Deborah Sementa is program chair and professor for the Master’s of Science in the Business Ethics and Compliance program at New England College of Business and Finance.
Sementa has worked in the financial services industry for 26 years and served as both a regulator and a compliance officer. She holds certifications as a certified regulatory compliance manager and a certified risk professional.
Sementa has also served as chairwoman of the Eastern Massachusetts Network.
PBN: The Consumer Financial Protection Bureau has unveiled its qualified-mortgage rule that puts into place the “ability-to-repay” standard for all mortgage lenders. It is a far-reaching regulation mandated by the Dodd-Frank legislation. What are the basics of this bill?
SEMENTA: The Consumer Financial Protection Bureau’s qualified-mortgage rule is not too far reaching when one considers the sound underwriting practices that mortgage lenders should follow. The basics of this bill require that creditors underwriting mortgage loans make a “reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms.” On the surface this appears to be sound banking practices. However, the past has proven that too many granted mortgages to consumers without regard to the consumer’s ability to repay the loan. This happened in the years preceding the current mortgage crisis.
PBN: How will the qualified-mortgage rule affect banks and other lenders?
SEMENTA: Lenders who grant loans with negative amortization, interest-only payments, balloon payments or terms exceeding 30 years will no longer fall under the definition of qualified mortgages. Nor will lending institutions granting “no-doc” loans, where the creditor does not verify income or assets. Also, loans cannot generally be qualified mortgages if the points and fees paid by the consumer exceed three percent of the total loan amount. The rule does provide guidance on the calculation of points and fees and thresholds for small loans. The most important underwriting criteria under the rule is that monthly payments must be calculated based on the highest payment that will apply in the first five years of the loan. Also, the consumer must have a total, or “back-end,” debt-to-income ratio that is less than or equal to 43 percent. The CFPB believes that these criteria will protect consumers by ensuring lenders use underwriting requirements that safeguard mortgage affordability, while providing bright lines for creditors who want to make qualified mortgages. According to the CFPB, there are many instances in which individual consumers can afford a debt-to-income ratio above 43 percent based on their particular circumstances. In these cases, the CFPB recommends creditors evaluate consumers on an individual basis under the ability-to-repay criteria, rather than with a blanket presumption.
PBN: The qualified-mortgage rule goes into effect in Jan. 10, 2014. In your opinion, do you think banks will tend to approve more mortgages during the remainder of 2013 or do you think lenders are still wary as a result of the mortgage crisis and will remain cautious through this year?
SEMENTA: I think the majority of financial institutions will continue to grant mortgages to consumers by implementing sound underwriting criteria. The industry has learned a lesson from the recent mortgage crisis and will remain cautious through this year, even before the qualified mortgage rule comes into effect.
PBN: Will the qualified mortgage rule diminish the role of mortgage brokers selling off mortgages to third parties, which was one of the major issues with the subprime mortgage fiasco?
SEMENTA: The qualified mortgage rule has left a key issue unresolved: How are the fees that lenders pay to mortgage brokers counted when it comes to defining a qualified mortgage? If the CFPB appropriately resolves this issue, the rules will be good for consumers and investors. However, they should not create a loophole that allows high-fee loans to count qualified mortgages under the rule.
PBN: How do you think the qualified mortgage rule will impact banks and other financial institutions in the next few years and in the long-term?
SEMENTA: Some, such as Debra Still, chair of the Mortgage Bankers Association, believe that the qualified-mortgage rule is too inclusive for consumers because of some of its facets, including the cap on points and fees, and that it may hurt competition among financial institutions and make less credit available. On the other hand, I think this final rule will help stabilize the mortgage industry by providing sound and consistent underwriting standards and steering borrowers into mortgages where they have the ability to repay.