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July 10, 2012 – NAFCU on Monday urged the Consumer Financial Protection Bureau to demonstrate flexibility and an awareness of credit unions' unique characteristics as it works toward finalizing a proposal it inherited from the Federal Reserve Board on mortgage borrowers' ability to repay.

In a comment letter to the CFPB, NAFCU Regulatory Affairs Counsel Tessema Tefferi said the bureau's proposal would "create yet more regulatory burden for credit unions."

The CFPB is considering using data it received from the Federal Housing Finance Agency and other sources in drafting the definition of "qualified mortgages." Based on the data, the agency may include a minimum debt-to-income ratio as part of the definition of the term.

While NAFCU generally supports efforts to ensure that consumers are not placed in mortgages they cannot afford, the CFPB's proposal "should provide credit unions and small institutions with the flexibility necessary to continue to meet their members' needs," Tefferi wrote. However, NAFCU opposes "the use of narrow and specific measurements and thresholds for defining loans that would be presumed to comply with the ability-to-repay requirements."

If the CFPB ultimately determines that a consumer's debt-to-income ratio be part of the definition of a qualified mortgage, NAFCU recommends that the agency show flexibility to lenders, consumers and investors "by providing either exceptions to the ratio requirement or allowing different ratios if certain other factors exist in conjunction with a higher DTI ratio."

To illustrate this point, Tefferi cited an example of a loan to a borrower with a large amount of liquid financial reserves or assets but limited income. In such a case, the loan "should not automatically be disqualified from being a ‘qualified mortgage,'" he said.

The CFPB's definition of qualified mortgages would apply to loans purchased or insured by the government-sponsored enterprises and those securitized into private mortgage securities. Tefferi urged that this definition not be applied to loans insured or purchased by the Federal Housing Administration, the Department of Veteran Affairs, the Department of Agriculture or the Rural Housing Service.

Regarding litigation cost estimates associated with the proposal, Tefferi reiterated NAFCU's view that the ability-to-repay rule should contain a clear legal safe harbor for qualified mortgages. "The criteria to meet the safe harbor should be broadly crafted so that credit unions can continue to meet their members' needs, and with consideration given to how the regulations would impact innovation and product development," he said.

Tefferi also echoed views included in NAFCU's July 22, 2011, comment letter to the CFPB and asked that it also be taken into account as the bureau moves forward on this proposal.