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RULES MAY NOT BENEFIT JUMBOS Chris Chakford, managing director at NewOak Capital, doesn't think there will be many problems in implementing the new rules and regulations. "Overall, it will have a positive effect because I think underwriting standards will be more uniform across lenders," he said. However, there is one area, Chakford believes, that may present a problem: jumbo loans. New regulations will make it much more difficult for jumbo loans to attain QM status because of the required debt-toincome level of 43 percent and the restriction against interest-only loans. According to Chakford, this will make it much more difficult for people looking for a jumbo mortgage. "Jumbo loans appeal to wealthy individuals because they are used as financial planning tools," Chakford explained. "These loans are basically more than $420,000, and people in these income brackets are not worried about the balloon payment at the end of the loan term. In addition, they like the lower monthly payments on interest-only loans as well as the tax benefit provided by these loans." Chakford says statistics show that the demand for jumbo loans is there and because many banks will not offer jumbo loans outside of QM standards, he thinks the private sector will step in and take advantage of the opportunity. "Currently, NewOak is exploring ways to provide financing for all prospective homeowners including those who are searching for super jumbo loans," he said. SIZE AND STRENGTH DETERMINE SURVIVAL According to Bob Walters, chief economist for Quicken Loans, a lender that closed $70 billion in home loans in 2012, the company is ready and eager to begin operating under the new CFPB mandates. "We've had entire teams working for a year and even more intensely over the last six months to put many changes in place in our systems," he explained. "The sheer scope of the changes has been formidable." "We've had inside and outside counsel working on this, both in our Detroit offices and in Washington, D.C.," he explained. "We also have lots of IT people implementing systems and code." He says the cost of all these changes and the personnel required to make them has been astronomical, running into the millions. However, one advantage Quicken Loans has is that all of its preparedness for the new regulations has been done in-house. 52 Despite the disadvantages in adapting to the new rules and regulations, Walters thinks there may be some new opportunities available to those companies that do survive. "Any regulation of this size leads to unforeseen opportunities and unintended consequences," he said. Survivors of this transition will be those companies with enough financial resources to make all the changes, and those with fewer resources may not endure. "Smaller companies may decide to give up," Walters explained, "creating new customers for those companies that do survive." SOME LENDERS UNDECIDED ON QM As the effective date for implementation of the new CFPB rules approaches, some lenders are still struggling with the decision of how to proceed, particularly as they relate to QM requirements. Jim Shankle, managing director of CrossCheck Compliance, says some clients are pondering the results of issuing loans that do not meet all of the conditions. Shankle said that a recent update from the CFPB on December 13 provides some clarification. It states that non-QM loans may be acceptable "if the lender writes a prudent loan and considers key risk areas such as loan terms, borrower qualification standards, loanto-value limits, documentation requirements, and portfolio and risk management practices." This seems to indicate that there might be some flexibility in determining the acceptability of non-QM loans. In recent months, Shankle's firm, which offers consulting on regulatory compliance, internal audits, and loan review services, has been spending a lot of time with clients to perform gap analysis of their existing policies compared to the new rules, he says. It's also been doing training for all levels of management and employees on the requirements. Regarding non-conforming loans, Shankle feels that what happens in the secondary market is the wild card. Will there be new investors who prefer unqualified mortgages? Will nonconforming loans be discounted? He thinks there will be opportunities for a private investor market for non-QM loans. "Already there is talk of some organizations beginning to do that," he explained. COMPLEXITY CREATES CONFUSION "What we are seeing is a decade worth of change in a one-year time frame," said Jeanne Erickson, senior attorney in compliance services for Wolters Kluwer Financial Services, a company that designs and develops software to assist and simplify many of the functions of compliance. "First of all, the sheer volume of the regulations is a challenge," she said. "So far in 2013, we've had 23 different proposed or final regulations, all affecting mortgage lending. That's an incredible volume, and it's overwhelming." However, she believes the regulations lenders should really concentrate on understanding are QM and the Ability-to-Repay rule. "What Dodd-Frank has done for the mortgage industry is to define a low-risk mortgage with specific features prohibiting balloon payments, negative amortization, and other risky features," she said. Because of this, lenders need to make some big decisions about their products. Are they going to limit themselves to QM loans, non-QM loans, or both? "I think there is going to be a bit of nervousness about lending outside of QM," Erickson said. "For those who work outside of QM, they will have to sell to private investors in the secondary market, which is not very active at the present time." Just when it seemed the worst was about to be over, Erickson says that more new regulations are on the agenda. Regulations implementing the Home Mortgage Disclosure Act (HMDA) will be published sometime in 2014. However, the biggie will be the Integrated Disclosures requirement, which will take effect August 1, 2015. "People need to start working on that now," she said. "It's one of the most complex I've ever seen." TESTS SHOW SYSTEMS READY TO GO "Given our volume of operations, we think the clarity and certainty provided by these new CFPB guidelines are needed and most welcome, bringing a positive impact to all our lending operations," Vickee Adams, VP for external communications for Wells Fargo Bank, explained. As for problems, Adams says the bank is not seeing anything significant. "We've been working with regulators who have provided feedback," she said. "We've also been doing a lot of testing, and we feel that we're ready to go." As part of that criteria, Adams says their most recent test for servicing standards showed they met all 29 required metrics. "We are the only bank that had no misses," she added. To inform and help customers adapt to this

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