Tag Archives: OCC

Qualified Mortgage Fair Lending Concerns Quashed

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Federal regulators (the FRB, CFPB, FDIC, NCUA and OCC) announced that “a creditor’s decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.” This announcement was intended to address lenders’ concerns that they could be stuck between a rock (QM regulations) and a hard place (fair lending requirements pursuant to the Equal Credit Opportunity Act and the Fair Housing Act). For instance, a lender might want to limit its risk of lawsuits relating to the mortgages it issues that could arise under a variety of state and federal consumer protection statutes by only issuing QMs only to find itself the defendant in a Fair Housing Act lawsuit that alleges that its lending practices had a disproportionate adverse impact on a protected class.

The five agencies issued an Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule that gives some context for this guidance:

the Agencies recognize that some creditors’ existing business models are such that all of the loans they originate will already satisfy the requirements for Qualified Mortgages. For instance, a creditor that has decided to restrict its mortgage lending only to loans that are purchasable on the secondary market might find that — in the current market — its loans are Qualified Mortgages under the transition provision that gives Qualified Mortgage status to most loans that are eligible for purchase, guarantee, or insurance by Fannie Mae, Freddie Mac, or certain federal agency programs.

With respect to any fair lending risk, the situation here is not substantially different from what creditors have historically faced in developing product offerings or responding to regulatory or market changes. The decisions creditors will make about their product offerings in response to the Ability-to-Repay Rule are similar to the decisions that creditors have made in the past with regard to other significant regulatory changes affecting particular types of loans. Some creditors, for example, decided not to offer “higher-priced mortgage loans” after July 2008, following the adoption of various rules regulating these loans or previously decided not to offer loans subject to the Home Ownership and Equity Protection Act after regulations to implement that statute were first adopted in 1995. We are unaware of any ECOA or Regulation B challenges to those decisions. Creditors should continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring their policies and practices and implementing effective compliance management systems. As with any other compliance matter, individual cases will be evaluated on their own merits. (2-3)

 Lenders and their representatives have raised this issue as a significant obstacle to a vibrant residential mortgage market. This interagency statement should put this concern to rest.

If QRM = QM, then FICO+CLTV > DTI ?@#?!?

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The long awaited Proposed Rule that addresses the definition of Qualified Residential Mortgages has finally been released, with comments due by October 30th. The Proposed Rule’s preferred definition of a QRM is the same as a Qualified Mortgage. There is going to be a lot of comments on this proposed rule because it indicates that a QRM will not require a down payment. This is a far cry from the 20 percent down payment required by the previous proposed rule (the 20011 Proposed Rule).

There is a lot to digest in the Proposed Rule. For today’s post, I will limit myself to a staff report from the SEC, Qualified Residential Mortgage: Background Data Analysis on Credit Risk Retention, that was issued a couple of days ago about the more restrictive definition of QRM contained in the 2011 Proposed Rule.  The report’s main findings included

  • Historical loans meeting the 2011 proposed QRM definition have significantly lower SDQ [serious delinquency] rates than historical loans meeting the QM definition, but applying this definition results in significantly lower loan volume than QM.
  • FICO and combined loan-to-value (CLTV) are strong determinants of historical loan performance, while the effect of debt-to-income (DTI) is much lower.
  • Adding FICO or CLTV restrictions to the QM definition reduces SDQ rates faster than the loss of loan volume: max ratios achieved at 760 FICO and 55% CLTV. (2)

Certainly, some readers’ eyes have glazed over by now, but this is important stuff and it embodies an important debate about underwriting.  Is it better to have an easy to understand heuristic like a down payment requirement? Or is it better to have a sophisticated approach to underwriting which looks at the layering of risks like credit score, loan to value ratio, debt to income ratio and other factors?

The first approach is hard to game by homeowners, lenders and politicians seeking to be “pro-homeowner.” But it can result in less than the optimal amount of credit being made available to potential homeowners because it may exclude those homeowners who do not present an unreasonable risk of default but who do not have the resources to put together a significant down payment.

The second approach is easier to game by lenders looking to increase market share and politicians who put pressure on regulated financial institutions to expand access to credit. But it can come closer to providing the optimal amount of credit, balancing the risk of default against the opportunity to become a homeowner.

It would be interesting if the final definition of QRM were able to encompass both of these approaches somehow, so that we can see how they perform against each other.

These Are A Few of My Favorite Things

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Along with raindrops on roses and whiskers on kittens, reforming Government-Sponsored Enterprises and rationalizing rating agency regulation are two of my favorite things. The Federal Housing Finance Agency noticed a proposed rulemaking to remove some of the references to credit ratings from Federal Home Loan Bank regulations. This is part of a broader mandate contained in Dodd Frank (specifically, section 939A) to reduce the regulatory privilege that the rating agencies had accumulated over the years. This regulatory privilege resulted from the rampant reliance of ratings from Nationally Recognized Statistical Rating Organizations (mostly S&P, Moody’s and Fitch) in regulations concerning financial institutions and financial products.

The proposed new definition of “investment quality” reads as follows:

Investment quality means a determination made by the Bank with respect to a security or obligation that based on documented analysis,including consideration of the sources for repayment on the security or obligation:

(1) There is adequate financial backing so that full and timely payment of principal and interest on such security or obligation is expected; and

(2) There is minimal risk that that timely payment of principal or interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security or obligation. (30790)

The FHFA expects that such a definition will preclude the FHLBs from relying “principally” on an NRSRO “rating or third party analysis.” (30787)

This definition does not blaze a new path for the purposes of Dodd Frank section 939A as it is in line with similar rulemakings by the NCUA, FDIC and OCC. But it does the trick of reducing the unthinking reliance on ratings by NRSROs for FHLBs. Forcing financial institutions to “apply internal analytic standards and criteria to determine the credit quality of a security or obligation” has to be a good thing as it should push them to look at more than just a credit rating to  make their iinvestment decisions. (30784) This is not to say that we will avoid bubbles as a result of this proposed rule, but it will force FHLBs to take more responsibility for their decisions and be able to document their decision-making process, which should be at least a bit helpful when markets become frothy once again.

When the cycle turns, when greed sings
When I’m feeling sad,
I simply remember
my favorite things
and then I don’t feel so bad!