Consumer, Lender Groups Offer Recommendations on Mortgage Underwriting

With the Consumer Financial Protection Bureau reportedly nearing a decision on new rules under Dodd-Frank for underwriting mortgages, CFA, the Center for Responsible Lending, the Leadership Conference on Civil and Human Rights, and the Clearing House Association (an association of the largest banks that currently account for the lion’s share of mortgage originations) submitted a compromise proposal to the CFPB in March spelling out recommendations on the Dodd-Frank Act’s ability-to-repay requirements and qualified mortgage (QM) definition.

Dodd-Frank requires lenders to make mortgage loans only after making a reasonable judgment that the borrower can repay the loans on the terms offered.  Lenders who fail this “ability to repay” test can face penalties, and borrowers can raise such a failure as a defense against foreclosure.  Dodd-Frank also established a “qualified mortgage” definition.  Such loans are “presumed” to meet the ability to repay test.  To qualify, a loan must be an amortizing, long-term fixed rate mortgage, or plain vanilla adjustable rate mortgage, have lower points and fees than non-qualifying loans, and include strict limits on prepayment penalties, among other features.  The law’s intent was to create an incentive for lenders to make these more stable and sustainable loans the market norm by providing a limited shield from liability.

Industry and consumer groups were far apart on key issues in comments filed with the Bureau last summer.  Lenders’ comment letters had promoted adoption of a legal safe harbor for loans that meet the qualified mortgage test, while CFA and other consumer and civil rights groups strongly supported the adoption of a “rebuttable presumption” instead.  (The proposed rule issued by the Federal Reserve Board had asked for comment on both approaches.)

The groups subsequently began an intensive series of meetings to explore whether a compromise approach could be developed and recommended to the Bureau. The new joint comment letter is the result.  It strongly endorses adoption of a qualified mortgage standard that is as broad as possible; includes “bright line” definitions of a qualified mortgage to enhance standards and ease lender concerns about uncertainty; and endorses the rebuttable presumption standard.

“If the QM definition is construed narrowly, it will be more difficult for low-income and minority families to qualify for safer loans, and, to the extent that mortgage credit is available to them at all, many of these borrowers will be left to the part of the market where they will be significantly more vulnerable to equity stripping through high fees and bad practices,” the groups wrote.   Combining a broad QM definition with a limited litigation remedy would benefit homeowners, investors, and lenders alike, they added.  “It would also support access to credit, since secondary market standards are very likely to require loans to be QM,” they added.

The recommended approach to litigation rights – a “rebuttable presumption” that loans issued according to quality standards are non-abusive – has drawn criticism both from bankers seeking a stronger “safe harbor” from litigation and from some consumer advocates, who charge that the legal hurdles homeowners would have to overcome under the recommended approach are too onerous.  “The goal is to ensure that lenders have a strong incentive to fulfill all the obligations they’re required to fulfill,” said CFA Director of Housing Policy Barry Zigas. “The consumer who is disadvantaged does have redress, but it’s not a casual redress.”

The CFPB is expected to issue rules as early as June.

Greater Protections against Telephone Cramming Needed

A group of nine organizations, including CFA, wrote to the Federal Communications Commission last month to express concerns about “cramming,” the practice of placing unauthorized, misleading or deceptive charges on a customer’s telephone bill.  “We appreciate the FCC’s effort to require more disclosure regarding third-party billing,” the groups wrote. “However, we urge the FCC to go further and provide greater protections for consumers and for those protections to apply not just to landline users but also for those who use wireless phones and VoIP services.”  The groups cited a Senate report, which has found that many third-party vendors are illegitimate, created solely to exploit third-party billing, while most third-party charges appear to be unauthorized. “Cramming abuses are especially worrisome because in most states consumers lack the legal right to refuse to pay unauthorized third-party charges on their phone bills without fear of losing their phone service,” said CFA Consumer Protection Director Susan Grant.   “Consumers need strong protection regardless of what type of phone service they use.”

Scrutiny of UMG-EMI Merger Urged

A proposed merger between Universal Music Group and EMI would raise prices and undermine competition, according to a CFA press statement released last week.   CFA and Public Knowledge wrote to the Senate Committee on Antitrust, Competition Policy and Consumer Protection urging them to closely scrutinize the proposed merger.  The letter notes that under the Department of Justice’s recently revised Merger Guidelines, the UMG-EMI merger “will be presumed to be likely to enhance market power,” because it would create a highly concentrated music album market.  In fact, the increase in concentration in the album market the merger would cause is five times the level that the Guidelines identify as triggering an unacceptable increase in market power. “Consumers have benefited greatly from the growth of digital distribution of music, but albums are still the marquee product,” said CFA Research Director Mark Cooper.  “Access to current and catalogue albums is essential to the success of any new business model.  One company controlling over 40 percent of the marquee content would have the power to undermine alternatives it did not like … This is exactly the kind of threat to competition and consumers that antitrust review of mergers is intended to prevent,” he added.

Groups Call on CFPB to End the Payday Loan Debt Trap

With the Consumer Financial Protection Bureau undertaking an examination of payday lending, a group of 16 consumer organizations, including CFA, wrote to the CFPB last month urging the agency to “end the debt trap caused by these loans.”  The comment letter analyzes research, which shows that:

• Payday loans are structured to create a long-term debt trap.
• Over 75 percent of payday loan volume is because of churn – borrowers having to take out additional loans to pay off the original debt.
• Extended payment plans are not an adequate solution.  
• Payday loans result in long lasting financial harm.
• Bank payday lending and internet payday lending cause the same harms as their storefront counterparts.
• Payday lenders target communities of color.
• There are a wide range of options to enable consumers to bridge a budget gap without creating a spiraling debt trap.

“The abusive debt trap of payday lending must end,” said CFA Financial Services Director Jean Ann Fox.  “We urge the Bureau to use the full panoply of tools available to it – including supervision, enforcement, and rulemaking – to end the debt trap caused by payday lending.”

Survey Reveals Income Protection Needs, Opportunities

Workers know little about group disability insurance, including important features of coverage they may have, according to a survey released last week by CFA and Unum.  Group disability insurance provides financial protection to employees unable to work because of injury or illness.  When given information about this financial protection benefit, nine out of ten employees say they want this protection and would be willing to pay for it.  However, only about one-third of workers are protected by long-term disability insurance, whose monthly premiums – paid for by the employer, employee, or some combination – usually range between $10 and $30.  “Almost all workers wisely want disability insurance protection and are willing to help pay for it,” said CFA Executive Director Stephen Brobeck.  “But since only about one-third have long-term disability insurance, there is a huge gap between worker desire for coverage and the extent of actual coverage.”