Mortgage Lending Reform

Position

  • 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 – including balloon payment mortgages – by community banks should receive “qualified mortgage” (QM) safe harbor status under the Consumer Financial Protection Bureau’s (CFPB’s) “ability-to-repay” rules. Mortgage loans originated by community banks and retained in portfolio should not be subject to the CFPB’s mandatory escrow requirements regardless of where the property is located or the pricing of the loan.
  • ICBA strongly encourages the CFPB to continue to collaborate with ICBA and other stakeholders to take a commonsense approach to amending TRID rules, including the TRID tolerances and timelines. ICBA urges the CFPB to address compliance questions through written guidance and FAQs. We urge all regulators to continue taking a diagnostic and corrective approach regarding good-faith compliance efforts. Additional cure and correction procedures are needed to allow community banks to fix inadvertent errors.
  • The CFPB’s “small servicer” exemption limit must be increased from 5,000 loans to the higher of 30,000 loans serviced or $5 billion in total unpaid principal balance of mortgages serviced. Moreover, to be fully beneficial, an increase in the limit must be accompanied by corresponding relief from the punitive capital treatment of mortgage servicing assets (MSAs) under Basel III.
  • The CFPB needs to address servicing issues such as the prohibition on initiating foreclosure actions on uncooperative borrowers for loans that are perpetually 90-days delinquent.
  • ICBA strongly supports expanding the exemption for reporting under Home Mortgage Disclosure Act by increasing the reporting thresholds under the revised Regulation C. See the Loan Data Collection resolution for a full discussion.
  • ICBA strongly supports the use of “property evaluations” performed by qualified bank staff, in lieu of a full residential property appraisal completed by a licensed appraiser, for any mortgage loan retained in portfolio. ICBA also believes reforms are necessary within the appraisal industry to ensure there is sufficient access to appraisers particularly in rural areas.

Background

Community Banks Are Responsible Lenders. 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. Community banks do not have aggressive marketing programs targeting 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.

Portfolio Mortgage Lending Should be Exempt from Onerous Regulatory Requirements. ICBA supports safe harbor QM status for community bank loans held in portfolio without regard to their pricing, including balloon loans. Limiting 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 and reduce access to credit.

By the same token, community bank loans held in portfolio should be exempt from mandatory escrow requirements, regardless of the location of the property or the pricing on the loan. Mandatory escrow requirements raise the cost of credit for those borrowers who can least afford it, and impose additional unnecessary compliance costs for community bank lenders. Further, community banks should be permitted to use property evaluations completed by qualified bank staff in lieu of a full residential property appraisal for any residential mortgage that a community bank originates and retains in its portfolio. A full appraisal is more costly and may only be completed by a certified appraiser.

Additional TRID Guidance is Needed. The TILA RESPA Integrated Disclosure (TRID) rule is a uniquely complex rule with unclear liabilities. The rule has caused some community banks to cease offering mortgages and has greatly increased compliance expenditures for others. Authoritative guidance is needed on many issues. ICBA appreciates the CFPB’s recent proposal to amend and clarify the TRID requirements, but issues remain and new problems continue to surface.

Small Servicer Exemption Limit Must Be Increased. To preserve the role of community banks in mortgage servicing, where consolidation has clearly harmed borrowers, the CFPB’s small servicer exemption limit must be increased from 5,000 loans to 30,000 loans or a maximum unpaid principal balance of $5 billion in mortgages serviced. New regulation has approximately doubled the cost of servicing with a direct impact on the consumer cost of mortgage credit. However, the full benefit of increasing the small servicer exemption limit cannot 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 limit have a proven record of strong, personalized servicing and no record of abusive practices. To put the 30,000-loan limit in perspective, consider that the five largest servicers service an average portfolio of 6.8 million loans each and employ as many as 10,000 people each in their servicing departments. The top 5 mortgage servicers each have more than $300 billion in unpaid principal balance on mortgages serviced.

Staff Contacts: Ron Haynie and Joe Gormley