Bankers in Mississippi and elsewhere in the country have complained often that evolving federal regulations have pulled them in separate directions over the last few years.
On one hand, regulators now want lenders to be much more discerning in reviews of loan applications and insist that borrowers meet a checklist of qualifications. On the other, regulators have expected lenders to adhere to decades-old laws and regulations pertaining to fair lending practices and community reinvestment standards.
The major regulators of lending practices recently tried to lessen some of that unease, issuing notice that banks and other creditors should not fear a regulatory backlash on the fair lending front by adhering to new and more stringent loan quality rules.
Mortgage lending rules that kick in on Jan. 10 designate mortgages as qualified and not-so-qualified and institute “Ability-to-Repay” criteria. Issuing qualified mortgages that meet conditions for conforming mortgage loans give lenders legal protections, or “safe harbor,” from borrower lawsuits and make the loans attractive to investors on the secondary market.
On the other hand, the not-so-qualified mortgage loans, or non-conforming mortgages officially termed “rebuttable” loans, carry no such legal protections and are not sold on the secondary market. These are predominantly the non-traditional balloon loans and adjustable rate loans that are mainstays of residential mortgage lending throughout under-served rural regions of Mississippi and other states.
Those loans have served as vehicles for banks to meet terms of the Community Reinvestment Act, or CRA. Enacted in 1977, the CRA 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.
Now comes a key promise from regulators: “Agencies do not anticipate that a creditor’s decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.”
The “no-risk” pledge comes in an advisory statement issued jointly by the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp. and the National Credit Union Administration.
The Consumer Financial Protection Bureau’s participation in the pledge is significant in that it is the agency that wrote and will enforce the Qualified Mortgage rules through authority granted it by the Dodd-Frank Wall Street and Financial Reform Act..
In the joint statement, the regulators voice hope that lenders won’t be so wedded to the Qualified Mortgage standards that they stop making non-qualified loans. “Consistent with the statutory framework, there are several ways to satisfy the Ability-to-Repay rule, including making responsibly underwritten loans that are not Qualified Mortgages,” the regulators said.
They also indicate they will give lenders flexibility in applying the Ability-to-Repay rule during a several-year period of transitioning to the Qualified Mortgage standards. The flexibility is designed to encourage “preservation of access to credit during this transition period,” the regulators said, addressing the statement to lenders inclined to limit loans to only those meeting qualified status.
They acknowledged that “real world impacts” may create a legitimate need for creditors “to fine-tune their product offerings over the next few years.”
As welcome as the clarification from the regulators may be, it does not restore “safe harbor” to lenders who resume making non-conforming mortgages.
Thus, they face exposure to retaliatory lawsuits for making a loan that fell short of qualifying standards. Courts may invoke the new rules to order banks to pay a host of costs, including punitive damages and, ultimately, having to forgive the loan without foreclosing on the property that secured it, banking attorneys say.
Creditors should be fully aware of the liabilities the non-qualified loans carry, the American Bankers Association warned in July.
“Lenders should understand the risks that attend making non-QM loans and the policies and robust controls that they will need to do so,” the ABA advised.
Banking attorney Ben Sones of Ridgeland’s Taggert, Rimes & Graham said in a July interview the contradictory regulations should not surprise lenders, considering the different missions of the Consumer Financial Protection Bureau and the FDIC, the agency that enforces fair lending rules of member institutions.
Lenders are left to try to read the tea leaves, he said, and advised: “The best we can do is to try to see what others in the industry are doing to try to establish some consistency.”
A good start, advised Balch & Bingham banking attorney Debra Lewis, is for banks to do a strategic reassessment of their mortgage business. From this, she said, they should try to discern the risks close adherence to new Qualified Mortgage rules will put on their standing in regards to the Community Reinvestment Act and fair lending laws.