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 should receive “qualified mortgage” (QM) safe harbor status under the Consumer Financial Protection Bureau’s (CFPB’s) “ability-to-repay” rules. This designation must include balloon payment mortgages. Community banks 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 supports a formalized safe harbor to protect community banks from legal actions resulting from minor errors during the TRID implementation period. ICBA urges the CFPB to provide clear written guidance on issues resulting from TRID implementation such as the disclosure requirements for a single-close construction-to-permanent loan or a co-op share loan.
- The CFPB’s “small servicer” exemption threshold must be increased from 5,000 loans to 20,000 loans. Moreover, to be fully beneficial an increase in the threshold must be accompanied by corresponding relief from the punitive capital treatment of mortgage servicing assets (MSAs) under Basel IIII.
- 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.
- The CFPB must raise the threshold for mandatory HMDA reporting to level that would exclude a significant number of community banks. See the HMDA resolution for a full discussion.
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 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 Should Broadly 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. 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. The CFPB’s QM rule allows balloon loans to be qualified mortgages provided they are made by rural or underserved lenders, operating predominantly in rural or underserved areas. At year-end 2015, Congress enacted legislation that eases but does not eliminate the rural or underserved lender test so that a lender that does not operate “predominantly” in such areas may qualify. ICBA urges the CFPB to promptly issue a rule to implement this new statute in the broadest manner possible, covering as many community banks and balloon loans as possible.
Portfolio Lending Should Be Exempt. ICBA’s solution to this 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. 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 new 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.
Small Servicer Exemption Threshold 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 threshold must be increased from 5,000 loans to 20,000. 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 threshold 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 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.