MBA Offers Recommendations on Fostering Economic Growth

Mike Sorohan msorohan@mba.org

April 18, 2017

The Mortgage Bankers Association, in response to a Senate Banking Committee leadership request, offered recommendations on fostering economic growth, focusing on housing finance reform and regulatory clarity.

The Apr. 14 letter (http://mba-pc.informz.net/mba-pc/data/images/AdvocacyDocuments/4 14 17 Mortgage Bankers Association Submission-Economic Growth Proposals.pdf) to Banking Committee Chairman Mike Crapo, R-Idaho, and Ranking Member Sherrod Brown, D-Ohio, also offers recommendation on the Consumer Financial Protection Bureau, SAFE Act transitional licensing, consumer protections for Property Assessed Clean Energy loans and reauthorization of the National Flood Insurance Program. The letter offers detailed comments and legislative language on the need for regulatory clarity, Ability to Repay/Qualified Mortgage changes, servicing regulations and Basel III and Federal Home Loan Bank membership.

On the commercial/multifamily side, MBA included suggestions on commercial mortgage-backed securities risk retention, High-Volatility Commercial Real Estate and Low-Income Housing Tax Credit allocations.

"MBA has consistently supported reasonable requirements that will prevent a reemergence of housing and market disruptions," wrote MBA Senior Vice President of Legislative and Political Affairs Bill Killmer. "However, while some of the new regulations enacted in the past several years have made the mortgage market safer, in many other respects these rules have reduced the availability and affordability of mortgage credit for many families. The current regulatory environment has increased costs and forced many responsible mortgage bankers to limit lending. This most often harms low-to-moderate income borrowers, minorities, and first-time homebuyers. We urge the Committee to do a thorough review of current rules and regulations and make adjustments where necessary in order to balance the need for consumer protection while ensuring access to safe, sustainable mortgage credit."

In this regard, Killmer added, MBA urged that particular attention be given to "simplifying rules, providing greater clarity and certainty and mitigating supervisory burdens. These goals are particularly important for smaller, community lenders that may not be able to sustain excessive compliance and legal infrastructures."

Below is a summary of MBA recommendations.

Regulatory Clarity and Relief
--CFPB. MBA said the CFPB's use of consent decrees and administrative decisions to make changes in the rules, rather than formal rulemaking or published guidance, has "created uncertainty in the market and higher costs for consumers."

"MBA believes the CFPB, when implementing new rules or changing the interpretation of existing rules, should adopt clear ‘rules of the road' through the issuance of official, written interpretative rules, supervisory guidance and/or compliance bulletins to facilitate regulatory certainty and consistent consumer protections throughout the market."

--Impact on Consumers and Market Participants. MBA said mortgage origination costs have increased, while the number of lenders have declined; MBA also noted large institutions have pared back their participation in the market.

"This ultimately impacts the American consumer, driving up the cost of credit, delaying closings, as well as limiting borrowers' choices due to reduced market competition," MBA said. "Increasing regulatory clarity will allow lenders to operate under clear guidance and decrease costs for lenders and consumers alike.

--Economic Impact. MBA said residential mortgage credit availability remains constrained due in part to uncertainty regarding the lack of clear guidance and overly aggressive enforcement actions, both of which have led to the rising costs of originating and servicing home loans. "Restrictions on credit availability for housing may in turn hinder the ability of potential first-time homebuyers to purchase a home and existing homeowners to move," the letter said.

Specifically, MBA recommended that Congress require the CFPB to establish and abide by a consistent framework for providing industry with authoritative written guidance that facilitates efficient compliance, reduces implementation costs, and ensures consistent consumer treatment across the market.

Servicing Market Regulations, Basel III Requirements
--Cost of Servicing. MBA said mortgage servicing market regulations would benefit from review and coordination among federal agencies and government guarantors. "The streamlining and harmonization of existing regulations will allow lenders to lower costs and increase the availability of credit," the letter said.

--Basel III: MBA said the "punitive treatment" of mortgage servicing rights under Basel III risk-based capital standards is acting as an impediment to lending and servicing and should be reconsidered. "These standards, imposed on U.S. institutions by an international regulatory body, threaten to undermine the value of this important asset, with adverse implications for the entire mortgage finance chain."

--Impact on Consumers and Market Participants. MBA data show the cost to service a performing loan has gone from $58 in 2008 to $228 by the first half of 2016. For a nonperforming loan this increase is even more dramatic, as costs have gone from $482 to $2,522. "These additional costs ultimately get passed through to consumers by raising the cost of new loans," MBA said. "Likewise, they directly impact consumer access to credit as defaulted loans cost more than 11 times as much to service as performing loans, causing lenders to reduce their exposure to borrowers that are perceived to pose greater risk."

Economic Impact. "Higher servicing costs are ultimately passed on to consumers," MBA said. "Some potential homebuyers will not be able to afford a home at the higher cost and others will be unable to refinance in order to access the equity they have built in their homes, or to lower their monthly payments."

MBA said agencies tasked with regulating mortgage servicing should be required to coordinate with one another in order to provide consistency in the mortgage servicing space and minimize regulatory conflicts.

Ability to Repay/Qualified Mortgage Rule Improvements
MBA said the Dodd-Frank Act and the CFPB's Ability to Repay rule requires lenders to determine whether a borrower has a reasonable ability to repay a mortgage before the loan is consummated; this obligation is coupled with significant penalties and liability for failing to meet this requirement. The ATR rule also provides a presumption of compliance for loans that are originated as Qualified Mortgages, which provides greater certainty to lenders and mortgage investors regarding potential liability where there has been compliance but a claim is made.

"The ATR rule and QM standards must be improved to responsibly widen the credit box," MBA said. "While MBA appreciates some earlier efforts to address flaws in the QM definition, we believe changes to the ATR rule should not be confined to particular types of institutions or business models. The QM definition should be fixed holistically, not revised in piecemeal fashion with special exceptions for certain categories of lenders."

Specifically, MBA said changes should include
--Expanding the "safe harbor" regardless of their rate, beyond the current 150 basis point limit.

--Increasing the Small Loan Definition so that more loans qualify as QM loans to benefit moderate-income borrowers who have smaller loan balances.

--Establishing Alternatives to Appendix Q to allow use of other commonly accepted underwriting standards such as those acceptable to FHFA, FHA, VA and the Rural Housing Service.

--Broadening Right to Cure for DTI and other Technical Errors.

-- Replacing the Patch and the Default QM. MBA urges the CFPB to start the process of working with stakeholders to develop a transparent set of criteria, including compensating factors, to define a QM--replacing both the QM patch and the 43 percent DTI standard. "Such a standard must provide workable, flexible underwriting standards that are consistent with the Dodd-Frank Act without injecting undue complexity or uncertainty into the process of serving consumers' credit needs," MBA said.

FHLB Membership Rule
MBA recommended Congress pass legislation that re-permits captive insurers to gain access to the Federal Home Loan Bank System. "Such legislation would give [the Federal Housing Finance Agency] the clear direction it needs to allow captive insurance companies who commit to supporting the residential home market access to the System. The narrowly tailored legislation includes a strong housing nexus that will only permit mREITs primarily engaged in the making or purchasing of residential home loans to join. This will ensure members of the System are aligned with the overall mission of the Federal Home Loan Banks."

High Volatility Commercial Real Estate
MBA noted loans characterized as HVCRE are subject to a 150 percent risk weight (12 percent capital requirement). "We are concerned that the rule is not sufficiently clear and that it results in HVCRE treatment for many loans with standard risk characteristics, "MBA said.

To provide clarity to banks and to better align HVCRE treatment with factors affecting credit risk, MBA recommends that the specifications around HVCRE be modified as follows:

--Clarify the definition of an "HVCRE ADC Loan"

--Permit banks to count the value of appreciated property toward the borrower's required 15 percent capital contribution;

--Provide banks with greater flexibility to permit some capital withdrawals during the life of the loan without triggering HVCRE status; and

--Exempt loans originated prior to January 1, 2015.

CMBS Risk Retention
Under the final risk retention rule under Section 941 of the Dodd-Frank Act, a sponsor of a securitization transaction is required retain a 5 percent interest in the transaction. "We remain concerned that the current retention rules will add costs to the security borne by borrowers, which in turn will stifle economic growth and reduce investor interest in the commercial real estate market," MBA said.

MBA offered the following recommendations:

--Modify the unduly restrictive underwriting metrics for determining which "qualified" CRE loans are eligible for zero risk retention.

--Exempt single asset, single borrower CMBS from the risk retention requirement.

--Expand the range of retained interest structures that satisfy risk-retention requirements to permit either a senior-subordinate structure or pari passu for third-party purchasers of the horizontal "risk retention" residual interest. Under current rules, residuals interests must be shared pari passu.

LIHTC Allocations
MBA said the Low Income Housing Tax Credit program has been a "critically important" catalyst for investment in affordable multifamily rental housing, but noted that some Housing Finance Agencies have promoted their own in-house debt financing when meeting with potential LIHTC borrowers or developers, threatening to undercut the effectiveness of the LILHTC program.

"MBA believes the original congressional intent was appropriate and should be incorporated into law so the LIHTC allocating agencies, individually or in partnership with other HFAs, do not provide both the tax credits and debt financing on the same multifamily affordable rental property transaction," the letter said. "Similarly, should there be a workforce housing tax credit program (a.k.a. middle-income housing tax credit) for multifamily rental properties approved by Congress, we urge that distribution of such credits include a prohibition against a HFA providing both tax credits and debt financing on the same property."

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