Consumer Financial Protection Bureau Impact on Mortgage Lending Ellen Harnick NC Housing Coalition Conference October 15, 2014

2 About Self-Help & CRL Self Help Credit Union, since 1980  Lending to low-wealth communities  People of color, women, rural residents  $6 billion in loans to almost 70,000 families & organizations Center for Responsible Lending, since 2002  Use lending experience to shape policy  Protect homeownership & family wealth

Who cares about homeownership?  Still the best means of wealth-building for low- to-moderate- and middle-income families.  Neighborhood and family stability depends on it.  Strongly tied to educational opportunities.  Housing and mortgage markets are key to stability for national economy. 3

Recent history  13 million foreclosures  93 million neighbors’ homes impacted  Average neighboring home loses $21,000 in value  $2 Trillion in lost home equity—  $1 Trillion lost by communities of color 4

How we got there  Incentives to steer borrowers into risk-layered loans.  Liar Loans.  Based on repeated refinancing and hope of home price appreciation.  2/28 Hybrid Adjustable Loans.  Equity stripping high costs.  Prepayment penalties when refinancing before rate increase. 5

, $200,000 ARM (Remember these?) Source: CRL Calculations

Doing Better—Principles  Don’t makes loans borrowers can’t afford.  Align borrower and originator interests.  Avoid dual market.  Avoid unduly restricting credit.  Bright line rules so lenders know what to expect.  Consider loss mitigation before foreclosure. 7

Avoiding Mistakes of the Past  Originations  Ability to Repay  Stable Loan Products  Servicing  Reasonable chance to get back on track. 8

Origination basic standard For all loans, lenders must make:  “Reasonable and good faith” determination of ability to repay at the time the loan is originated (e.g., lender not responsible for unanticipated job loss.).  Based on verified, documented info. 9

ATR: Must Verify and Document 8 Underwriting Factors:  Current or reasonably expected income or assets;  Current employment status;  Monthly payment on the covered transaction;  Monthly payment on any simultaneous loan;  Monthly payment for mortgage-related obligations;  Current debt obligations, alimony, and child support;  Monthly debt-to-income ratio or residual income;  Credit history (can be non-traditional, e.g. rental hist) 10

Qualified Mortgages  Qualified Mortgages are presumed to satisfy the “ability to repay” requirements.  All QM loans are required to meet specified product standards.  Once loans meet these product requirements, the CFPB’s final rule provides 4 pathways to QM status.  Based on how the loan’s APR compares to the average prime offer rate (APOR), the loan will either have a safe harbor or rebuttable presumption of compliance. 11

QM: What Loan Terms?  Fully amortizing – no IOs or Neg Am;  No teaser ARMS – must be underwritten so borrower can afford maximum rate for 5 years;  No more than 3% in points and fees, with adjusted thresholds for smaller loans;  Term no longer than 30 years;  Prepayment Penalties only on fixed-rate loans or non- higher-priced ARMs, only for 3 years, no greater than 2% of loan for first 2 years and 1% for third year—and must offer consumer an alternative without a PPP. 12

4 Paths to QM Status (in addition to product requirements) 1.“Back end” DTI no greater than 43%; or 2.Satisfy requirements for: purchase by GSEs (in conservatorship) or FHA insurance or guarantee by VA, USDA or RHS (eg Automated Underwriting System); or 3.Small creditors that hold mortgage in portfolio for at least 3 years, must consider DTI or residual income, but are not limited by 43% DTI; or 4.Small creditors making balloon loans in rural areas (temporarily extends beyond rural loans) 13

Qualified Mortgage Presumption QM loans are presumed to satisfy the Ability to Repay requirement.  Prime rate loans: The presumption is conclusive.  Higher cost loans: Borrower can present court with evidence to try to rebut the presumption. 14

Loan Officer Compensation: Limits apply to QM & non-QM  Prohibition on Steering Incentives: Compensation cannot vary based on loan terms (except loan amount).  Why?: “The market is paying me to do a no- income-verification loan more than it is paying me to do the full documentation loans. What would you do?” - William Dallas, CEO Ownit Mortgage Solutions (1/2007) 15

Servicing Standards  Servicers must provide periodic statements, and notice of interest rate adjustments.  Must respond to borrower requests for information and address borrower notices of “covered errors.”  Limitations on force-placed insurance.  Good faith effort to talk to borrower soon after delinquency.  Provide opportunity for loss mitigation before foreclosure starts; no f/c sale while reviewing a timely loss mit. application; borrower can appeal denial.  Continuity of contact (can’t bounce from rep. to rep.). 16

CFPB Loss Mitigation Rules Outreach to borrower  Loss Mitigation Outreach  36 days to inform about available loss mitigation options  45 days written notice about delinquency and info on housing counselors 17

CFPB Loss Mitigation Rules Denial of Modification  Denial Notification – must state specific reasons  Appeal Rights –  14 days to appeal  May appeal only if complete application was received 90+ days before foreclosure sale  Different personal evaluating appeal  Decision on appeal within 30 days  Right to Seek Actual Damages for Violations

CFPB Loss Mitigation Rules Foreclosure  Dual-Track Restrictions:  Pre-foreclosure – Can’t pursue foreclosure until a borrower is 120 days delinquent  Post-foreclosure – Can’t go forward with the foreclosure sale, if the borrower submits a complete loss mitigation application 37 days before the foreclosure sale

CFPB Loss Mitigation Rules Continuity of Contact Continuity Requirements: Servicer has 45 days to assign personnel to assist borrower with available loss mitigation options.

What will all this mean?  Broad definition of QM provides protection for lenders.  Bright-line QM rules provides certainty.  Eliminating high-risk practices protects borrowers.  Reducing unsustainable lending protects home values and community stability.  Avoid foreclosure where possible.  Stability in the housing market is essential for national economic recovery. 21

Challenges—Access to Credit HMDA data for 2013  African-Americans got just 4.8% of all purchase mortgages (down slightly from 2012, well below pre-crisis levels of ~ 7%.)  Hispanic borrowers got 7.3% of all purchase mortgages (slightly down from 2012).  LMI borrowers got fewer purchase loans in 2013 (742,660) than in 2012 (763,190). 22

More Challenges  African-Americans, Latinos and LMI borrowers still mostly served by government-backed loan programs, not the private market.  FHA price increases.  FHFA recently proposed changes to Fannie/Freddie pricing structure.  Result is rising prices for households least well- served by the private market. 23

And yet...  By 2025, nearly half of first-time homebuyers will be households of color.  To be successful, lenders have to find ways to better serve these communities. 24

Looking ahead  The mortgage market is recovering, slowly.  Refinancing declined from 2012 to 2013, but purchase mortgages increased slightly.  Lender risk is greatly reduced by QM rules, and by GSE policy changes re buy-backs. Some lag time in lender reaction; should see more lending.  Some good programs slowly getting going—e.g. Fannie Mae “My Community Mortgage.” 25

What are you seeing? … 26