MORTGAGE LENDING REFORM
- Efforts to stop abusive lending practices should not prohibit responsible, though not conventional, loan products created to meet the diverse needs of consumers, such as lower income borrowers, borrowers in rural and underserved communities, or first-time homebuyers. These are products that help community banks meet credit needs and support economic development in many communities.
- ICBA supports legislation that would provide “qualified mortgage” (QM) status under the Consumer Financial Protection Bureau’s (CFPB’s) “ability-to-repay” rules for loans originated and held in portfolio by community banks, including balloon mortgages, regardless of loan pricing. This is a key provision of ICBA’s Plan for Prosperity.
- The accommodations made for community banks in the CFPB’s final rule implementing the “ability to repay” provisions of the Dodd-Frank Act are appropriate and necessary to ensure that community bank customers continue to have access to mortgage credit. ICBA urges the CFPB to eliminate the use of the “rural” and “underserved” designations for QM eligibility for community bank balloon mortgage loans held in portfolio. ICBA also urges the CFPB to increase the annual loan origination limitation for “small creditors” and not to include loans sold into the secondary market in determining whether a bank meets the limitation.
- ICBA strongly supports the proposed adoption of the QM definition for the “qualified residential mortgage” (QRM) definition but strongly objects to the QRM-plus alternative that would require an unnecessarily high down payment requirement.
- Community banks should be exempt from escrow requirements for loans held in portfolio.
- ICBA will work closely with community banks to understand the impact of implementing the new integrated mortgage disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) and will urge the CFPB to address any implementation challenges. ICBA supports CFPB initiatives to significantly reduce paperwork requirements associated with obtaining a mortgage.
- The CFPB’s “small servicer” exemption threshold should be increased from 5,000 loans to 20,000 loans.
As relationship lenders who underwrite based on firsthand knowledge of their customers and communities and who thrive based on the strength of their reputations, community banks have every incentive to make fair, commonsense, and affordable loans. They do not need prescriptive regulations to compel them to do so.
Policy makers must take care to distinguish between non-traditional lending and predatory lending, as non-traditional lending is an important tool to help banks reach all types of consumers, particularly those in rural and underserved areas. Failure to recognize the distinction does a disservice to legitimate and responsible non-traditional borrowers and creditors.
Community Banks Serve Non-Traditional Borrowers.
Community banks do not have aggressive marketing programs targeting particular low-income areas or low-income borrowers. However, they do help borrowers with non-traditional credit histories or imperfect credit, as well as borrowers in rural communities where non-traditional loans, especially balloon loans, are prevalent due to the unique nature of rural properties. Community banks often structure loans to meet the unique needs of the borrower based on their type of employment, type of property, amount of assets or net worth. These loans are not sold into the secondary market but are kept in portfolio. This gives the bank a vested interest in the loans, and permits the bank and the borrower to work out a solution if repayment problems arise. Because of the nature of community bank mortgage loans and community banks’ vested interest in loan performance, additional regulatory requirements, such as mandatory escrow accounts or restrictions on certain types of balloon loans, are unnecessary regulatory burdens.
QM Rule Does Not Adequately Protect Community Bank Balloon Mortgages. The CFPB’s QM rule defines mortgages that are either “conclusively” or “presumptively” deemed to comply with the Dodd-Frank “ability-to-repay” requirements. Non-QM mortgages expose the lender to liability in case of borrower default. While the CFPB’s QM rule allows balloon loans made by small creditors that operate predominantly in rural or underserved areas to be qualified mortgages, the Bureau’s definitions of “rural” and “underserved” are far too narrow. The CFPB’s regulatory definition of “rural” designates entire counties as either rural or non-rural, which is inherently inaccurate. As a result, too many communities are denied rural status and unnecessarily cut off from access to credit. In addition, the CFPB’s definition of “underserved” is nearly impossible for a non-rural county to meet. Only 22 counties that are not also designated as “rural,” or less than .7% of all counties in the United States, qualify as “underserved.” When a balloon loan does not receive QM safe harbor protection, the lender is exposed to undue litigation risk. Many community banks are not willing to assume that risk and will exit the mortgage lending business particularly in rural and underserved markets that do not qualify under the CFPB’s narrow definitions. The CFPB’s recent amendment to the QM rule provides a two-year transition period during which balloon loans made by small creditors, even those that do not currently qualify for the “rural” or “underserved” exemptions, can obtain QM status as the CFPB studies whether the definition of “rural” or “underserved” needs to be changed, as strongly advocated by ICBA. The QM rule provides loans made by “small creditors” are not subject to the rule’s debt-to-income limitation and have a higher trigger for “high cost” QM category, which carry weaker liability protections. To meet the small creditor definition, a bank must make fewer than 500 loans annually and have assets of less than $2 billion. However, many banks that exceed either or both of these thresholds have all the attributes of authentic community banks. What’s more, the loan volume test is not consistent with the asset test. ICBA urges the CFPB to increase the loan volume threshold and not to include loans sold into the secondary market in applying the threshold.
Legislation needed to exempt portfolio lending. ICBA’s solution to this new regulatory threat is simple, straightforward, and will preserve the community bank lending model: Safe harbor QM status for community bank loans held in portfolio, including balloon loans in rural, underserved, and non-rural areas and without regard to their pricing. Withholding safe harbor status for loans held in portfolio, and exposing the lender to litigation risk, will not make the loans safer, nor will it make underwriting more conservative. It will merely deter community banks from making such loans in the many counties that do not meet the definition of rural or underserved.
By the same token, community bank loans held in portfolio should be exempt from new escrow requirements for higher priced mortgages. Again, portfolio lenders have every incentive to protect their collateral by ensuring the borrower can make tax and insurance payments. For low volume lenders in particular, an escrow requirement is expensive and impractical and, again, will only deter lending to borrowers who have no other options.
Small servicer exemption threshold should be increased. To preserve the role of community banks in mortgage servicing, where consolidation has clearly harmed borrowers, ICBA’s Plan for Prosperity would raise the CFPB’s small servicer exemption threshold from 5,000 loans to 20,000. Community banks above the 5,000 loan threshold have a proven record of strong, personalized servicing and no record of abusive practices. To put the 20,000 threshold in perspective, consider that the five largest servicers service an average portfolio of 6.8 million loans and employ as many as 10,000 people each in servicing alone.
Risk Retention. ICBA strongly supports the Agencies’ proposal to equate QRM and QM definitions. QRM mortgages are exempt from the 5 percent credit risk retention requirement of the Dodd-Frank Act. The QM-QRM alignment will provide clarity for consumers and the industry and limit the already enormous burden community banks face implementing new residential mortgage related rules. ICBA strongly objects to the Agencies’ alternative QRM approach or “QM-plus,” that was considered by the Agencies, but ultimately not selected as the preferred approach in the proposed rule. The alternative approach would take the QM criteria as a starting point for the QRM definition, and then incorporate additional standards that were selected to reduce the risk of default including a requirement that the Loan-to-Value or LTV ratio at closing could not exceed 70 percent.
Integrated RESPA-TILA Mortgage Disclosures. The CFPB’s new rule integrating the mortgage loan and property settlement disclosures will affect virtually all consumer real estate transactions and all community banks. The final rule incorporates suggestions from ICBA that will reduce some of the unnecessary burden and cost of the original proposed rule. Nonetheless, the mortgage application and closing process remains cumbersome and paper-laden. Accordingly, ICBA supports CFPB initiatives to significantly reduce paperwork requirements associated with obtaining a mortgage.