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CUNA supports VA defining qualified mortgages

(June 9, 2014) — The Credit Union National Association (CUNA) submitted a comment letter in support of the Department of Veterans Affairs’ (VA) interim final rule to amend the VA’s loan guaranty regulations that implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The VA’s rule, which became effective May 9, replaced the Consumer Financial Protection Bureau’s temporary rule that exempts VA loans from the 43% debt-to-income ratio threshold.

Below is the text of the letter sent to the Department of Veterans Affairs:

Director, Regulation Policy & Management
Department of Veterans Affairs
810 Vermont Avenue NW
Washington, DC 20420

Re: RIN 2900–AO65—Interim Final Rule on Loan Guaranty: Ability-to-Repay Standards & Qualified Mortgage Definition under the Truth in Lending Act

To Whom It May Concern:
The Credit Union National Association (CUNA) appreciates the opportunity to submit comments regarding the Department of Veterans Affairs’ (VA) interim final rule to amend the VA’s loan guaranty regulations that implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.[1] By way of background, CUNA is the country’s largest credit union advocacy organization, representing state and federal credit unions, which serve over 99 million members.

Summary of CUNA’s Views

CUNA wholeheartedly supports the approach of the VA in defining “qualified mortgage” and we strongly encourage the VA to adopt the rule as final. Specifically, under the final rule, all purchase money origination loans and refinances other than certain streamlined refinances, also known as Interest Rate Reduction Refinance Loans (IRRRL), guaranteed or insured by the VA are defined as “safe harbor, qualified mortgage” loans.

In addition, we support the VA’s guidance that IRRRLs that do not meet specific requirements will be subjected to a rebuttable presumption status instead of a safe harbor. We believe extending qualified mortgage safe harbor consideration to only those IRRRLs that satisfy certain conditions is an effective way to safeguard the IRRRL program, while supporting credit availability for borrowers in need of such loans.

Overall, we appreciate the approach the VA has taken on the issues addressed in the final rule. We believe the flexibility the VA has provided will help borrowers as well as credit unions and other lenders.

Background on Credit Unions

Even before the passage of the Dodd-Frank Act, as now, credit unions work hard to ensure they only extend home mortgage credit to individuals who can back the loans. As member-owned, not-for-profit financial cooperatives, credit unions are distinct from most other types of financial service providers. Credit unions operate to promote thrift and to provide credit and savings vehicles to their members at reasonable rates.

The not-for-profit, cooperative structure of credit unions presents incentives that are different from the incentives of for-profit, shareholder-owned financial institutions. Because credit unions have no outside shareholders, they have no incentive to maximize profits, and they tend to be more conservative lenders than their for-profit counterparts are.

CUNA Supports the VA’s Definition of “Qualified Mortgage”

Section 1412 of the Dodd-Frank Act amended the Truth in Lending Act (TILA) to include a definition of a “qualified mortgage.” In addition, the Act requires the VA, along with the Department of Housing and Urban Development, the Department of Agriculture, and the Rural Housing Service, to prescribe rules to define the types of loans they insure, guarantee, or administer, as the case may be, that are qualified mortgages. The Ability-to-Repay (ATR) rule is intended to prevent consumers from becoming trapped in mortgages that they cannot afford to repay, and to prevent lenders from extending such loans.

The VA’s interim final rule, which became effective May 9, 2014, defines a “qualified mortgage” for VA-insured and guaranteed loans. Under the rule, all purchase money origination loans and refinances other than certain IRRRLs, guaranteed or insured by the VA are defined as safe harbor qualified mortgage loans. Further, under the rule, some VA IRRRLs are considered rebuttable presumption qualified mortgages. The rule also designates as a qualified mortgage: (1) any loan that the VA makes directly to a borrower; (2) Native American direct loans; and (3) vendee loans, which are made to purchasers of properties the VA acquires as a result of foreclosures in the guaranteed loan program.

This is a practical, common sense approach, fully consistent with the Dodd-Frank Act that we support. This approach provides important flexibility to lenders making VA loans in regard to the qualified mortgage requirements and limitations. In our view, consumers and the mortgage market generally would benefit if much more flexibility is provided for all creditors to lend to borrowers, who for example do not meet the CFPB’s 43% debt-to-income (DTI) benchmark.

CUNA Supports the VA’s Application of Safe Harbor & Rebuttable Presumption

The VA’s rule replaces the CFPB’s temporary qualified mortgage rule that exempts VA loans from the strict 43% DTI ratio threshold. In essence, all VA loans are “safe harbor, qualified mortgage” loans, regardless of whether the loan is a high-cost mortgage or exceeds the CFPB’s DTI ratio limit, subject to certain exceptions pertaining to VA IRRRLs.

We support the VA’s approach as included in the interim final rule, as we believe the rule’s application of the safe harbor and rebuttable presumption is appropriate.

Interest Rate Reduction Refinance Loans

While all VA IRRRLs will be considered “qualified mortgages,” not all will be “safe harbor, qualified mortgages.” Loans that are not safe harbor, qualified mortgages, meaning that they cannot conclusively be deemed to meet the ATR requirements, are qualified mortgages entitled to a presumption that they meet the ATR requirements of the Dodd-Frank Act. Unlike a “safe harbor, qualified mortgage,” a “rebuttable presumption, qualified mortgage” provides the borrower with the opportunity to challenge that the lender did not make a good faith determination that the borrower has a reasonable ability to repay the loan.

We share the VA’s concerns with potential serial refinancing and equity stripping regarding IRRRLs. We support the VA’s guidance that IRRRLs that do not meet specific requirements will be subjected to a rebuttable presumption status instead of a safe harbor.

The purpose of the VA’s IRRRL program is to place veterans into a better financial position by reducing interest rates and payments, reducing the terms of loans, or converting adjustable rate mortgages (ARM) to fixed rates. The objective is to reduce risk from market fluctuations. VA-backed IRRRLs can only be used to refinance VA-guaranteed loans and to pay for closing costs; IRRRLs cannot be used as a “cash out” refinance. However, VA IRRRLs that are not classified as safe harbor, qualified mortgage loans are still entitled to a rebuttable presumption that they meet the ATR requirements. In order for a VA IRRRL to be considered a safe harbor qualified mortgage, the loan must meet the following conditions:

The loan being refinanced was originated at least six months before the new loan’s closing date;
The veteran has not been more than 30 days past due during the six months preceding the new loan’s closing date;
The recoupment period for all allowable fees and charges financed as part of the loan or paid at closing does not exceed 36 months; and
All other VA requirements for guaranteeing an IRRRL are met.

We believe extending qualified mortgage safe harbor consideration to only those IRRRLs that satisfy the above conditions is an effective way to safeguard the program, while supporting credit availability for borrowers in need of such loans. We agree that to protect veterans from potential equity stripping, IRRRLs that do not meet the safe harbor conditions should receive rebuttable presumption status in order to provide a disincentive to lenders against putting veterans at risk of equity stripping.

Conclusion

We appreciate the approach the VA has taken on these issues. The flexibility the VA has provided will help borrowers as well as credit unions and other lenders. As the VA noted in the rule’s “Supplementary Information,” of the loans that the VA guaranteed in 2013, over 95,000 would have exceeded the CFPB’s strict 43% DTI ratio and nearly 5,000 would have exceeded the APR limit to qualify for the qualified mortgage safe harbor. We believe the interim final rule appropriately addresses the concerns of many lenders regarding the potential and significant negative effects of the CFPB’s “qualified mortgage” requirements on the VA’s programs.

Thank you for the opportunity to express our views on the VA’s interim final rule regarding qualified mortgage loans. If you have any questions about our comments, please do not hesitate to contact CUNA Deputy General Counsel Mary Dunn or me at (202) 508-6743.

Sincerely,

Luke Martone
Senior Assistant General Counsel