July 18: More on Appendix Q; pre-disclosure restrictions; CFPB on complaint sharing; big bank bankruptcy plans

“I’m working as hard as I can to get my life and my cash to run out at the same time. If I can just die after lunch Tuesday, everything will be perfect.” So spoke Doug Sanders, professional golfer. We continue to hear about a) how the Millennials are going to save the housing industry in spite of maybe not even buying into the “American Dream”, and b) how working families have saved up very little for retirement. And certainly no one wants to go bankrupt. Is the money from the fines and penalties even making it to John Q. Public? Here’s one report on where the money that makes the headlines is going.


Do you have a plan in case you go bankrupt? The “big boys” do! The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) as systemically important periodically submit resolution plans to the FDIC and the Federal Reserve. The Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) released the public portions of annual resolution plans for 17 financial firms describing the company’s strategy for rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure of the company. Included are plans from Bank of America Corporation, Bank of New York Mellon Corporation, Barclays PLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, HSBC Holdings plc, JPMorgan Chase & Co., Morgan Stanley, State Street Corporation, UBS AG, and Wells Fargo & Company. Initial public resolution plans for American International Group, Prudential Financial, Inc., and General Electric Capital Corporation were also released. The public sections of the plans are available on the FDIC and Board websites.


Speaking of big bucks, the FHFA’s Office of the Inspector General (OIG) released a report indicating that GSE purchases of mortgages from their largest counterparties have declined significantly since 2011, and that smaller lenders have significantly increased direct sales to the GSEs. This is a positive trend that the MBA has highlighted and supported with policy positions that call for fair and competitive markets for lenders of all sizes and business models (e.g., guarantee fees based on loan quality, not volume or asset size). Unfortunately, the OIG report inexplicably concludes that the shift to “smaller and nonbank lenders” may increase the GSEs’ exposure to counterparty risk and raised the costs for managing this risk. The report’s narrative ignores the significant risks that the GSEs took through their aggregation models, and the OIG’s “findings” defy basic principles of risk management – that diversification of business partners lowers the GSEs’ and the taxpayer’s risk, period. Taxpayers, the GSEs and most of all consumers benefit from a strong, diversified market, where lenders of all sizes and business models can constructively and fairly participate. As you would expect, the MBA will be preparing a detailed rebuttal to the OIG report to set the record straight on the important benefits that a more competitive and diversified seller base has had on the GSEs.


Look out Trip Advisor, it looks like the CFPB will soon by on Yelp. Or something close to it. “Consumers Could Opt-In to Share Complaint Narrative in CFPB’s Public Database” read the headlines. Hey, who doesn’t want folks to listen to their complaints, especially if they’re actually constructive? The CFPB is proposing a new policy that would empower consumers to publicly voice their complaints about consumer financial products and services. When consumers submit a complaint to the CFPB, they would have the option to share their account of what happened in the CFPB’s public-facing Consumer Complaint Database. Publishing consumer narratives would provide important context to the complaint, help the public detect specific trends in the market, aid consumer decision-making, and drive improved consumer service. “The consumer experience shared in the narrative is the heart and soul of the complaint,” said CFPB Director Richard Cordray. “By publicly voicing their complaint, consumers can stand up for themselves and others who have experienced the same problem. There is power in their stories, and that power can be put in service to strengthen the foundation for consumers, responsible providers, and our economy as a whole.”


We’ve all seen it, but as a reminder the CFPB weighed in on same-sex marriages. After all, nothing is beyond the scope of the CFPB, correct? In order to insure equality for all, the CFPB writes, “On June 26, 2013, in United States v. Windsor, the U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act as unconstitutional. This decision has important consequences for our work. In order to fully implement this decision, we took steps to clarify how the decision affects the rules that we are responsible for. Recently, Director Cordray issued a memo to staff clarifying that, to the extent permitted by federal law, it is our policy to recognize all lawful marriages valid at the time of the marriage in the jurisdiction where the marriage was celebrated. This aligns our policy with other agencies across the federal government.” The Bureau clarified that it will use the terms of: spouse, married, marriage, wife, and husband, including all terms relating to a “family status” as policy; this policy will apply to the Equal Credit Opportunity Act and Regulation B, the Fair Debt Collection Practices Act, the Interstate Land Sales Full Disclosure Act and Regulation J, the Truth in Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X, the Bureau Ethics Regulations, and the Procedures for Bureau Debt Collection.


Compliance folks enjoy bantering about things like, “Limits on Verifying Documentation Prior to Issuing a Loan Estimate”. IDS Compliance is happy to address that tendency, and noticed that page 142 of the preamble to the final rule states, “The Bureau understands that some creditors require a purchase and sale agreement prior to issuing the RESPA GFE and the early TILA disclosure. While this practice may be permissible under current Regulation X in some cases, it would conflict with final § 1026.19(e)(2)(iii), which prohibits a creditor from requiring verifying documentation before issuing a Loan Estimate. See the section-by-section analysis of § 1026.19(e)(2)(iii).”


On this point, IDS Compliance recently heard an employee of the CFPB provide an “unofficial verbal guidance” reminder for the industry, which went as follows: We assume that in most cases, creditors will seek additional information about the loan product or products that the consumer is considering before providing the loan estimate. I just will let you know that there are a few pre-disclosure restrictions at 1026.19(e) (2). For example, prior to a consumer receiving a Loan Estimate and indicating an “intent to proceed” with the transaction, a creditor may not ask the consumer for verifying documentation, or charge the consumer for anything other than a reasonable fee to obtain a credit report. Comment 19(e)(2)(i)(A)-5 gives an example of the creditor requiring a consumer to provide a check that the creditor holds but does not cash or a credit card number that the creditor requires the consumer to provide but does not charge until the consumer has received a Loan Estimate and indicated an “intent to proceed,” and the commentary explicitly explains that these practices violate the rule.


And recently the commentary addressed a QM underwriting issue about “What is required to prove rental income in order for a loan to be a Qualified Mortgage?” The CFPB is in charge of underwriting criteria now for QM loans, of course, and Appendix Q is under its jurisdiction. Look for the sections II. Non-Employment Related Consumer Income; D. RENTAL INCOME; 4. Documentation Required to Verify Rental Income.  “Analysis of the following required documentation is necessary to verify all consumer rental income: a. IRS Form 1040 Schedule E; and b. Current leases/rental agreements.” To my uneducated eye, it seems pretty clear that if a borrower has rental income, in order for the lender to make a QM loan they’d better have both the Schedule E and the lease agreements IF the borrower needs it to qualify. If you feel that the “and” should be changed to an “or”, or if you have other questions & comments, they should be addressed to the CFPB.


I received this note. “Your compliance-minded readers should know that there are other pathways to QM status under the rule, besides the ‘general definition’ under which Appendix Q treatment is required for all income and debt elements underlying the DTI calculation. (The ‘general definition’ is also the only QM definition that stipulates a max of 43% for the DTI.) For instance, to achieve QM status through the ‘temporary definition,’ a lender must comply with GSE rental income underwriting guidelines and doc requirements, not with Appendix Q requirements. It is possible that there is ‘daylight’ between the two requirements, and, as an example, remember that the DTI maximum is whatever GSE guidelines allow which is currently 45%. There are also QM status pathways using FHA guidelines, as well as various flexibilities to achieve QM status for ‘small creditors.’ (‘Small creditors’ are very specifically defined under the regulations.) These pathways to QM likewise do not require adherence to Appendix Q requirements, nor do they stipulate max DTIs outside of FHA program requirements or any small creditor guideline. The information that you provided is absolutely correct given that a lender is seeking to confer QM status on a loan using the ‘general definition.’ (The ‘general definition’ is likely most frequently relied on for jumbo loan amounts as these are not eligible via GSE or FHA program guidelines so not eligible to be assessed under those pathways to confer QM status.) But for most loan amounts, there are other QM definitions being regularly used in the market which do not require hewing to App Q. Of course, things will become really interesting when we approach the end of the ‘temporary’ 7-year period for the GSE QM patch and a majority of originator’s business will have to find its way through Appendix Q!”


With fire season out west, tornados in the Midwest, and hurricanes up and down the eastern seaboard and gulf, it’s always an interesting time of year for appraisers and originators alike. With that said, what documentation is required after the appraisal is completed and the subject property happens to be located in a disaster area? When the property is located in an area where a natural disaster has struck, a lender must certify to its investors (or potential investors) that the property was not damaged, and the original valuation is supported. If the property was somehow damaged, and in need of repairs, the lender must be made aware prior to the loan’s closing. If an appraisal is completed “As Is,” “Subject to Completion of Repairs,” or “Subject to Completion per the Plans and Specifications’” prior to the disaster event, the lender must provide evidence the subject property did not sustain any damage or value deterioration due to the disaster event affecting the area in which the property is located. The most accepted form to be used is either the 1004D or 442 Appraisal Update and/or Completion for FNMA and FHLMC or the 92051 Compliance Inspection Report for FHA and VA loans. This evidence must be provided by a licensed appraiser, but not limited to the appraiser who prepared the original appraisal.


The 10-yr yield ended Thursday back in the 2.40’s (2.47%). Low rates are good, but unfortunately this was caused by increased risk aversion brought on initially by heightened tensions in Ukraine and additional sanctions on Russia – yes, more bad news for Malaysian Airlines, passengers, and stockholders. On the news the 10-year was up/improved by .5 in price and current coupon agency MBS prices were better by about .375. Housing starts in June came in way below expectations (is that the fault of housing starts or the people estimating them?) while May starts were revised lower. Building permits were also less than expected at 963k versus a predicted 1.04 million with the decline due to 5+ units. And don’t look for scheduled news of substance today: there is none. The 10-yr. is at 2.48% and agency MBS prices are worse about .125.



(Rated PG. Adult themes.)

Upon hearing that her elderly grandfather had just passed away, Katie went straight to her grandparent’s house to visit her 95 year-old grandmother and comfort her.

When she asked how her grandfather had died, her grandmother replied, “He had a heart attack while we were making love on Sunday morning.”

Horrified, Katie told her grandmother that two people nearly 100 years old having sex would surely be asking for trouble.

“Oh no, my dear,” replied granny. “Many years ago, realizing our advanced age, we figured out the best time to do it was when the church bells would start to ring. It was just the right rhythm. Nice and slow and even. Nothing too strenuous, simply in on the Ding and out on the Dong.”

She paused to wipe away a tear, and continued, “He’d still be alive if the ice cream truck hadn’t come along.”



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Rob Chrisman