MORTGAGE LENDING REFORM
- Efforts to protect consumers from abusive lending practices should not prohibit responsible, though unconventional, loan products created to meet the diverse needs of consumers, including lower-income borrowers, borrowers in rural and underserved communities, and first-time homebuyers. These products help community banks meet the unique credit needs of their customers and support economic development in many communities.
- All loans originated and held in portfolio by community banks regardless of loan pricing, including balloon mortgages, should receive “qualified mortgage” (QM) safe harbor status under the Consumer Financial Protection Bureau’s (CFPB’s) “ability-to-repay” rules.
- If the CFPB does not give community bank portfolio loans automatic QM safe harbor legal status, then ICBA urges it to eliminate the use of the “rural” and “underserved” designations for QM eligibility for community bank balloon mortgage loans held in portfolio. ICBA supports increasing the annual loan origination limitation for “small creditors” and excluding portfolio loans in determining whether a bank meets the limitation.
- Community banks should be exempt from escrow requirements for loans held in portfolio.
- ICBA strongly supports efforts by the CFPB to ensure community banks are prepared to implement the new integrated mortgage disclosure requirements under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) by the August 2015 compliance deadline. The CFPB should address implementation challenges, conduct compliance training, and provide written materials clarifying individual requirements under the new rules.
- The CFPB’s “small servicer” exemption threshold should be increased from 5,000 loans to 20,000 loans. However, to be fully beneficial an increase in the threshold should be accompanied by corresponding relief from the punitive capital treatment of mortgage servicing assets (MSAs) under Basel IIII.
- The CFPB must provide written guidance and clarifications to all its rules on a timely basis to enable compliance by all lenders. In particular, the CFPB needs to address issues such as the prohibition on initiating foreclosure actions on uncooperative borrowers for loans that are perpetually 90 days delinquent.
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.
Policymakers must take care to distinguish between non-traditional lending and predatory lending. Non-traditional lending is an important tool to help banks reach all types of consumers, particularly those with low-to-moderate income and 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 and rural economies. Community banks often structure loans to meet the unique needs of the borrower based on their type of employment, type of property, value of assets or net worth. These loans are not sold into the secondary market but are kept in portfolio.
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. 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. For community banks that assume the risk, providing non-QM loans is a costly process that requires extensive time and compliance resources to originate the loan and satisfy the documentation requirements. According to ICBA’s September 2014 Lending Survey, 66 percent of community banks currently will not make non-QM loans or will only do so in special cases. 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 current definitions of “rural” and “underserved” are far too narrow. The CFPB’s current 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 a September 2014 ICBA Lending Survey of approximately 520 community banks, half of the respondents that serve rural communities answered they do not qualify for the “rural” exception under the CFPB’s definition. ICBA supports efforts by the Bureau to expand the definition of rural. The CFPB’s ability-to-repay rule, whether lenders choose to offer QM or non-QM loans, increases the cost of compliance, lender risk, and the cost of credit, thereby placing a drag on the housing recovery.
Portfolio Lending Should be Exempted. 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 without regard to their pricing, including balloon loans in rural, underserved, and non-rural areas. Withholding safe harbor status for loans held in portfolio, and exposing the lender to litigation risk and greater compliance costs, 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 and reduce access to credit for borrowers in those counties.
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 limited financing options.
QM Small Creditor Exception Should Be Expanded. ICBA also is urging the CFPB to expand the current “small creditor” exception under the QM/ability-to-repay requirements so that more small creditors are covered. The “small creditor” exception allows more community bank mortgage loans to have QM safe harbor legal status and an exemption from debt-to-income requirements. Currently, 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 supports efforts by the CFPB to increase the loan volume threshold and exclude portfolio loans in applying the threshold.
Small Servicer Exemption Threshold Should Be Increased. To preserve the role of community banks in mortgage servicing, where consolidation has clearly harmed borrowers, the CFPB’s small servicer exemption threshold should increase from 5,000 loans to 20,000. However, the full benefit of this change would not be realized without corresponding relief from the punitive capital treatment of mortgage servicing assets (MSAs) under Basel III. (See resolution titled “Regulatory Capital: Basel III and the Standardized Approach” for more detail.) 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 their servicing departments.
Mortgage Application and Closing Process Remains Paper Intensive. 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.