With Richard Cordray finally confirmed by the Senate as head of the Consumer Financial Protection Bureau earlier this month, any lingering uncertainties about the agency’s future should finally be put to rest. But less than six months before sweeping new regulations that will alter the landscape for the mortgage industry are due to kick in, many lenders still have plenty of questions.
“I don’t know of anybody in the industry right now who’d consider themselves ‘settled in’ at this point to the CFPB changes,” said Mike Kemple, the Northeast regional manager for Sierra Pacific Mortgage. “The sheer volume of what’s out there is going to take the remainder of 2013 just to swallow.”
Earlier this month, the CFPB released a guidebook that aims to familiarize lenders with the new rules. But many crucial details about the nitty-gritty of the regulations are still unclear, lenders say.
Dodd-Frank aimed to curtail the type of predatory lending that occurred during the boom by holding banks liable if they choose to issue high-cost loans and/or loans that the purchaser wouldn’t be able to repay. But the law also contains a safe harbor, saying banks won’t be at risk for “qualified mortgages” which are issued with sound underwriting standards.
After months of wrangling, the CFPB has come out with its definition of what a “qualified mortgage” is – but even after reviewing the rules, exactly how to determine whether a loan is or isn’t QM is still unclear to many lenders.
“I would say there are still a number of things which are very open ended,” said Ruth Dillingham, a special counsel for First American Title Insurance Co. who often lectures on compliance issues.
A particular sticking point is the definition of points and fees, Dillingham explained. Under the CFPB’s rule, in order to be a QM, the fees charged to a consumer must be no more than 3 percent of the total loan balance. But it’s unclear exactly which of the dozens of service fees and charges that go into underwriting a loan count towards the cap. And many of them aren’t in a broker’s control.
For example, in some circumstances “loan level price adjustments” – essentially, penalty points charged by Fannie and Freddie to riskier borrowers – may fall under the 3 percent cap. For an investor purchasing a double- or triple-decker, the loan level price adjustment alone may be as much as 3 percent of the loan’s value, essentially making it impossible for a broker to make a QM loan for such properties. Borrowers with lower credit Wscores also face steep adjustments.
Overlays At Issue
An even bigger open question – and one beyond the control of the CFPB and most mortgage lenders – is what kinds of “overlays” big lenders will insist upon when the rules do come into effect. Ever since the crash, big national banks like Wells Fargo and Bank of America as well as private investors have often been even more cautious than Washington’s rules require when it comes to the loan terms they’re willing to offer, providing mortgage lenders with extensive “overlays” to Fannie and Freddie’s rules with they must adhere to.
As written, some of the new rules which will come into effect in January may provide a bit of flexibility – Fannie and Freddie are exempt from QM standards, for example, and may still be willing to underwrite a loan with a debt-to-income ratio greater than QM allows. But that won’t matter if the big lenders who act as middlemen between brokers and local lenders and the GSEs implement strict overlay requirements for all their loans.
There are “loans I can make today and sell to any number of investors, but after January next year, perhaps even before that, lenders could decide not to offer them, and you’re looking at a significantly worse rate and price to that first-time homebuyer for that loan,” said Kemple.
Dillingham’s also worried about how lenders will accommodate the new regulations’ stance toward things like condo maintenance and home owner’s association fees. Previously, such costs weren’t accounted for when a lender made its initial assessment of how much a borrower was qualified to borrow. The CFPB rules do require them to be added in – something that can often be a tricky proposition before the borrower has even successfully made an offer.
Such fees “have to be independently verified,” Dillingham said, and a breezy assurance from a listing agent may not be enough. “I’ve been raising this with a lot of people, and absolutely no one has raised their hand and said, ‘Here’s how we plan to handle it, Ruth,’” she said.
These are exactly the kinds of questions that the compliance committee at the Massachusetts Mortgage Bankers Association is now puzzling through, said Debbie Sousa, executive director. “We’re at the stage of testing things out – if this is what it actually means, how does that work when it comes to putting together a loan? Does it fit? Does it not fit?”
There’s a lot still to be done to come up with answers to such dilemmas. Dilligham hopes that lenders are paying attention now – because otherwise “when you wake up on Jan. 14, these things are going to be a huge issue.”
Email: csullivan@thewarrengroup.com
