Mortgage Lending Update

Mortgage Lending Update

By David A. Wolfe, Esq.

In the wake of the 2008 financial crisis, mortgage lending is currently undergoing a major legislative overhaul.  The purpose of the increased regulation is to create strong incentives for responsible lending and borrowing and to help borrowers get home loans that are less likely to result in hardship or default, which will most certainly have the added effect of increasing costs to borrowers. 

The Dodd-Frank Financial Reform Bill requires mortgage lenders to retain a 5 percent share of each loan they originate, but Qualified Residential Mortgages (QRMs) will be exempt from the new risk-retention rules.  The legislation specifically identified loans guaranteed or originated by FHA, VA, and USDA as qualified for exemption but left other products, including loans written by Fannie Mae and Freddie Mac, up to federal regulators to determine.  A joint effort between six federal agencies, including the Department of Housing and Urban Development, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Federal Reserve, Office of the Comptroller of the Currency, and the U.S. Securities and Exchange Commission, the QRM definition is of great importance because it will determine the types of mortgages that will be generally available for borrowers in the foreseeable future. 

The current QRM definition proposed at the end of March would require an 80% or less loan-to-value, (at least a 20% down payment); limiting the mortgage payment to 28% of gross income and all debts to 36%. Further, while no credit score requirement is included, a mortgage loan would qualify as a QRM only if the borrower is not currently 30 or more days past due on any debt obligation; borrowers could not have been 60 or more days past due on any debt obligation within the preceding 24 months; and during the preceding 36 months borrowers could not have been through bankruptcy, foreclosure, engaged in a short sale or deed-in-lieu of foreclosure, or subject to a Federal or State judgment for collection of any unpaid debt.  The proposed definition is subject to public comment through June 10, 2011, and will then be reviewed by Congress.

In a recent speech, Federal Reserve Chairman Benjamin Bernanke urged lawmakers to avoid “imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit.”  However, a restrictive QRM definition will work against homeowners.  The longest recession since the Great Depression has been the cause of high unemployment and under-employment, leading a high debt-to-income ratio for many borrowers and devastated credit scores.  These factors combined with falling property values will prevent many U.S. homeowners from refinancing into a QRM.  Without the ability to secure a 20% down payment, the capital reserve retention rules will subject borrowers to higher costs for the additional risk and will combine with higher mortgage rates for many to add additional roadblocks to sustainable home ownership, especially those in the hardest hit areas of the country.

David A. Wolfe is an associate in Consumer Collections who practices within the Consumer Collections, Corporate & Financial Services, Credit Union, Collateral Recovery/Replevin and Litigation & Defense Groups of Weltman, Weinberg & Reis Co., LPA. He is based in the Detroit office and can be reached at 248.362.6142 or dwolfe@weltman.com.

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Update on Debit Card Interchange Fees

Update on Debit Card Interchange Fees

by John B.C. Porter, Esq.

On December 16, 2010, the Federal Reserve Board (“Board”) released its proposed rule to implement the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted on July 21, 2010.  The Durbin Amendment amends the Electronic Fund Transfer Act by adding a new section 920 regarding interchange transaction fees and rules for payment card transactions.  Comments on the proposed rule were due by February 22, 2011, and the rule goes into effect July 21, 2011.  The Board was supposed to release its final rule on April 21, 2011, but that date has passed and a final rule has not materialized.  The proposed rule capped debit card interchange fees at $0.12 per transaction for institutions with assets exceeding $10B.

There is speculation that the Board is playing a waiting game with Congress, as two bills to delay implementation of the Durbin Amendment (one for two years and the other for one year) have been sponsored in Congress, S. 575 and H.R. 1081 respectively. 

Debbie Matz, Chairman of the National Credit Union Administration (“NCUA”), wrote a letter to Ben S. Bernanke, Chairman of the Board, dated April 29, 2011, in which she furthers the comments of the NCUA with respect to the Board’s proposed rule on interchange fees.  In her letter, Ms. Matz outlined the results of data collected from credit unions of various asset sizes relative to the direct costs of processing debit card transactions.  This data does not include indirect costs such as labor, facilities, equipment and other overhead costs related to operating a debit card program.  Based on this data, Ms. Matz concludes that the cost per debit card transaction for institutions with assets of less than $100M exceeds the $0.12 cap within the proposed rule.  In conclusion, Ms. Matz urged the Board to modify the proposed rule on interchange fees to provide meaningful exemptions for smaller card issuers related to network exclusivity and merchant routing.

Interchange Cost Chart

Senator Richard Durbin continues to defend his amendment, despite unprecedented opposition from financial institutions from multi-billion dollar banks down to the smallest credit unions, and penned an open letter to JPMorgan Chase CEO Jamie Dimon in which he wrote:  “[T]here is no need for you to threaten your customers with higher fees when you and your bank are already making money hand-over-fist.  And there is no need to make such threats in response to reform that simply tries to spare consumers from bearing the cost of interchange fees that are anticompetitive and unreasonably high.”  This was partly in response to Dimon’s letter to shareholders in which he stated that the proposed fee caps are akin to “price fixing” and “downright idiotic.”  It is not entirely clear who will benefit from the interchange cap, consumers or merchants, but it is abundantly clear that the big loser in all of this will be credit unions.  With the effective date quickly approaching and uncertainty as to what the fee cap will be or when it will be implemented, this promises to make an interesting, if not rocky, summer for us all.  Stay tuned….

John B. Porter is the managing attorney of the Credit Union Group in the Columbus office. He can be reached at 614.857.4488 or jporter@weltman.com.

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Update on Debit Card Interchange Fees

Update on Debit Card Interchange Fees

by John B.C. Porter, Esq.

On December 16, 2010, the Federal Reserve Board (“Board”) released its proposed rule to implement the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted on July 21, 2010.  The Durbin Amendment amends the Electronic Fund Transfer Act by adding a new section 920 regarding interchange transaction fees and rules for payment card transactions.  Comments on the proposed rule were due by February 22, 2011, and the rule goes into effect July 21, 2011.  The Board was supposed to release its final rule on April 21, 2011, but that date has passed and a final rule has not materialized.  The proposed rule capped debit card interchange fees at $0.12 per transaction for institutions with assets exceeding $10B.

There is speculation that the Board is playing a waiting game with Congress, as two bills to delay implementation of the Durbin Amendment (one for two years and the other for one year) have been sponsored in Congress, S. 575 and H.R. 1081 respectively. 

Debbie Matz, Chairman of the National Credit Union Administration (“NCUA”), wrote a letter to Ben S. Bernanke, Chairman of the Board, dated April 29, 2011, in which she furthers the comments of the NCUA with respect to the Board’s proposed rule on interchange fees.  In her letter, Ms. Matz outlined the results of data collected from credit unions of various asset sizes relative to the direct costs of processing debit card transactions.  This data does not include indirect costs such as labor, facilities, equipment and other overhead costs related to operating a debit card program.  Based on this data, Ms. Matz concludes that the cost per debit card transaction for institutions with assets of less than $100M exceeds the $0.12 cap within the proposed rule.  In conclusion, Ms. Matz urged the Board to modify the proposed rule on interchange fees to provide meaningful exemptions for smaller card issuers related to network exclusivity and merchant routing.

Interchange Cost Chart

Senator Richard Durbin continues to defend his amendment, despite unprecedented opposition from financial institutions from multi-billion dollar banks down to the smallest credit unions, and penned an open letter to JPMorgan Chase CEO Jamie Dimon in which he wrote:  “[T]here is no need for you to threaten your customers with higher fees when you and your bank are already making money hand-over-fist.  And there is no need to make such threats in response to reform that simply tries to spare consumers from bearing the cost of interchange fees that are anticompetitive and unreasonably high.”  This was partly in response to Dimon’s letter to shareholders in which he stated that the proposed fee caps are akin to “price fixing” and “downright idiotic.”  It is not entirely clear who will benefit from the interchange cap, consumers or merchants, but it is abundantly clear that the big loser in all of this will be credit unions.  With the effective date quickly approaching and uncertainty as to what the fee cap will be or when it will be implemented, this promises to make an interesting, if not rocky, summer for us all.  Stay tuned….

John B. Porter is the managing attorney of the Credit Union Group in the Columbus office. He can be reached at 614.857.4488 or jporter@weltman.com.

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Mortgage Lending Update

Mortgage Lending Update

By David A. Wolfe, Esq.

In the wake of the 2008 financial crisis, mortgage lending is currently undergoing a major legislative overhaul.  The purpose of the increased regulation is to create strong incentives for responsible lending and borrowing and to help borrowers get home loans that are less likely to result in hardship or default, which will most certainly have the added effect of increasing costs to borrowers. 

The Dodd-Frank Financial Reform Bill requires mortgage lenders to retain a 5 percent share of each loan they originate, but Qualified Residential Mortgages (QRMs) will be exempt from the new risk-retention rules.  The legislation specifically identified loans guaranteed or originated by FHA, VA, and USDA as qualified for exemption but left other products, including loans written by Fannie Mae and Freddie Mac, up to federal regulators to determine.  A joint effort between six federal agencies, including the Department of Housing and Urban Development, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Federal Reserve, Office of the Comptroller of the Currency, and the U.S. Securities and Exchange Commission, the QRM definition is of great importance because it will determine the types of mortgages that will be generally available for borrowers in the foreseeable future. 

The current QRM definition proposed at the end of March would require an 80% or less loan-to-value, (at least a 20% down payment); limiting the mortgage payment to 28% of gross income and all debts to 36%. Further, while no credit score requirement is included, a mortgage loan would qualify as a QRM only if the borrower is not currently 30 or more days past due on any debt obligation; borrowers could not have been 60 or more days past due on any debt obligation within the preceding 24 months; and during the preceding 36 months borrowers could not have been through bankruptcy, foreclosure, engaged in a short sale or deed-in-lieu of foreclosure, or subject to a Federal or State judgment for collection of any unpaid debt.  The proposed definition is subject to public comment through June 10, 2011, and will then be reviewed by Congress.

In a recent speech, Federal Reserve Chairman Benjamin Bernanke urged lawmakers to avoid “imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit.”  However, a restrictive QRM definition will work against homeowners.  The longest recession since the Great Depression has been the cause of high unemployment and under-employment, leading a high debt-to-income ratio for many borrowers and devastated credit scores.  These factors combined with falling property values will prevent many U.S. homeowners from refinancing into a QRM.  Without the ability to secure a 20% down payment, the capital reserve retention rules will subject borrowers to higher costs for the additional risk and will combine with higher mortgage rates for many to add additional roadblocks to sustainable home ownership, especially those in the hardest hit areas of the country.

David A. Wolfe is an associate in Consumer Collections who practices within the Consumer Collections, Corporate & Financial Services, Credit Union, Collateral Recovery/Replevin and Litigation & Defense Groups of Weltman, Weinberg & Reis Co., LPA. He is based in the Detroit office and can be reached at 248.362.6142 or dwolfe@weltman.com.

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