By TED CARTER
The U.S. Consumer Financial Protection Bureau has backed off enacting new mortgage rules that would make nonstandard home loans, including balloons, legally risky for small lenders in rural and under-served areas.
The action comes as a relief for credit unions and small community banks in rural and small-town markets that had worried they would lose legal protections for the non-standard loans they have made for decades. Some had either left the home mortgage market or were considering an exit.
In a final version of a rule that goes into effect Jan. 1, the 3-year-old CFPB makes it easier for credit unions and community banks to be classified as “small creditors,” thus freeing them from new restrictions on residential lending.
The new rule pertains to banks with assets below $2 billion and serving sparsely populated areas that the Bureau will now define as any county or census block the U.S. Census Bureau does not designate as “urban.”
To assist lenders, the CFPB says it will have an automated tool to determine rural or underserved status by the time the rule takes effect.
The rule revision’s main benefit in rural and small-town Mississippi is the providing of “qualified” mortgage status to balloon mortgages that small lenders keep on their books until the borrower is able to qualify for a standard home mortgage. The banks and credit unions refinance the balloons at intervals that can range from five to 10 years, with seven years the typical duration.
“It’s a little bit of a win for community banks,” said Robbie Barnes, president and CEO of PriorityOne, a $521 million community bank based in Magee in Simpson County.
“I still think they should completely exclude banks under $10 billion, But they are probably not going to do that,” he said.
Barnes said he is puzzled about why the Dodd-Frank created CFPB enacted an earlier rule that went into effect Jan. 1, 2013 that designated non-qualified loans as too risky for “safe harbor” legal protections. Safe harbor helped to protect banks from borrower lawsuits by signifying the bank verified the borrower’s ability to repay before granting the loan.
The Bureau at that time limited the safe harbor protections to standard fixed-rate 20-to-30-year home mortgages that make and subsequently sell on the secondary market. It also extended the protections to small lenders in counties across the country deemed as rural and under-served, though bankers and other representatives of the lending industry questioned the validity of the selections.
Starting in 2013, PriorityOne reduced its mortgage lending by about 15 percent as a way to avoid the legal exposures that come with making non-qualified loans.
With the new rules, PriorityOne and other small lenders can ramp back up their mortgage lending, said Barnes, whose PriorityOne market is sandwiched between the metro markets of Jackson and Hattiesburg, a circumstance that prevented it from enjoying the exemption the CFPB granted banks and savings institutions operating in 34 Mississippi counties designated as rural and under-served.
With the far more encompassing definition of rural and under-served markets, “I think this is going to open up the mortgage market for a lot of borrowers who were unable to get mortgages before,” Barnes said. “Banks that exited (home mortgage lending) will come back into the market.”
Ray Britt, president of one of the state’s smallest banks, Leake County’s $56 million Walnut Grove Bank, said the new rule will be especially beneficial to his bank because it keeps all of its mortgages on its books. “Most have a balloon,” he said.
In the years leading up to adoption of the final rule in late September, the CFPB spoke openly about wanting small banks to continue to make non-qualified loans as a way to help to ensure home ownership in rural and small-town America. The Bureau tried to downplay the legal risks that accompany the loans, though banking organizations such as the Mississippi Bankers Association were unconvinced.
“You still must respond to the suits, even if there is, in the end, no liability,” said Mac Deaver, president of the Mississippi Bankers Association, in a June 2014 interview. “With things as tight as they are and margins being as close as they are, banks don’t want to assume that risk.”
A provision especially welcomed by small lenders and community banks expands the cap on qualified mortgages a lender can make from 500 to 2,000 while maintaining a “small creditor” designation. The provision excludes non-conventional loans such as balloon loans from the tally.
“This change is huge for our community banking clients,” said Debra Lewis, a managing partner and banking attorney in Balch & Bingham’s Birmingham office. Lewis cited a 2014 lending survey by the Independent Community Bankers of America that found new regulations prevented 75 percent of community banks from making more residential loans.
“Under the new rule, banks will have greater flexibility to make these loans without worrying quite as much about losing their status as a small creditor under the rule,” Lewis said.
Further, the final rule scraps a provision that prevented small creditors and community banks from gaining a qualified mortgage designation on residential loans to borrowers whose income-to-debt ratio exceeded 43 percent, according to Lewis. “Essentially, if a small creditor under the rule now follows the process outlined in the new rules, the loan may be a qualified mortgage even if it exceeds the 43 percent limit set elsewhere in the regulations,” she said.
Scott Gray, a Balch & Bingham associate who works with Lewis, said he thinks the flexibility the CFPB has put into the final rule is recognition of the significant impact small lenders and community banks have on the economy. It’s an acknowledgement, he said, that consumer regulations must be balanced with the need to keep small banks open and doing business.
“Obviously, the rule is not yet broad enough to fully capture all of the lenders that should fall within the definition of small lenders,” Gray said. “But this rule is a sign that small lenders can make their voices heard in Washington and that they can obtain a favorable result from the regulatory community.”
Meanwhile, for Barnes of PriorityOne, the rule revisions are an admission that sometimes regulations “hurt the very people they were trying to help.”