The U.S. Consumer Financial Protection Bureau has moved to ease fears among community bankers that new mortgage rules make nonstandard home loans, including balloons, too legally risky.
Already, worries about such risks have led executives in Mississippi’s smaller banks to cut back on mortgage lending.
However, with proposed rules issued last week, the 3-year-old CFPB said it wants to make it easier for community banks to be classified as “small creditors.” The new rules would pertain to banks with assets below $2 billion and serving sparsely populated areas.
The “small creditor” classification exempts banks from a host of “ability-to-repay” requirements established in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the same legislation that created the CFPB.
A big advantage offered by the proposed rules is the “safe harbor” they give nonstandard mortgages made by banks that qualify as small creditors. With the rule changes, the balloon mortgage loans and other non-conforming home loans the small creditors make can be treated as Qualified Mortgages entitled to protection against borrower lawsuits.
The new rules would let community banks that make up to 2,000 first-lien mortgage loans in a three-year period to be classified as small creditors. The current rule sets the maximum mortgage loans at 500.
Serving a designated “rural” area also helps to qualify a small bank’s nonstandard home loans as Qualified Mortgages. To that end, the Consumer Financial Protection Bureau proposes expanding the definition of rural areas in the QM rule to include census blocks the U.S. Census Bureau defines as rural. This change is expected to double the allowed population base for a small bank’s nonconforming mortgage loans to receive QM status.
Only about 9 percent of the U.S. population live in areas the CFPB currently classifies as rural, said Debra Lewis, a managing partner and banking attorney with Balch & Bingham’s Birmingham office. “Now we’ll have 20 percent,” she said. “It’s a much bigger pool” that “should open up a lot of these banks to being small creditors.”
In Mississippi, for instance, the CFPB rule now classifies about half of the state’s counties as rural and thus awards Qualified Mortgage status to the mortgage lending of small banks within them. The new rule is expected to significantly increase the number of Mississippi counties deemed rural, especially those counties that are sparsely populated but still part of a Metropolitan Statistical Area.
The CFPB also is proposing to do away with escrow requirements as a QM condition and to allow community banks to hold balloon mortgages and other non-standard loans in their portfolios, even if the borrower’s debt-to-income ratio exceeds the current benchmark of 43 percent, according to Balch & Bingham’s Lewis.
“Obviously, this is aimed specifically to help the community banks,” she said.
Recognizing the importance of home ownership, the Consumer Financial Protection Bureau and other financial sector regulators have encouraged small banks – and even larger banks serving small communities — to continue making non-conforming loans – though at their own risk. The suggested rule changes are seen, however, as a willingness of regulators to move beyond encouragement to specific protections.
“Before, they were blocking off whole populations from mortgage lending,” Lewis said. “I don’t think they wanted to do that.”
CFPB Director Richard Cordray said as much in a statement accompanying the suggested changes. “Responsible lending by community banks and credit unions did not cause the financial crisis, and our mortgage rules reflect that small institutions play a vital role in many communities,” he said. “Today’s proposal will help consumers in rural or under-served areas access the mortgage credit they need, while still maintaining the important new consumer protections.”
Both the American Bankers Association and the Independent Community Bankers of America praised the proposed rule changes.
“Many communities will enjoy more choice and expanded competition for mortgage credit,” the ABA said in a press statement.
The ICBA said the new rules are a welcome response to tight regulations that have hamstrung “access to home financing across the country.”
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