CHLA Comment Letter to USDA Rural Housing Service re: RHS Interest Rate Ceiling


October 12, 2018


Request for Information

Establishment of Maximum Interest Rate

Rural Housing Service

Kate Jensen
Finance and Loan Analyst
Single Family Housing Guaranteed Loan Program
USDA Rural Development
1400 Independence Avenue
STOP 0784, Room 2250
Washington DC  20250-1522
Dear Ms. Jensen:
The Community Home Lenders Association (CHLA) is pleased to submit these comments in response to the August 17 Request for Information regarding the Rural Housing Service (RHS) existing maximum interest rate allowable under RHS guaranteed single family loans.
CHLA is submitting these comments as the only national association exclusively representing non-bank mortgage bankers, also known as independent mortgage bankers or IMBs.  CHLA members are small and mid-sized IMBs from across the nation, and CHLA members originate loans pursuant to the RHS single family guaranteed loan program.
Our principal recommendation regarding this comment letter is that the RHS eliminate the program’s maximum interest rate provision, which: (1) is an anachronism from an earlier era, (2) is no longer needed in light of stronger provisions (QM) that cap points and fees, and (3) has the impact of reducing the availability of RHS loans for consumers.
The RHS single family guaranteed loan program is an important source of zero down payment single family mortgages that serves borrowers in more rural areas that otherwise are unable to secure affordable mortgages from conventional mortgage loan sources.  The program is flexible, guaranteeing not just home purchase loans, but also construction and acquisition loans, as well as refinance loans.
The RHS single family guaranteed loan program is financially sound, in that it charges sufficient mortgage loan fees to borrowers to maintain a neutral or slightly negative “credit subsidy” – i.e. the program breaks even or runs a small profit based on federal credit scoring.
The RHS Maximum Allowable Interest Rate is an Anachronism – and Should be Eliminated
However originally well intentioned, the RHS Maximum Allowable Interest Rate is an anachronism.  Congress gave RHS the authority to establish a maximum interest rate as part of the Cranston-Gonzalez National Affordable Housing Act of 1990, and RHS elected to institute a cap the following year.  While FHA also had a similar maximum interest rate cap, it removed the cap later that decade.  Today, no other federally insured mortgage program – including FHA, VA, GNMA, Fannie Mae, Freddie Mac, or the Federal Home Loan Bank system – has such an interest rate cap.
Question 4 asked whether this ceiling creates any barriers to loan origination in eligible rural areas.  The answer – according to the experiences of CHLA members – is YES.  One of the critical characteristics of RHS loans is that they are in rural areas.  Since home prices in rural areas are considerably lower than home prices in suburban and urban areas, the average size of mortgage loans also reflects a significant discrepancy between the two.
Quite simply, having an interest rate cap pegged to the Fannie Mae posted yield for 90-day delivery is mixing apples and oranges.  The nationwide allowable loan floor for Fannie Mae and Freddie Mac single family mortgage loans is $453,100 and loans in high cost areas can go as high as $679,500.  In contrast, the RHS maximum loan amount is below $200,000 in many states, and below $300,000 in most states.  More to the point, the average loan amount is significantly lower in the case of RHS loans compared to Fannie or Freddie loans.
In turn, the somewhat fixed costs of loan origination applied to a much lower loan amount in the case of RHS loans makes it harder to compete on rates and terms with higher cost loans.  In our members’ experience, depending on the size and type of loan, this can very often making it difficult or impossible to underwrite and close RHS loans for many otherwise qualified homebuyers or homeowners and still comply with the interest rate ceiling.
This problem is compounded by the fact that there are fewer alternative loan options available to borrowers who live in rural areas than in more populous areas.
Therefore, to answer question 5, the elimination of the maximum interest rate allowable would increase the availability of RHS mortgage loans to borrowers in underserved populations and rural communities – by overcoming the artificial RHS interest rate cap that makes it difficult if not impossible for many lenders to originate loans for certain borrowers.
Borrowers Would Still Have Protections if the Interest Rate Ceiling is Eliminated
Questions 6 asks whether there are other protections that exist if the RHS interest rate ceiling were to be eliminated (or raised), and question 7 asks whether there is anything that RHS should do to ensure that borrowers are not overcharged.
First, we would point out the market for RHS loans is very competitive.  RHS establishes underwriting guidelines for RHS loans, and any qualified lender that follows these guidelines can originate RHS loans to borrowers who meet the guidelines.  The universe and market share of IMBs has grown significantly over the last decade, and with the internet, the ability of lenders to reach borrowers in rural areas has improved considerably.
Therefore, our perception is there is a very competitive market for the origination of RHS loans – and borrowers do not need an artificial ceiling in order to obtain competitive rates.
Secondly, since the original imposition of RHS’ maximum allowable interest rate, a comparable but more effective protection has been put in place for consumers – the Ability to Repay requirement, also known as Qualified Mortgage (QM).  While the RHS sets its own points and fees limitations for QM for RHS loans, it has generally followed CFPB guidelines for these points and fees limitations.  Given that these caps focus on direct costs to borrowers, they are more effective in protecting borrowers than any regulation that caps interest rates.
Therefore, even with the elimination of the maximum interest rate allowable for RHS loans, strong points and fees limitations will be in place under RHS QM.
For all these reasons, CHLA recommends that the RHS act expeditiously to eliminate the maximum interest rate allowable for RHS single family guaranteed loans.
Thank you for your consideration of these comments and request.