by Fredric J. Gooch – General Counsel/VP Compliance, DocuTech Corporation
Mortgage rates are at historic lows and so many DocuTech clients are working as fast and furious as they can to help borrowers take advantage of the great deals in the market. There are also several important regulatory issues that are of great importance to the future of our industry that are decided in this market. Hopefully these issues are not being lost as you try to accommodate the increased demand for mortgage loans. Three issues related to the implementation of the Dodd-Frank Act could have lasting impacts on our industry. DocuTech encourages everyone involved in the mortgage industry to take a few moments to inform and influence their respective representatives on the following issues:
Consumer Finance Protection Bureau (CFPB) Oversight
The Dodd-Frank Act created the Consumer Finance Protection Bureau (CFPB) with a broad mandate to ensure consumers are treated fairly in the marketplace. It has extraordinarily broad powers and responsibilities to regulate consumer markets, with supervision over nearly every federal law that touches the mortgage industry. There could be many benefits associated with consolidation and unification of many of the areas regulated by the CFPB. For instance, the current effort to combine and consolidate the RESPA/TILA early disclosures is a good step toward simplifying the process for consumers and for lenders if implemented appropriately. However, an agency with such broad reaching powers could have the power to easily disrupt the market and choke the supply of credit to qualified borrowers by overreacting to political pressures.
The industry needs clear and consistent regulation and guidance from the new bureau to continue to comply with new rules without burdening the consumer with unneeded red tape and costs. For this reason it is best to insulate the bureau from the political pressures associated with having a single director. We believe it would be best for the bureau to be governed by a bipartisan commission which would stabilize and temper the bureaus approach to solving problems in the marketplace. A commission would help insulate the bureau from the winds of political change, which if left unchecked could add tremendous uncertainty and increased costs to consumers and lenders.
Qualified Residential Mortgage (QRM)
Dodd-Frank requires the federal banking agencies and other rule makers to develop rules that require securitizers to retain a portion of the risk of the assets they package into securities. This has been called the “skin in the game” rule because it requires the securitizers to keep a portion of the risk they pass through the market in the securities they sell. The Act requires the regulators to develop a “Qualified Residential Mortgage” (QRM) exception to the skin in the game rule. The exception is intended to preserve the flow of credit into the housing market for loans that are well underwritten and pose a very low risk.
The regulators have proposed a rule to implement this QRM, but it is so restrictive that it will dramatically change the way the mortgage industry can operate by shutting down the flow of credit to a large portion of the marketplace. There is broad bipartisan consensus that the current QRM rule is problematic, and it appears that the rule will be overhauled. However, this issue is so important that is is critical to continue to remind your elected representatives and rulemakers that a QRM must be established that exempts low risk mortgages while preserving the flow of credit to underserved markets.
Qualified Mortgage (QM)
Dodd-Frank requires the CFPB to promulgate regulations that prohibit lenders from making loans to borrowers unless the lender has made a good faith effort to determine that the borrower has the ability to repay the loan. This rule represents the policy that the industry is to return to practices associated with sound underwriting. Due to market constraints, this is already taking place within the mortgage market, so this rule essentially regulates a part of the market that no longer exists.
The problem with this rule is that it provides substantial liability for those who do not meet its ability to repay standards. Legal liability associated with such a failure could serve as a severe constraint to the flow of credit into the mortgage marketplace. In order to reduce uncertainty in the market during a time of economic challenge, it is important that lenders have clear guidelines that provide a safe harbor for loans that meet clear criteria. The current Qualified Mortgage (QM) standard does not contain such a safe harbor. We believe a safe harbor provision should be added to the rule, as well as consolidation between the QM and the QRM definitions to reduce the burden and costs associated with maintaining two different standards.
We know that everyone is really busy right now trying to do business, but it is important, for the future of our industry to be educated on these important issues. We also urge clients and industry participants to get involved to make the mortgage market a better place for lenders and consumers, so that we may continue to provide this valuable service to the public.