Friday, April 20, 2012

What You Need to Know about Know Before You Owe

This week has seen a flurry of activity from all areas of the housing sector.  The Consumer Financial Protection Bureau is coming dangerously close to finalizing its rulemaking on the Know Before You Owe initiative.  In response to the CFPB's request for comments, on Monday April 16, the American Bankers Association, the American Escrow Association, the American Financial Services Association, the American Land Title Association, the Community Mortgage Banking Project, the Consumer Mortgage Coalition, the Mortgage Bankers Association, the National Association of Realtors and RESPRO sent a joint letter to the CFPB outlining their concerns with the proposed legislation. The full text of the letter can be read by going to and clicking the appropriate link for the document dated 4/16/2012.

While the letter is quite lengthy and includes comments on a number of different aspects of Know Before You Owe, I want to focus on just a couple of major points about how broad this initiative will be.(To get a sense of the scope of what is involved here, I really do recommend that everybody working in this industry read the comments' letter for themselves; I promise that it will be an eye-opening experience.) The Dodd Frank bill charged the CFPB with creating a new disclosure to merge the Good Faith Estimate and the Truth in Lending Form into one new document that would be easier to understand.  In 2008, after 6 years of working and hosting round tables, HUD mandated the new three page good faith estimate that we are now using.  In 2011, the Federal Reserve changed the truth in lending form.  So both forms have already undergone pretty significant revisions.  Apparently this is going to be a huge process.

This time around, the CFPB has included items such as changing the RESPA definition of an application, requiring more disclosures (because we all know that we don't have enough disclosures), reducing the current tolerance that we are now allowed for our settlement service providers on our "written provider's list" from 10% to 0% and requiring that borrowers receive their HUD-1 settlement statement three days before closing.

While each of these proposed reforms is sweeping and has huge consequences for us, perhaps the most important consideration to the future of U.S. Housing Finance is going to be the CFPB's effort to define the Qualified Residential Mortgages and Qualified Mortgages.  The Dodd Frank bill requires the creation of qualified residential mortgages which will be exempt from the new 5% risk retention rules.  QRMs will be the only mortgages that third party loan originators will be allowed to sell in the new regulatory environment, so their definition is very critical to our futures.  The Dodd Frank bill requires that these mortgages contain a 3% cap on points and fees. For a refresher on this issue see Risk Retention, Qualifed Residential Mortgages and the Future of Housing. Now the CFPB is trying to define what constitutes "points and fees."  Initially, many of us supposed that this cap would cover lender and broker fees and attorney fees--the items that go into block 1 of the GFE.  But apparently the CFPB has other plans and is now looking at including title insurance, third party fees such as appraisals and surveys, and escrows.  Under this definition, no small loan will qualify as a QRM.  This definition will mean the end of third party origination in the U.S., especially since we are not allowed to adjust our percentage of compensation from transaction to transaction.

This week NAMB (The National Association of Mortgage Brokers) sent out a call to action video asking all brokers to contact their Representatives and ask for support of HR 4323, The Consumer Mortgage Choice Act, which would change the way the 3% cap is calculated on qualified residential mortgages.  If this bill were to pass and be signed into law, it could fix many of the immediate considerations that threaten to shut down our industry.  NAMB legislative chair John Hudson's video can be seen below:

Frankly I think everybody in our industry is being way too polite.  Instead of adopting a "please don't kill us all" strategy, we should be pressing for a total repeal of Dodd Frank, closure of the CFPB and the removal of Richard Cordray from his recess appointment position.  Interestingly, this week also saw the several members of the U.S. Senate join a lawsuit against a number of recess appointees from January on the grounds that the Senate was not in recess when these appointments were made.  Unfortunately, the lawsuit applies only to appointments involving the National Labor Relations Board.  Corday's appointment is not being challenged as part of the suit because the plaintiff is alleging damage at the hands of the NLRB only.

We as an industry have not done a good job of standing up for ourselves or explaining to the American people that housing finance is important to their individual futures and to the overall economy.  And because of that, we are really suffering now as Cordray doubles down to finish off all independents who have survived the last five years.

We expect to see a lot more activity on these issues in the next few weeks.  I will keep you posted.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen. For more information, visit her website at

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