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Lenders Press for More Time on Key QM Element

JUN 9, 2014 1:36pm ET
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Lenders are seeking fixes to a proposal by the Consumer Financial Protection Bureau that would allow institutions to repay points and fees that inadvertently exceeded the "qualified mortgage" rule.

The agency unveiled a plan in April that would give lenders 120 days after closing to review a loan to ensure it doesn't exceed a 3% points-and-fees cap. If an overage is discovered, the lender must refund the overage amount to the borrower.

Lenders are overwhelmingly in favor of the change.

"The proposed cure period for points-and-fees overages would be extremely helpful," wrote Anne Canfield, the executive director of the Consumer Mortgage Coalition, in a June 5 comment letter. "It would create an incentive for creditors who become aware of errors to cure them without fear of Truth in Lending Act liability for even minor errors."

But some argue the 120-day window is too short. In a comment letter filed with the agency, the American Bankers Association said that it would be difficult for small banks to comply with the timeline. They also said it would increase compliance costs and reduce access to credit.

"Revising the time for a cure to within 180 days of consummation would allow lenders as well as secondary market participants more time to adequately review and cure loans that have been originated and delivered," wrote Robert Davis, an executive vice president at the ABA.

Plaza Home Mortgage Inc. wrote that most lenders perform a post-close or post-purchase quality control on 10% or less of their mortgages.

If a purchased loan is selected for review and "it is discovered a cure is necessary, the 120 days from consummation may have already elapsed," the San Diego-based firm said in a comment letter. "A longer time period would allow mistakes to be rectified when discovered by aggregators or other third parties like Plaza and reported to the original lender."

Some credit union representatives also weighed in to ask for more time.

The Iowa Credit Union League commented that an extended 180-day period would "allow many credit unions to maintain existing systems for review without causing expensive changes to the review process."

The ABA and Mortgage Bankers Association also suggested that the CFPB should consider giving lenders a second chance at resolving errors after the 120-day or 180-day period and pay more for taking so long.

If the lender discovers excess points and points after the "cure" period and the borrower discovers it, the borrower should be refunded the excess amount "as well as an amount that is 50% of the amount refunded, with this additional amount capped at $1,000," the ABA and MBA wrote in separate letters, using the same language to describe the changes they were seeking.

"Such an approach would both reward prompt quality control procedures as well as alleviate more of the repurchase and legal risk that is preventing too many borrowers from receiving safe, sustainable QM loans," the ABA’s Davis wrote.

Pegging the timeline to the discovery of the error will ensure prompt correction of errors throughout the life cycle of loan, according to MBA senior vice president Pete Mills.

"It is important to note that absent this second window, inadvertent points-and-fees errors will result in significant costs to the lender (repurchase and resale at a discount) but no benefit to the borrower," Mills says in MBA's comment letter.

One potential sticking point involves the reimbursement of interest borrowers pay on excess points and fees that are financed into the loan. The CFPB requested comment on this issue but it is not part the proposal yet.

CMC warns that such restitution would be complicated to calculate and unneeded since the frequency of QM overages will be low and the amount of individual overages will usually be small.

"The cure provision as proposed is clearly defined, not disproportionately complex and burdensome, and will result in broader access to credit, and refunds of inadvertent overages," Canfield writes. 

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