[authors: By Francis X. Riley, III and Nicholas C. Stewart]

Summary

Members of the U.S. House of Representatives from both parties filed on Thursday, March 29, 2012 the "Consumer Mortgage Choice Act" ("CMCA"). If enacted, CMCA would amend Dodd-Frank Act's calculation for determining if a mortgage loan is QRM compliant by: (1) excluding affiliated title fees as long as they are "reasonable;" (2) clarifying that escrows held for taxes and insurance are excluded, and (3) clarifying that compensation paid by a mortgage lender or broker to its individual employee loan originators are excluded.

The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") imposed a risk-retention requirement for lenders who securitize the mortgages they originate. To encourage "sound lending practices," Dodd-Frank requires these lenders to hold on to 5 percent of the "credit risk of any asset" and, thus, to have some "skin in the game."

Dodd-Frank exempts from this risk retention requirement QRMs, which are residential mortgages loans with "underwriting and product features that historical loan performance data indicate result in a lower risk of default." As the argument goes, securitizing firms will prefer to securitize these "qualified" residential mortgages because it will be cheaper to do so under the exemption. In turn, mortgage lenders will be incentivized to originate more of these qualified, "responsible" loans.

Presently, in order for a residential mortgage loan to obtain "qualified residential mortgage" status under Dodd-Frank, the lender's fees to the consumer cannot be more than 3 percent of the loan. In calculating this cap, not only are the lender's direct fees to the borrower considered, but also any fees assessed by the lender's affiliated business – title or real estate company. In effect, this cap strongly discourages lenders from pursuing joint ventures with other settlement services providers that allow borrowers to take advantage of, among other things, one-stop shopping and lower fees. This is because a real estate transaction that takes advantage of an affiliated business arrangement will produce aggregate lender fees, under Dodd-Frank's present provisions, that will remove the loan from QRM. Lenders will not want to originate such loans because non-qualified loans are extremely hard to securitize. Thus, at the end of the day, Dodd-Frank dramatically decreases the size of the secondary market for mortgages.

Although the CMCA does not fully resolve these practical consequences of Dodd-Frank, it does affect Dodd-Frank's cap on fees in three important ways. In particular, it would amend the definition of "points and fees" used to calculate the 3 percent cap to (1) exclude affiliated title fees as long as they are "reasonable;" (2) clarify that escrows held for taxes and insurance are excluded, and (3) clarify that compensation paid by a mortgage lender or broker to its individual employee loan originators are excluded.

The CMCA was introduced by members of Congress from both parties and will be considered by members of the House Committee on Financial Services.