» Mississippi’s 63 credit unions designated to serve limited-income residents will be faced with lending decisions on potential borrowers who fall outside qualified mortgage rules
The era of “qualified mortgage” rules that began Jan. 10 has raised the bar on home lending for all segments of Mississippi’s financial services sector from large banks to community banks to mortgage brokers and credit unions.
Perhaps no part of the sector is feeling as uneasy today as the 63 Mississippi credit unions designated as loan pipelines to low-and-moderate income borrowers.
Mississippi has 85 credit unions. But it is the specially-designated ones that will be faced with lending decisions on potential borrowers who fall outside the standards set by the federal Consumer Finance and Consumer Protection Bureau in the qualified mortgage rules.
The mandate for the rules came from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act requires lenders to document a borrower’s ability to repay a home mortgage loan and opens an avenue for borrowers to sue lenders that make loans without fully verifying an ability to repay.
Banking lawyers are advising their clients to thoroughly acquaint themselves with the rules before making any home loans outside the qualified mortgage standards. Already, according to a Jan. 15 Federal Reserve Beige Book report, some bankers in the Southeast are putting the brakes on any non-QM lending. Others are even halting mortgage lending altogether, the Beige Book reports.
But choices can be limited when your job is lending to less-than-ideal loan candidates. Such is the case with the dozens of credit unions designated to serve Mississippi’s low-and-moderate income borrowers. That segment makes up about 90 percent of the assets held by Mississippi credit unions and around 87 percent of members, according to Charles Elliott, president and CEO of the Mississippi Credit Union Association.
Among other criteria, the QM rules specify a relatively clean credit history and a mortgage debt-to-income ratio no higher than 43 percent.
“We’re trying to digest all of this to determine what the right thing to do is,” Elliott said.
That task includes how to treat down payments, which are a requirement for loans from the credit unions, but certain designated credit unions can offer loan programs for the down payment as well.
Most of the home mortgage loans issued by Mississippi credit unions have 15-year fixed rates, Elliott said.
Generally, loan applicants meet the 43-percent debt-to-income ratio, but “a lot of the people live day to day and are carrying debt loans in excess of 43 percent of their income,” he added, referring to debts beyond home mortgages.
The Consumer Financial Protection Bureau exempted non-profit lenders from the QM rules, but the state’s credit unions designated for low-and-moderate income lending did not get the exemption. Their lending to borrowers above those income levels kept them from it.
Un-exempted lending entities in Mississippi include Hope Federal Credit Union, an arm of Jackson-based Hope Enterprise Corp., even though 75 percent to 80 percent of its loans go to low-and-moderate income borrowers. The QM rules raised the bar considerably, but “we are absolutely going to go ahead and continue to lend,” said Bill Bynum, CEO of both the Hope Federal Credit and Hope Enterprise Corp.
He said he thinks the QM standards “are absolutely on point,” but conceded the pressing need for home loans by Hope Federal Credit Union’s limited-income members will make operations at the more than one dozen Hope Credit offices in Mississippi, Louisiana and Arkansas more difficult from here on.
Since the Great Recession, dysfunction in the secondary market has forced Hope Credit to keep around 60 percent of its loans, “We have been very prudent about the loans we make because we know we don’t have the ability to resell and we have to live with them.”
The loans it does pass on for resell are HUD’s Federal Housing Administration mortgages, he said, which have underwriting standards that fall within the QM rules.
The 30-year fixed is the predominant home loan at Hope Credit, according to Bynum, and a debt-to-income ratio in the 40s has been required all along. “We do not do balloon loans,” he said. “But we do participate in several mortgage down payment assistance programs.”
While Bynum is determined to maintain current loan levels despite the new, more stringent underwriting standards, the CEO of Orion Federal Credit Union in Memphis is preparing to turn way many credit worthy borrowers.
Historically low interest rates, legal liabilities and the narrow profits provided by QM loans make them no longer worthwhile, Orion CEO Daniel Weickenand said in testimony last week to the House Financial Services Subcommittee.
“While some institutions may start charging a premium on their margins on the QM loans, we do not feel this is in the best interest of our credit union members and our community,” he said.
Weickenand, whose testimony was reported by the National Association of Federal Credit Union’s website, said the decision to limit lending at Orion’s half dozen Memphis-area locations did not come easy. “Orion takes great care in placing our members with the right mortgage product, and the QM standard will inevitably force us to turn many creditworthy borrowers away,” he said.
More than 900 credit unions have closed since 2009. Look for more of them to disappear, Weickenand predicted, as the pressures of the QM lending standards and other new federal regulations begins to take force.