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
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.