Today, the Credit Union National Association (CUNA) filed a comment letter with the Consumer Financial Protection Bureau (CFPB) on amendments to the 2013 Mortgage Rules under the Truth in Lending Act (Regulation Z).

Below is the text of the letter sent to the CFPB:

Ms. Monica Jackson

Office of the Executive Secretary

Consumer Financial Protection Bureau

1700 G Street, NW

Washington, D.C.  20552

Re: Docket No. CFPB-2014-0009; Comments on Amendments to the 2013 Mortgage Rules under the Truth in Lending Act (Regulation Z)

Dear Ms. Jackson:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Consumer Financial Protection Bureau's ("CFPB" or "Bureau") proposal to amend certain provisions of the Regulation Z.  By way of background, CUNA is the nation's largest credit union trade organization, representing the nation's state and federal credit unions, which serve over 99 million members.

CUNA appreciates the Bureau's ongoing review of the implementation of the mortgage rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Important questions are being raised by credit unions and other stakeholders and we welcome the agency's willingness to listen to these concerns and consider additional clarifications and updates to the final rules.  We encourage the CFPB to continue these efforts throughout the coming year to determine whether further changes are needed to minimize regulatory burdens without jeopardizing the purpose of the Dodd-Frank Act's mortgage credit provisions.   

CUNA Urges Expansion of the Small Servicer Exemption

The CFPB is proposing to add an alternative definition of small servicer which would apply to nonprofit entities having a tax exemption ruling or determination letter from the Internal Revenue Service under Section 501(c)(3) of the Internal Revenue Code of 1986 (IRC).  In general, such servicers would only qualify if they service loans for which they are the creditor.  Specifically, the Bureau proposes to allow nonprofit entities that are part of a larger association of nonprofits to be considered small servicers for purposes of the small servicer exemptions under Regulation Z.  Such entities may be separately incorporated but must be operated under mutual contractual obligations to serve the same charitable mission, and use a common name, trademark, or servicemark.

While we recognize this proposed expansion of the small servicer definition is positive, it does not go far enough to exempt other nonprofit entities such as credit unions.  Federal and State credit unions are defined as nonprofit entities under Sections 501(c)(1) and 501(c)(14) of the IRC, respectively.  As nonprofit entities, credit unions exist to serve their members, and should be afforded the same exemptions as other nonprofit lenders such as those with 501(c)(3) designations.  Credit unions play a valued role in housing finance for consumers and local communities, similar to 501(c)(3)-designated entities, and should not be excluded from the definition of small servicer simply because they receive their non-profit status under a differing statutory provision.

In the preamble to the proposal, the CFPB notes that 501(c)(3)-designated entities "may have fewer resources to comply with additional rules." [1]   As institutions that can statutorily only raise capital through the growth of retained earnings,, credit unions also have many constraints on their resources, and should be afforded similar protections under the proposal.

We urge the Bureau to consider expanding the proposed definition of small servicer in its final rule to include both federal and state credit unions to lessen the regulatory burdens on these institutions, which will allow for the greater availability of mortgage credit for low- and moderate-income members that a majority of credit unions serve across the country.

CUNA Encourages the CFPB to Revisit the Nonprofit Small Creditor Exemption Under the Ability-to-Repay Rule

In a similar vein as the discussion on small servicers, CUNA respectfully recommends that the Bureau revisit the exclusion of credit unions for purposes of Section 1026.43 of the ability-to-repay (ATR) rule.  Under the May 2013 ATR Final Rule, the Bureau excluded credit unions from the nonprofit small creditor exemption, and again limited the exception to those entities with a 501(c)(3) designation. 

Yet in the January 2013 ATR proposed rule, the CFPB stated:

The Bureau believed that limiting the proposed exemption to creditors designated as nonprofits was appropriate because of the difference in lending practices between nonprofit and other creditors.  The proposed exemption was premised on the belief that the additional costs imposed by the ability-to-repay requirements might prompt some nonprofit creditors to cease extending credit, or substantially limit their credit activities, thereby possibly harming low- to moderate-income consumers.  The Bureau further stated that for-profit creditors derive more revenue from mortgage lending activity than nonprofit creditors, and therefore presumably are more likely to have the resources to comply with the ability-to-repay requirements.

These statements apply to credit unions as well.  Unfortunately, they have been proven true since the final ATR rule has gone into effect, as evidenced by many comments CUNA has received in recent months from credit unions, one of which we share for purposes of this comment letter:

When I purchased my first home, I used a 7-year balloon.  We purchased a small 2-bedroom 1 bath home, and knew we would move to a larger house within 7 years.  The benefit of this strategy was that I could fix my rate and payment at a significantly lower rate than otherwise was available via a 30-year loan.  Under the revised rules, I would no longer have the option to benefit from the mortgage that is more appropriate for my circumstance.  We are limiting consumer choice and costing consumers more money.  As a result, as we discuss mortgage options with our members, we are not able to provide them with a full palate of alternatives and in too many cases can only offer options that wind up costing them more money than necessary.

For the same reasons as stated in our discussion of small servicers above, we urge the Bureau to reconsider the nonprofit small creditor definition and include both federal and state credit unions in the exemption contained in any final rule adopted as a result of this proposal.

CUNA Supports a Properly-Tailored Cure/Correction Mechanism for Points & Fees Overages for Qualified Mortgages

The CFPB is proposing to allow lenders an opportunity to cure loans that are intended to be originated as Qualified Mortgages (QMs), but that exceed the general 3% points and fees caps [2]  under the ATR final rule.  More specifically, lenders would be able to take advantage of such a cure mechanism if the points and fees calculation caused a loan to fall outside of the QM points and fees cap and:  (1)          The loan was originated in "good faith" as a QM and otherwise meets all of the remaining QM requirements; (2) The cure is provided by the creditor or assignee as a refund of the excess to the consumer within 120 days after consummation; and (3) The creditor or assignee follows policies and procedures for post-consummation review of loans and for providing refunds to consumers when the points and fees inadvertently exceed the QM caps.

CUNA agrees with the CFPB's assessment that some creditors seeking to originate QMs may be establishing buffers, set below the points and fees caps provided in the ATR final rule to avoid exceeding the QM limits.  In these instances, creditors may simply refuse to extend mortgage credit to those consumers whose loans would exceed the buffer threshold, which would limit the availability of credit to otherwise qualified consumers in the marketplace.  Without a cure mechanism, lenders will continue to avoid exceeding these limits in order to avoid both litigation risk as well as the possibility of originating loans which may be unsalable on the secondary market.  Accordingly, CUNA generally supports the Bureau's proposal to provide a cure mechanism. 

However, we urge the CFPB to consider amendments to the proposed mechanism for the following reasons:

First, CUNA is concerned that the proposed 120-day cure period may not allow ample time for credit unions to refund the overage amount to consumers.  For example, many credit unions outsource their post-consummation mortgage loan reviews.  In these instances, it is not uncommon for the loan review results/report to be returned to the credit union until between 90-120 days after loan consummation.  As such, we would urge the Bureau to consider lengthening this period to no less than 180 days after consummation to give creditors an adequate amount of time to issue a refund to the affected consumers.

Additionally, credit unions outsourcing these loan reviews can be charged as much as $250 to $350 per loan file.  In these instances, credit unions would likely have to weigh the costs and benefits of a post-consummation review for those mortgage loans the institution holds in its portfolio.  If credit unions were required to conduct post-consummation reviews on all originated QM mortgage loans to determine if a points and fees cure was needed, it would be extremely expensive.  In these instances, lenders would likely need to hire additional employees to conduct post-consummation reviews in-house, which would also be an added regulatory burden for credit unions.  CUNA understands that the CFPB believes that the cure provision will encourage further post-consummation quality control reviews of loans. However, we urge the Bureau to be mindful of the regulatory burdens and costs of the post-consummation review process and allow institutions to review a much smaller sampling of loans rather than all loans in connection with a cure mechanism under a final rule.

Related to the proposed cure provision, CUNA believes that the only restitution required to be made to an affected consumer in a QM cure situation be that of a refund of the actual overage amount of points and fees which exceeds the QM caps, as the Bureau proposes.  Requiring lenders to restructure loans in these limited circumstances could prove much costlier to consumer borrowers if such additional means of restitution are required.

Finally, CUNA is concerned about the "good faith" requirement relating to the cure mechanism under the proposed rule.  Due to the existing stringent requirements for a loan to meet the ability-to-repay requirements in the ATR rule under the QM standard, CUNA would recommend that the CFPB not make the "good faith" standard a requirement in its final rule. 

If the Bureau decides to retain the "good faith" requirement, CUNA urges the CFPB to provide additional clarification and explanation for the term in its final rule.  While we appreciate the Bureau's efforts in providing examples as to what would and would not constitute "good faith" by way of examples contained in the proposed official staff commentary to the rule, CUNA would recommend that the CFPB consider providing additional details and examples to further clarify this term or perhaps provide criteria for a safe harbor on which credit unions could rely, especially with respect to the term "contemporaneously" as used in the proposed commentary.  Without additional clarity around this standard, CUNA feels that possible ambiguity could invite potential litigation in the future for lenders relying on the "good faith" requirement.

Additionally, with respect to whether the consumer must be current on loan payments at the time of the cure, CUNA feels that consumers are contractually obligated to make timely payments as agreed.  A condition that a consumer must be current on his/her loan at the time of cure should make little to no difference, as such a cure should either be allowed to be refunded to the consumer or applied to the consumer's outstanding principal obligation, as long as this is consistent with the contractual agreement between the borrower and the lender.  

Credit unions recognize that exceeding the points and fees caps under the ATR final rule is not incorrect or illegal, but for those lenders choosing to take advantage of the QM safe harbor presumption of compliance under the rule, having a properly-tailored cure mechanism would allow credit unions to approve more qualified borrowers near the QM limits on points and fees. 

CUNA Supports a Well-Tailored Debt-to-Income Cure and/or Correction Mechanism

CUNA recognizes the CFPB is not requiring comments on this particular aspect of the proposal be submitted until July 7, 2014.  However, CUNA supports the concept of a cure and/or correction mechanism in situations where a creditor incorrectly calculates the 43% debt-to-income (DTI) ratio when originating a general definition QM loan, and urges the Bureau to allow for mechanism that is well-tailored for this purpose.

Similar to the issue discussed above in the points and fees section of our comment letter, CUNA agrees with the Bureau's assertion that there may be a certain number of creditors that have established buffers beneath the 43% DTI ratio limit, which could lessen the availability of mortgage credit to otherwise qualified borrowers.  To the extent that inadvertent omissions of either additional sources of a borrower's debts or incomes are brought to light subsequent to consummation, a cure and/or correction mechanism would be helpful to creditors and borrowers, alike.  CUNA, however, does not have any examples to share with the Bureau as to how a borrower's income can be increased, or a borrower's debt obligations can be decreased, outside of the circumstances enumerated within the proposal.

With respect to the cure and/or correction period, due to similar concerns about the outsourcing of post-consummation loan reviews as discussed in the points and fees section earlier, CUNA would recommend that the CFPB allow lenders at least 180 days subsequent to consummation for any DTI ratio cure or correction that may be proposed. 

CUNA Urges the Bureau to Raise the Credit Extension Limit for Small Creditors

As with the previous DTI provision, CUNA understands that the CFPB is not requiring comments be filed on the small creditor credit extension limit until July 7, 2014, but we would like to take this opportunity to provide the Bureau with our comments as part of this comment letter.

Under the CFPB's Title XIV mortgage rules, there are four exceptions that apply only to small creditors.  In order to qualify for these special exceptions, the creditor must have (1) together with its affiliates, originated 500 or fewer covered transactions [3]  secured by a first lien in the preceding calendar year; and (2) had total assets of less than $2 billion at the end of the preceding calendar year.  Under the proposal, the CFPB is only seeking comment on the annual 500 first-lien origination limit under the small creditor test, and the requirement that the limit be determined for any given calendar year based upon results during the immediately prior calendar year.

CUNA's economists indicate that there are over 200 credit unions across the nation that at the end of 2013 had assets of less than $2 billion, but originated more than 500 first-lien loans in the preceding calendar year.  In light of this fact, CUNA urges the CFPB to raise the first-lien origination limit to at least 5000 to allow more credit unions to take advantage of the exceptions available to small creditors under the rules.  In turn, this will allow more credit union lenders to provide an increased level of mortgage credit availability to more low- and moderate-income consumers.


Thank you for the opportunity to comment on the on the Bureau's amendments to the 2013 mortgage rules under the Truth in Lending Act (Regulation Z).  If you have any questions concerning our letter, please feel free to contact CUNA's Senior Vice President and Deputy General Counsel Mary Dunn or me at (202) 508-6732.


Jared Ihrig

Associate General Counsel

[1] See 79 FR 25735

[2] CUNA understands that Section 1026.43 (e)(2) and (3) provides varying points and fees limits for loans that are less than $100,000.  In these instances, we recognize that the points and fees are limited by percentages that differ from the 3% used in this paragraph.

[3] "Covered transaction" is defined in § 1026.43(b)(1) to mean a consumer credit transaction that is secured by a dwelling, as defined in § 1026.2(a)(19), including any real property attached to a dwelling, other than a transaction exempt from coverage under § 1026.43(a).

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