New home mortgage lending rules that threaten to end balloon mortgage lending in Mississippi likely will top the list of concerns the Mississippi Bankers Association will note in a reply to federal regulators who have initiated a series of comment periods on banking regulations.
The replies by Mississippi bankers and their advocacy organization, the MBA, will come in response to an invite from federal bank regulatory agencies to help identify outdated, unnecessary, or unduly burdensome regulations imposed on insured depository institutions. The FDIC, Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve extended the invitation in order to meet terms of the Economic Growth and Regulatory Paperwork Reduction Act of 1996.
Regulators plan to hold roundtable discussions with bankers and interested parties as the series of comment periods progress over the next two years. The current period, which is open to anyone who wants to voice a concern, runs through Sept. 2.
“We haven’t decided what comments we will make,” said Mac Deaver, Mississippi Bankers Association president.
“Gosh, where do we start.”
Deaver said the first step will be a close look at the Dodd-Frank Wall Street Reform & Consumer Protection Act, a 2010 financial sector regulatory overhaul that the MBA chief says brought a lot of “over-kill” by putting small banks under new rules designed to rein in irresponsible lending by giant national banks.
However, the most immediate concern he hears from bankers comes from the Dodd-Frank-created Consumer Finance Protection Bureau’s new qualified mortgage rules and what he says is inconsistent enforcement. The inconsistency comes, he said, from having one agency, the CFPB, make the rules and the three regulatory entities interpret and enforce them.
“That is a concern in itself because of the potential inconsistency there,” Deaver said.
On the home lending front, the worry stems from the “non-qualified” status the new rules put on the longstanding practice of balloon lending, Deaver said, referring to an arrangement by which a loan is issued for five to seven years to be either refinanced or paid in full at the end of the loan term. Being non-conforming and ineligible for the secondary market, the loans are kept on the books of the originating banks.
Without access to such loans, many Mississippians will be shut out from home ownership, Deaver said.
The financial services industry has always deemed balloon-payment mortgages made throughout Mississippi and elsewhere as non-conforming. A chief reason for that classification is the absence of securitization that could otherwise qualify the borrower for conforming loans such as those insured by the Federal Housing Administration, the U.S. Department of Agriculture or the Department of Veterans Affairs.
Further adding to their non-conforming status is the absence of fixed interest rates. Given the fluctuation in rates, bankers who do mortgages that lack a level of securitization to qualify for the secondary market do not want to be stuck for 15 to 30 years with a fixed-rate loan.
Lend But Carry the Risks
While not making non -conforming loans off limits, the CFPB is removing legal protections from them and warning bankers that they make them at their own risk.
Realizing the potential for loss of home ownership opportunities, particularly in rural Mississippi and other regions where non-conventional lending is practiced, the Bureau is encouraging lenders to keep making the loans.
CFPB Director Richard Cordray emphasized the need for continued non-conventional lending in a visit to Mississippi several months ago. He sought to convince bankers the risks of borrower lawsuits from balloon lending and other non-qualified mortgage loans are minimal.
You still must respond to the suits, even if there is, in the end, no liability, Deaver noted. “With things as tight as they are and margins being as close as they are, banks don’t want to assume that risk.”
Already, much of Mississippi’s mobile home mortgage lending has disappeared, he said, noting the risks involved in the non-qualified nature of the lending.
Freddie Bagley, chairman of Brandon-based Community Bancshares and 2014 chair of the Mississippi Bankers Association, said he expects lawsuits to arise once lawyers around the state catch on that bankers are making unprotected mortgage loans. The exposure is to individual borrower and class action suits challenging the underwriting and adherence to guidelines of the balloon mortgages, banking lawyers say.
Should the challenges be upheld, the bank could lose repayment of the loan as well as the option of foreclosing on the property that secured the loan.
New mortgage lending rules give safe harbor protection to loans that meet federal criteria for qualified loans. Under the Ability to Repay rule, which is the foundation of the new mortgage rules, lenders must determine the consumer’s ability to repay both the principal and the interest over the long term − not just during an introductory period when the rate may be lower, the CFPB says, and notes the new rules do not prohibit adjustable rate mortgages but do forbid “teaser” rates as a means of determining a borrower’s ability to repay.
“For them to say we shouldn’t worry is an erroneous statement to me,” Bagley said. “We don’t know and they don’t know. But based on past history, I think banks have a reason to be scared.”
CDFI and Other Protections
Community Bancshares of Mississippi, which has a half dozen separately chartered community banks in Metro Jackson, can continue making non-conventional loans by virtue of its Treasury Department designation as a Community Development Financial Institution, or CDFIs.
CDFI-designated banks must do a least 60 percent of their lending in under-served, low-and-moderate income areas. In addition to providing banks low-cost capital, the designation frees banks from qualified mortgage rules, a circumstance Bagley says he expects will lead other Mississippi banks to seek CDFI status.
Bagley said he also expects that Mississippi’s community banks will at some point resume making non-conforming loans, “because that is our market.”
In the short-term, small banks and savings & loans with assets of $2 billion or under can continue making the balloon mortgages without fearing the legal liabilities. They can keep making the loans through Jan. 10, 2016, provided they keep them in their portfolios for three years.
Beyond Jan. 10, 2016, banks and savings institutions operating in 34 Mississippi counties can continue making non-qualified mortgage loans under a special exemption from the Consumer Financial Protection Bureau. The agency granted the exemptions after determining the counties are “rural” or “under-served,” though banking advocates such as the Independent Community Bankers Association said the designations seemed arbitrary and left out many under-served counties in rural Mississippi and elsewhere.
For the two-year transition period granted all institutions under $2 billion, regulators will give the balloons “qualified” loan status. After that, banks will issue them without the legal protections that accompany the qualified loan designation.
In Washington, the Independent Community Bankers Association is working to broaden qualified loan eligibility to lending done by banks of $10 billion in assets and under, said Ron Haynie, the association’s senior VP of mortgage finance policy.
“Any home mortgage loan granted by a community bank should be a qualified mortgage loan with safe harbor,” Haynie said in an interview Monday.
As Haynie sees it, the Consumer Financial Protection Bureau “is protecting the consumer out of being able to get a home loan.”
The solution, he said, “is to let community banks do the lending they have always done, and performed well.”
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