Adhering closely to the new mortgage lending rules of the federal Consumer Financial Protection Bureau could get Mississippi banks into hot water with examiners who scrutinize banks’ community reinvestment and fair lending practices.
Mortgage lending rules that kick in on Jan. 10 designate mortgages as qualified and not-so-qualified. Issuing qualified mortgages that meet conditions for conforming mortgage loans gives lenders legal protections, or “safe harbor,” from borrower lawsuits.
On the other hand, the not-so-qualified mortgage loans, or non-conforming mortgages officially termed “rebuttable” loans, carry no such legal protections. These are predominantly the non-traditional balloon loans that are a mainstay of residential mortgage lending throughout rural regions of Mississippi and other states.
The Catch 22 is that putting the brakes on providing balloon mortgage loans could expose banks to penalties for failing to meet federal Community Reinvestment Act standards and provisions of the Fair Lending Act, said Ridgeland-based Butler Snow banking attorney Ed Wilmesherr, who expects to have a busy year ahead helping banks balance the competing federal regulatory demands.
The Community Reinvestment Act, enacted in 1977, requires banks and savings & loans that receive FDIC deposit insurance to serve a cross-section of borrowers, including people who live in low- and moderate-income neighborhoods.
In meeting the Consumer Financial Protection Bureau’s qualified mortgage rules, Wilmesherr said, “There may appear to be discrimination when, in fact, all the bank was trying to do was make qualified mortgages.”
The root of the pending troubles, he said, is that the regulations have “not been synched in a very satisfactory way.
“I think in some cases satisfying one may create a problem with the other, maybe two others,” Wilmesherr said.
Ben Sones, head of the banking group at Ridgeland’s Taggart, Rimes & Graham, attributes the regulatory conflict to the different missions of the new entry into mortgage lending regulation — the Consumer Financial Protection Bureau — and the Federal Deposit Insurance Corp.
While the Bureau seeks to ensure consumer protection, the FDIC focuses on a bank’s financial safety and soundness as well as its conformance with anti-discriminatory lending rules.
“It’s a tough scenario… the experts have to read the tea leaves to advise you how to respond to contradictory legal requirements,” Sones said. “The best we can do is try to see what others in the industry are doing to establish some consistency.”
The CRA risk for banks that make only qualified mortgage loans is real enough, said Debra Taylor Lewis, banking attorney and partner at Birmingham, Ala.’s, Balch & Bingham.
“This requires every bank to perform a strategic reassessment of their mortgage business, to determine their CRA and fair lending risks encountered by implementing the new QM rules,” Lewis said.
Sones said he will urge his community bank clients to continue with the non-traditional loans, a move that will help his clients on the CRA side but expose them to new legal liabilities. “I will advise my banks that we have got to make these loans — that‘s what we do. We‘re a community bank.”
The Consumer Financial Protection Bureau’s new mortgage rules provide some flexibility to smaller banks with under $2 billion in assets — at least during a two-year phase-in period that runs through Jan. 10, 2016. These banks, provided they make no more than 500 mortgage loans a year, will get “safe harbor” protection on their balloon loans for the two-year period. Also, community banks that operate in 36 Mississippi counties designated as “rural and underserved” will get safe harbor on their non-conforming loans for an indefinite time after Jan. 10.
All of the flexibility built into to the rules went to the smaller banks, according to Butler Snow’s Wilmesherr. “By definition Bancorp South, Regions and even Renasant are not going to be eligible for any of that flexibility.”
The result could be new difficulties for the bigger banks in meeting CRA standards in the rural communities they serve, Wilmesherr said.
In what he concedes is an act of faith, he said he is banking on examiners understanding the competing demands put on lenders since enactment of the Dodd-Frank Financial Reform Act and the Consumer Financial Protection Bureau that sprung from it.
“I tend to believe that if a bank really has its act together and understands the QM (qualified mortgage) rules and applies them consistently, they ought to be able to explain to an examiner why some people got approved and others did not get approved.”
But that does not mean banks won’t spend a lot of time and money trying to explain it, he said.