article concludes that the FHA can responsibly address objectives other than the provision of liquidity to the residential mortgage market. It further proposes that FHA homeownership programs for low- and moderate-income families should be required to balance access to credit with households’ ability to make their mortgage payments over the long term. Such a proposal will ensure that the FHA extends credit responsibly to low- and moderate-income households while minimizing the likelihood of future bailouts.

Shaking up the Title Industry

Posted on by

Deeds

The United States Court of Appeals for the 9th Circuit issued an opinion in Edwards v. The First American Corporation et al., No. 13-555542 (Aug. 24, 2015) that may shake up how the title insurance industry works. As the court notes,

The national title insurance industry is highly concentrated, with most states dominated by two or three large title insurance companies. See U.S. Gov’t Accountability Office, Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers 3 (Apr. 2007). A “factor that raises questions about the existence of price competition is that title agents market to those from whom they get consumer referrals, and not to consumers themselves, creating potential conflicts of interest where the referrals could be made in the best interest of the referrer and not the consumer.” Id. Kickbacks paid by the title insurance companies to those making referrals lead to higher costs of real estate settlement services, which are passed on to consumers without any corresponding benefits. (9)

The Real Estate Settlement Procedures Act (RESPA) is intended to eliminate illegal kickbacks in the real estate industry. In this case, the 9th Circuit has reversed the District Court’s denial of class certification in a case in which home buyers alleged that First American engaged in a scheme of paying title agencies for referring title insurance business to First American in violation of RESPA. The reversal does not get to the merits of the underlying claims, but it does open up a can of worms for title companies.

The title industry is not only highly concentrated but it is also highly profitable. In some jurisdictions like NY its prices are set by regulation at rates that greatly exceed the actuarial risks they face. Regulators like the NYS Department of Financial Services have begun to pay more attention to the title insurance industry. This is a welcome development, given that title insurance is one of the most expensive closing costs a homeowner faces when buying a home or refinancing a mortgage.

Tuesday’s Regulatory & Legislative Round-Up

Posted on by