February 25, Ms. Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street NW Washington, DC

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1 Robert R. Davis Executive Vice President Mortgage Markets, Financial Management & Public Policy (202) Ms. Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street NW Washington, DC Re: Docket No. CFPB RIN 3170-AA34 Ability to Repay Standards Under the Truth in Lending Act (Regulation Z) Calculation of Points and Fees under the Recently-Finalized Ability to Repay Rule 78 FR (January 30, 2013) Dear Ms. Johnson: The American Bankers Association (ABA) appreciates this opportunity to comment on the Consumer Financial Protection Bureau s clarifications to Regulation Z. This comment letter is the second of two comments submitted by ABA on this solicitation for comments. This letter focuses on those portions of the proposal that deal with the calculation of points and fees under the recently-finalized Ability to Repay rule. 1 The Bureau is currently proposing two alternative staff commentaries intended to clarify the calculation of points and fees in mortgage transactions involving loan originator compensation. The Bureau solicits feedback regarding these exemptions and modifications. Background Under TILA section 103(bb)(4) as amended by the Dodd-Frank Act, 2 points and fees are defined to include all items included in the finance charge (except interest rate), all compensation paid directly or indirectly by a consumer or creditor to a loan originator, and various other enumerated items. The legislation therefore requires that amounts paid to loan originators must be included in the points and fees calculation. In the Proposal, the Bureau properly identifies certain perverse outcomes that would result from a simple aggregation of loan originator amounts to the finance charge amounts. Specifically, the Bureau expresses some reservations about potential overstatements that would result in transactions where consumers pay upfront origination fees to the lender. Under the January 2013 final regulations, origination fees must be counted towards the points and fees test under Section (b)(1). Since these origination fees are often used by creditors to compensate, 1 78 FR 6622 (Jan. 30, 2013) 2 Public Law , 124 Stat.1376 (2010).

2 Page 2 in part or in whole, the loan originator, adding the full amount of the loan originator s compensation to the points and fees calculation would replicate, and therefore artificially inflate, the points and fees threshold amount. Stated differently, if the regulatory formula requires that payment to the LO must always be added to points and fees, then there is a potential double counting because the origination fees that fund the originator s compensation are already included in the calculation. This is a major concern because points and fees represent a critical test to determine QM qualification, and including charges inappropriately would result in immediate disqualification of many loans from QM protection. ABA Position ABA agrees with the Bureau s view, as set forth in the proposal s preamble, that the purposes of the statute would not be served by counting some or all of the funds paid to LOs when those amounts are already figured into points and fees through some other requirement (i.e., the origination fee). ABA therefore concurs with the Bureau s proposal to add regulatory commentary that would clarify this issue, and set forth a precise and simple formula for counting origination compensation into points and fees. ABA supports the Bureau s second alternative provided in the proposed rule, setting forth the standard that consumer payment of up-front fees and points must offset creditor payments to the loan originator when calculating points and fees. Specifically, this second alternative would provide that the creditor reduce the amount of loan originator compensation included in the points and fees calculation under (b)(1)(ii) by any amount paid by the consumer to the creditor and included in the points and fees calculation under (b)(1)(i). ABA supports the Bureau s second alternative for various interrelated reasons Legislative Intent: Although Dodd-Frank offers scant legislative history, the formula set forth under alternative 2 appears to come closest to advancing Congressional intent. Section 1431 of the Dodd-Frank Act amended TILA to require that all compensation paid directly or indirectly by a consumer or creditor to a mortgage originator from any source must be included in points and fees. This provision appears to call for a regulatory methodology that incorporates only actual compensation paid to the loan originator into the points and fees threshold test. The provision does not seek to swell or exaggerate payment levels to artificially discourage certain types of transactions. Thus, the correct regulatory methodology is one that focuses on actual amounts paid to loan originators. The approach outlined in alternative 2 accurately achieves this end. In addition, the interpretive approach that originator compensation must be inserted to points and fees as an additive, double-counted figure, implicitly assumes that Congress meant to penalize, and even restrain, those transactions where the loan originators receive transaction-specific compensation. This intent is not apparent anywhere in the statute or its legislative history. There is no evidence to reflect that Congress inserted this provision as a punitive measure against certain types of compensation plans. As set forth

3 Page 3 above, we believe Congress intended that there be a realistic and accurate calculation of fees into the points and fees threshold test, not that there be a tariff-like levy that shifts market choice towards a particular compensation arrangement. Discouraging Overpricing: The Bureau interprets that the overall objective of these rules should be to discourage more generalized rent-seeking and excessive loan originator compensation. ABA believes this this objective is best achieved through a realistic accounting of compensation amounts, not through artificial fee replication and double counting. By incorporating only actual compensation amounts into the points and fees threshold, the rule would ensure accountability and preserve systems in place to provide adequate compensation. Avoid Excessive Disqualification of Loans: As acknowledged by the Bureau, including loan originator compensation in points and fees would result in significant doublecounting, because creditors compensate loan originators with funds collected from consumers at consummation. If over-inclusive formulas increase the number of loans that trigger the points and fees threshold, many otherwise viable loans will simply not be made. As ABA has expressed through full previous commentary, banks will avoid any lending that is not protected by the QM provisions. If the points and fees test is effectively lowered by including inappropriate elements in its definition, the immediate and direct impact will be to eliminate loan products from the market. This needless reduction in credit would be a very unfortunate, and very unnecessary, result. The elimination of loan products will be most acute with respect to loans with lower amounts. Various member banks have suggested that if alternative 2 is not adopted it will be very difficult for banks to offer smaller balance loan products. To appreciate why, it is important to factor in the effects of the high-cost loan thresholds, and the fact that that the HOEPA and QM points and fees limits are identical for loans under $60,000. This common trigger definition means that while it is conceivable that a small fraction of non-qm loans might be available as niche products, the HOEPA points and fees limit will certainly prevent those loans from being made. Simplicity. The approach reflected in alternative 2 represents an efficient calculation that is simple to apply. The Bureau s proposal would not require parsing out compensation versus fee amounts, nor require creditors to use inaccurate calculations and ratios. The Bureau s approach is direct, and recognizes that the upfront fees paid to creditors are often used for multiple origination expenses, including LO compensation. The approach under alternative 2 effectively forces the inclusion of every single penny that could be used to compensate the LO into the points and fees figure, and does it without unnecessary complication. As set forth in the example proposed in the notice, if the LO s compensation is actually higher than the origination fee paid to the creditor by the consumer, the amount of the excess would be includable into points and fees. This simplicity ensures clarity and full protection for consumers.

4 Page 4 In summary, ABA agrees with the Bureau that a strict additive rule, requiring that loan originator compensation be counted against the points and fees thresholds even if it is already included for another reason, would not serve the broader purposes of the statute. We believe that such an approach actually would exaggerate the number of loans that exceed the thresholds, and therefore restrict credit availability across all markets. Calculation of Points and Fees ABA takes this opportunity to urge that the Bureau provide additional clarifications on the inclusion of specific real estate and transaction fees to the points and fees test under (b)(1). For various reasons, ABA believes the formula presented in the final rule is subject to misinterpretation and misapplication. The Final Rule generally adopts the existing intricate finance charge structure as the basis for the points and fees determination, and then grafts additional language to arrive at the new points and fees framework that will apply to both QM and HOEPA threshold calculations. When the new guidance in the final QM Rule Commentary is layered upon existing Regulation Z provisions, the result is amplified complexity at times the general statements appear to be trumped by specific instructions in the Rule about whether particular charges are to be excluded or included in the definition. We understand the difficulty in updating the legacy TILA framework to fit the new Dodd-Frank changes. We ask, however, that the Bureau assist the industry in clarifying the patently confusing formulas that are now codified in the final regulation. ABA believes that banks must have absolute certainty in the application of these laws, as the new legal framework can result in dangerous legal and reputational damage to banks. We also know that the most susceptible institutions likely will be smaller community banks that cannot afford expensive compliance systems necessary to adequately implement these changes. ABA respectfully requests that the Bureau simplify the process of calculating points and fees by publishing a schedule of typical fees that are charged in real estate transactions, and identifying which fees and charges are included, and which are excluded. Such a chart or schedule of fees would specifically delineate charge by name, and specifically indicate their classification for purposes of the points and fees analysis. For instance, the list would identify specific types of fees that are included in the points and fees test: application, origination, assumption, commitment, assignment recordation, document review, Desktop Underwriter, FHA MIP, funding fee, mortgage insurance premium, and others. These fees or charges would be explicitly named and defined as being included in the points and fees calculation, unless some special condition applies that would change that status. Likewise, the chart would include a listing of typical items that are excluded from the APR, such as appraisal, appraiser re-inspection, credit report, document preparation, property inspection, termite/pest Inspection, title charges, and others. Again, these fees would be explicitly named and defined as being excluded in the points and fees calculation, unless some special condition applies that would change that status.

5 Page 5 Such a schedule would be very helpful in assisting banks to decipher the precise meaning of the regulations and would ensure that examiners and compliance professionals have appropriate guidance to apply the law. Such a list could also be of great value to the home-shopping consumer, as they would have a precise listing of charges that they should understand as they progress through their shopping experience. Finally, this recommended schedule or chart of real estate settlement fees need not be incorporated into the regulatory text it could be issued informally, but under official Bureau letterhead, to ensure that it serves as conclusive guidance on how the specific fees must be analyzed under the law. Given that the industry is granted 12 months to fully comply with the new provisions, we urge that they Bureau consider such a tool to add standardization and precision to our compliance efforts. Looking Ahead ABA continues to communicate with members regarding the effects of these rulemakings, and our outreach and informal surveys with banks reveal that the proposed triggers are likely to have a measurably negative impact on already depressed lending levels. Our informal surveys confirm that HOEPA thresholds and QM qualifications are likely to remain virtual limits for mortgage lending activity nationwide. ABA is currently attempting to accurately measure the overall market impact of these rules, but overwhelming member testimony reveals that the points and fees threshold will have a critical and negative impact on mortgage lending levels. ABA understands that the Dodd-Frank reforms are meant to add strong protections for consumers. As ABA has expressed in previous comments, the legislation also intends that consumers have broad access to affordable financial products and services. The Bureau must, therefore, continue to engage in focused analysis of the impact brought by these regulatory provisions. We appreciate the Bureau s efforts to balance these goals, and we remain willing to work with the Bureau to ensure that our nation s banks are able to properly and safely serve their communities. Sincerely, Robert R. Davis