MBA Urges Clarity to CFPB LO Comp Rule, QM Requirements

The Mortgage Bankers Association, in a letter to the Consumer Financial Protection Bureau, urged the Bureau to make changes to its Loan Officer Compensation Rule for clarity and simplicity and to make adjustments so that more creditworthy borrowers can be eligible for Qualified Mortgage loans.

The MBA letter is the latest in a series of CFPB Requests for Information on its regulations and rulemaking authorities. This particular letter comes in response to a Bureau RFI on its adopted rulemakings, covering the Bureau’s mortgage rules stemming from the Dodd-Frank Act.

The letter notes the intent, articulated by Acting CFPB Director Mick Mulvaney, that the Bureau will end its past practice of “regulation by enforcement,” by which it used public enforcement actions to announce novel interpretations of its statutes and regulations. However, MBA said the Bureau must go further.

“It is not enough for the Bureau simply to stop applying new interpretations to past practices; instead, the Bureau has an affirmative and on-going obligation to re-examine its regulations and issue new interpretations that establish clear standards for complying with consumer protection laws that the industry can apply when providing products and services to consumers,” wrote MBA Senior Vice President of Member Engagement and Public Policy Pete Mills.

The letter offers several specific recommendations:

Loan Officer Compensation
MBA said the Bureau should change its Loan Officer Compensation rule to make the rule clearer and simpler, so that mortgage lenders have a level playing field to compete on price and service;

The letter noted the CFPB, in crafting the LO Comp rule, exceeded its congressional mandate and unnecessarily increased the cost, and decreased the availability, of credit, particularly in already underserved segments of the market. “The Bureau should explore ways to simplify the Compensation Rule, including but not limited to specifying a clear list of impermissible compensation factors rather than the current approach of providing a short list of permissible factors and a vague and complicated analysis that discourages everything else,” MBA said.

Absent that, MBA recommended a small number of modest changes to the Compensation Rule that would better align the rule’s incentive structure with market realities. “These changes would also provide the industry with clearer guidance so that lenders can compete based on their ability to provide consumers with the best rates and customer service, rather than on disparate interpretations of an overly complex rule,” MBA said.

Those changes include: giving lenders the ability to reduce LO compensation under certain circumstances; allow for changes in LO compensation to increase LO accountability; and clear guidance with respect to permissible practices.

Appendix Q/Qualified Mortgage
MBA said the Bureau should amend the Ability-to-Repay/Qualified Mortgage Rule’s Appendix Q to make it easier to qualify more creditworthy borrowers for Qualified Mortgage loans, such as self-employed borrowers and others who have been excluded by its “unnecessarily strict requirements.”

MBA noted since finalization of the QM rule, lenders and investors have shown a “clear preference” for QM loans, which has place non-QM loans at a distinct disadvantage. “Despite this worthy objective, the numerous problems associated with Appendix Q have created unnecessary obstacles for non-GSE, non-government-insured loans to achieve QM status–obstacles that are unrelated to credit risk,” MBA said. “The standards detailed in Appendix Q are woefully misaligned with established industry standards for calculating consumer income and debt.”

MBA recommended alternatives to Appendix Q would better serve consumers and provide greater clarity and certainty for lenders. “Alternatives should reflect established industry underwriting standards while maintaining strong government oversight,” MBA said. “Rather than the Bureau introducing its own changes to Appendix Q and maintaining its standards over time, it should instead modify the QM rule to allow the use of existing and accepted underwriting methodologies, such as those of FHA, VA, USDA and the GSEs, in addition to Appendix Q.” MBA said such an approach “ensures that no harm is done in the market, as it preserves the status quo option for lenders that are comfortable using the Appendix Q methodology.”

TRID Liability
MBA said the Bureau should expand the ability to cure minor errors under the TILA/RESPA Integrated Disclosure rule so that mortgage lenders can resolve any inadvertent defects without fear of disproportionate liability.

“The Bureau’s requirements for completing and issuing the forms are incredibly complex,” MBA said. “In some areas they are incomplete or contradictory. This creates significant risk for creditors and increases costs for consumers. The Bureau could eliminate these issues by clarifying, correcting, and simplifying the TRID Rule.”

To address these issues, MBA recommended the Bureau consider wholesale revisions to ensure the rule does not extend beyond its statutory mandate. This could be achieved by removing the overly burdensome and complex “tolerance” and redisclosure scheme. In its place, the Bureau could adopt a simplified requirement that (1) the initial LE be based on the best information reasonably available; (2) revised LEs be issued and updated based on the best information reasonably available when the borrower requests a change to the loan terms or product; and (3) the CD disclose actual costs or the best information reasonably available when actual costs are unknown.

Unfair, Deceptive or Abusive Acts or Practices
MBA recommended the Bureau should use its rulemaking or guidance authority to issue more specific standards with respect to unfair, deceptive, or abusive acts and practices (“UDAAPs”). MBA has noted in prior RFI responses that the BCFP has attempted to define through enforcement what acts and practices might be considered UDAAPs. Regulation by enforcement creates confusion and fear throughout the industry, robs industry participants of due process rights, and delivers incomplete and untimely guidance to the industry via negotiated consent orders.

TILA-RESPA Mortgage Servicing Rules
MBA recommended the Bureau should consider bringing its rules in line with Congress’s actual mandate, particularly in its authority to clearly pre-empt state law, thus avoiding duplicative regulatory regimes and creating a “comprehensive and cohesive national standard.”

The letter articulates a number of additional recommendations regarding each of these categories.