Wednesday, July 11, 2012

In Testimony before House Panel, Securities Industry Urges CFPB to Adopt Safe Harbor in Qualified Mortgage Regulations

The securities industry urged the Consumer Financial Protection Board to adopt a safe harbor in the qualified mortgage regulations under the Dodd-Frank Act and reject the alternative of a rebuttable presumption, which carries the risk of assignee liability. In testimony before the House Financial Institutions Subcommittee. SIFMA senior official Ken Bentsen also noted concern that the qualified mortgage regulations may be constructed in a narrow manner with parameters that will not allow for the certainty of compliance at origination. The securities industry believes that such an outcome would restrict the availability of credit, through increased costs and restrictive underwriting, and would be detrimental to consumers. SIFMA comes at these issues from the standpoint of securitizers and investors.

The Dodd-Frank Act mandates that all residential mortgages be made with respect to ability to repay. The Consumer Financial Protection Bureau is in the process of implementing minimum underwriting standards that loan originators would have to comply with under the Dodd-Frank Act in order to achieve qualified mortgage status for their loans.

SIFMA supports the concept that lenders should determine if borrowers have an ability to repay their loans before they extend credit. As a threshold matter, the ability to repay provisions of Title XIV of Dodd-Frank were not intended to outline the parameters of mortgage lending for the most creditworthy borrowers, said SIFMA, that is the purpose of a provision within the risk retention statute that exempts qualified residential mortgages from those requirements. Indeed, said SIFMA, the ability to repay provisions of Dodd-Frank impose a requirement on lenders to determine an ability to repay on virtually every residential mortgage loan, and the qualified mortgage definition is intended to define steps needed to show compliance with the ability to repay requirement. Thus, SIFMA urged the CFPB to craft qualified mortgage regulations that broadly outline the parameters of responsible lending.

Defining qualified mortgage broadly will create compliance guideposts for lenders that want to lend responsibly, posited SIFMA. While some predict that a narrower definition of qualified mortgage will not be disruptive because lenders and secondary markets will be comfortable operating outside of the protections afforded by a qualified mortgage, possibly with a reasonable pricing premium for those loans, noted SIFMA, such predictions contradict feedback from the securities industry.

In SIFMA’s view, history has shown that loans that carry with them significant or uncertain liability are simply not made, or are made with a significant pricing premium, which restricts the availability and affordability of those loans. SIFMA believes that lenders will respond to the liability risk through very restrictive underwriting guidelines, or significant pricing premiums, or both.

Secondary market participants will take steps to avoid or price the risk of assignee liability, which will also make loans more expensive and less available. For these reasons, SIFMA urged the CFPB to implement broad but sensibly structured parameters for the determination of a qualified mortgage.

Contending that a rebuttable presumption in the qualified mortgage regulations would transfer liability to securitizers and investor, SIFMA urged a safe harbor. Given the impact of assignee liability, SIFMA believes it is critical that the final rules provide for certainty of compliance with ability to repay requirements. The Board’s proposal provided two options regarding assurance of compliance: a rebuttable presumption of compliance, and a safe harbor for compliance.

SIFMA believes that consumer credit availability would be best protected through a safe harbor. The proposed rebuttable presumption approach could inhibit a lender’s certainty of its compliance, and effectively call the compliance of many loans into question after-the-fact. Because of this lack of certainty, a rebuttable presumption may cause lenders and secondary market investors to implement standards conservatively, as an overlay comfortably within the bounds of the qualified mortgage definition.

Rep. Stephen Lynch (D-MA) feared that a safe harbor would result in a check-the-box exercise creating an immunity from liability. He noted that we had such a structure in the securities rating of mortgage-backed securities, which were rated in a check-the-box exercise that rated the instruments Triple AAA regardless of the quality of the securities. The same thing could happen here, he warned, if you create a situation under which a lender could conduct a check-the-box exercise to obtain a safe harbor and still convey a mortgage that is not repayable or has a highly questionable ability to repay.

Arguing for a rebuttable presumption in the qualified mortgage regulations, Alys Cohen of the National Consumer Law Center said that a safe harbor that deems certain types of mortgages affordable no matter the circumstances will not build in incentives for creditors to ensure affordability. A rebuttable presumption, while still requiring a stiff uphill climb for homeowners, will provide a backstop to reckless lending. A rebuttable presumption will also deliver what lenders need the most, she noted, clear guidelines about how to proceed in reviving the mortgage market. This clarity will minimize the main risk creditors have faced in this crisis, repurchase risk from the secondary market.

Under a safe harbor, she feared that some creditors will focus on only the letter but not the spirit of the rule. It will leave the door open to known types of abusive lending and will predictably encourage the emergence of adjustable rate mortgages timed to reset at the end of six years instead of five. Finally, in her view, a safe harbor could interfere with state sovereignty and reduce the rights that consumers currently have under state laws to challenge reckless and bad faith underwriting. A safe harbor under Dodd-Frank would make it much more difficult for homeowners to raise state legal claims, such as fraud, where a creditor can show it has satisfied the ability to repay definition

Regardless of whether or not a safe harbor is provided, said SIFMA, clear qualified mortgage standards are paramount. Lenders and investors must be able to know at the time of origination whether the loan meets the standards. Thus, the standards that define qualified mortgage compliance must be clear, objective, and verifiable. The secondary market for mortgage loans and the securitization markets will require verification of the qualified mortgage status before a pool of loans is purchased or securitized.

SIFMA expressed further concern about the compliance and examination process to be employed by the CFPB in the context of bright-line standards. It is imperative that the ability to repay and qualified mortgage rules be based on clear and objective standards, so that judgments of compliance or non-compliance may be based on similarly objective tests. If the CFPB’s regulatory examination process is other than fully objective, cautioned SIFMA, the subjective guidance to field examiners will result in differential application of the regulations, resulting in a functional morphing of the regulations that could negate the critically necessary assurance of compliance.