The Center for American Progress, Center for Responsible Lending, Consumer Federation of America, and the National Council of La Raza recently submitted comments to the Consumer Financial Protection Bureau on the Ability to Repay Standards under the Truth in Lending Act (Regulation Z). These comments respond to the bureau’s proposed amendments to the Ability to Repay Standards, which it issued alongside the qualified mortgage rule in January. In particular, the comments addressed two concerns: defining mortgage-lending compensation in a way that protects consumers; and preserving lending programs that offer a gateway to safe and affordable credit. Read the full comment letter here.
Alongside its final qualified mortgage rule—which aims to insure that mortgage originators issue quality loans, and certify that borrowers have the ability to repay the loans they receive—the Consumer Financial Protection Bureau solicited comments on questions that were not resolved by the rule. This document, known as the concurrent proposal, addresses two issues that we believe are critical to the future of safe, sustainable, and affordable access to mortgage credit:
- First, it considers how to define compensation for the purpose of calculating the points and fees cap contained in the bureau’s final qualified mortgage rule. (Under this rule, borrowers who receive mortgages whose points and fees exceed 3 percent of the price of the loan will receive extra legal rights. Therefore, lenders have an incentive to originate mortgages with lower points and fees.)
- Second, it proposes a series of exemptions for specialized mortgage-lending programs and financial institutions that play an important role in ensuring broad access to safe and affordable credit.
Our concerns about defining mortgage-lending compensation arise from the danger of yield spread premiums, or YSPs. A yield spread premium is a method of payment in which the consumer pays a mortgage broker’s fee over the life of the mortgage through an increased interest rate, presumably instead of paying fees to the broker in cash upfront. Yield spread premiums were often abused, and as a result borrowers ended up with higher-cost mortgages. The use of yield spread premiums to push borrowers into higher-cost mortgages was a key part of the subprime crisis that stripped wealth from many lower-income borrowers and borrowers of color.
Because transactions using yield spread premiums are more complex and, therefore, less transparent, borrowers found themselves in loans where they essentially paid the broker twice—first through upfront fees and then through an increased interest rate that provided the funds for the lender to make a backend payment to the broker. Providing vulnerable borrowers more expensive loans may have resulted in greater returns for mortgage brokers, but it left many homeowners with mortgages designed for failure.
Currently, the Consumer Financial Protection Bureau is at risk of defining mortgage-lending compensation in a way that would encourage lenders to make opaque transactions that double-charge consumers. There are steps, however, outlined in the full comment letter, which the bureau can take to instead protect consumers.
Additionally, we strongly support the Consumer Financial Protection Bureau’s proposed exemptions for community-focused lenders, targeting rescue and refinance programs, and small entities as they will provide access to credit for borrowers without unnecessarily adding risk to the system. Because a full exemption from the ability-to-repay standards for some community lenders provides borrowers with very little recourse, however, we support loan limits for these entities as described in detail in the official comment letter.