Watt Defends URLA Language Question

DENVER–Federal Housing Finance Agency Director Melvin Watt defended his agency’s decision last week to include a controversial language preference question in the upcoming Uniform Residential Loan Application, saying both the decision and the timing of it will be beneficial in the long run.

“It’s probably fair to say that our decision will not be universally applauded by members of the MBA, certainly not in the short term,” Watt said here yesterday at the Mortgage Bankers Association’s Annual Convention & Expo. “However, every stakeholder from whom we received input acknowledged that serving all creditworthy borrowers, including those who are not proficient in English, is the right objective. Also, we all agree that it is important for every borrower to understand the terms of their loan. MBA’s commitment to these objectives lines up squarely with FHFA’s statutory mandates. The question, therefore, was how best to improve the process of meeting these objectives.”

FHFA said (https://www.fhfa.gov/PolicyProgramsResearch/Policy/Documents/Preferred_Language_Question.pdf) the question will enable borrowers who prefer to communicate in a language other than English to identify that language. It also provides clear disclosures that the mortgage transaction is likely to be conducted in English and that language resources might not be available.
MBA and other industry trade groups strongly urged FHFA to reconsider the proposed question, saying it would be problematic for mortgage lenders, subjecting lenders to “considerable legal risks” and “operational and customer service challenges.”

Watt said the decision to move ahead with the questions was “an important step forward” as part of the much larger URLA redesign effort that provides lenders with greater flexibility and process efficiencies.

“We engaged with a wide range of stakeholders, including the MBA and its members,” Watt said. “As part of our analysis, some stakeholders, including the MBA, expressed concerns about adding this question to the URLA. Let me assure you that every concern expressed was taken very seriously and that the process of exchanging views was essential to advancing FHFA’s thinking and the wording of the question itself.”

Ultimately, Watt said, FHFA’s decision to add a language access question to the URLA came down to two factors. “First, we concluded that the final wording of the question will set the right borrower expectations and appropriately mitigate legal concerns for lenders,” he said. “The wording of the question emphasizes that the mortgage transaction is likely to be conducted in English, explains that mortgage resources may not be available in languages other than English and explains that a borrower’s indication of a different preferred language does not mean the lender agrees to communicate or transact in the borrower’s preferred language.”

Second, Watt noted because this is the first time the URLA has undergone a significant update in 20 years and it is unlikely to be updated again anytime soon, “we concluded that this was the right time to start having borrowers make this important information available to lenders and that making this change now will reduce the prospect of another expensive retooling of Enterprise and industry systems in the future. In the long run, I think we will all find that both the decision and the timing of it will be beneficial.”

Moving forward, Watt added, “we want to continue our productive dialogue with MBA members and other stakeholders about the next steps needed to implement the revised URLA. In the time between now and the time when stakeholders begin using the revised form, we of course will continue our work with stakeholders to improve language access resources.”

Watt also said he has seen “positive signs” in FHFA’s efforts revise the GSEs’ representations and warranties framework.

“Through our conversations with MBA members and other stakeholders, we all had come to the conclusion that revisions to the reps and warranties framework could help reduce uncertainty and that collaborating and finding a viable way to address this uncertainty could help reduce overlays and increase credit access,” Watt said. “While it has been a slow and methodical process, I am pleased that we are seeing positive signs that lenders are expanding their use of the Enterprises’ credit box and may be showing more flexibility in their own. We continue to have a shared interest in meeting the challenge to ensure that borrowers who can afford a mortgage don’t stay on the sidelines and we should continue our collaborative efforts to achieve this objective.”

Watt cited another area of progress in FHFA’s efforts to transfer risk away from taxpayers and to the private sector. He said the GSEs now transfer a “meaningful” amount of credit risk to private investors on at least 90 percent of their targeted, single-family loans and have transferred a portion of credit risk on $1.6 trillion of mortgages, totaling $54 billion risk in force since 2013.

“We could not have made this progress without substantial input, cooperation and investment by industry stakeholders, including MBA members,” Watt said.

Watt conceded reaching a decision about whether to require the Enterprises to use alternative credit scores has been difficult.

“I initially thought this decision would be relatively easy to make–after all, we all believe that competition is good, don’t we?” Watt said. “However, the more we looked into this issue, the more complicated it became and it is turning out to be among the most complicated decisions I have faced during my tenure at FHFA.”

In light of the “complicated questions,” FHFA decided to develop a request for input to be released this fall. “Through the RFI, we hope to get honest and reliable information and stakeholder feedback on these and other matters relevant to this critically important decision,” he said.Watt also reiterated his belief in need for Congress to act on housing finance reform.

“Fannie Mae and Freddie Mac reached another milestone last month, completing their ninth year in conservatorship under the control of FHFA,” Watt said. “A conservatorship with a nine-year duration is unprecedented in the history of our country. What is perhaps even more startling, however, is the percentage of the overall economy that has been in conservatorship for this protracted period. The Enterprises back over $5 trillion in mortgages, by any measure not an insignificant percentage of the U.S. economy. It is not surprising, therefore, that calls for housing finance reform are growing more and more urgent every day.”

Watt said he has “made it clear that I firmly believe that it is the role of Congress, not FHFA, to do housing finance reform. Unlike what I have characterized as GSE reform, housing finance reform will address issues that only Congress can decide.”