• CFPB Releases Mortgage Rules That Will Impact Community Banks
  • January 31, 2013 | Author: Keri Ebeck
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Pittsburgh Office
  • On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued two new mortgage rules: (1) ability to repay; and (2) qualified mortgage.  Upon review of the new rules, it appears both will have an impact on lending with Community Banks.  However, the CFPB has carved out exceptions to aid those smaller banks.

    The "ability to repay" rule advises of certain minimum requirements that lenders should meet when making determinations of lending credit for mortgages.  Those requirements are: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for the mortgage-related obligations; (6) current debt obligations; (7) the monthly debt-to-income ratio; and (8) credit history.1   These standards would make the "no-doc" or "no employment verification" loans more difficult to offer to the borrower.  This new "ability to repay" rule would require lenders know the credit/employment history of its borrowers before lending sums of money that the borrowers may or may not be able to repay.

    The "qualified mortgage" rule provides a safe harbor for lenders who provide loans in accordance with the qualified mortgage standards.  If the lenders adhere to the qualified mortgage requirements, "banks will receive a massive benefit: They will be all but protected from many homeowner lawsuits."2  This safe harbor will be available to those lenders who issue loans in accordance with the underwriting requirements that prohibit negative amortizations, interest-only payments, terms exceeding thirty years, "no doc" loans, and balloon payments.3   A mortgage cannot be classified as a qualified mortgage if the points and fees paid by the borrower exceed 3% (with some provisions for loans of lesser amounts). Additionally, the qualified mortgage rule provides that the borrower must have a 43% or less debt-to-income ratio. Certainly under the qualified mortgage rule, a lender can still lend without adhering to these guidelines, but the lender is opening itself up to homeowner lawsuits that would otherwise be protected by the safe harbor of the "qualified mortgage" rule.

    The good news for smaller banks is that the CFPB proposed an exemption for lenders with less than two billion dollars in assets.  This exemption could give the smaller banks an advantage to lend to those who would not otherwise qualify under the stricter guidelines that the larger mortgage companies will follow.  Richard Cordray, the Director of the CFPB, recognizes that "Community Banks and credit unions did not cause the financial crisis...their traditional model of relationship lending has been beneficial for many people in rural arrears and small towns across this country."4 

    In addition, the CFPB has already carved out an exception to the "qualified mortgage" rule, that certain balloon payment loans would be covered under the rule if the loan is held by a bank with less than two billion dollars in assets. The loans would consist of a term of at least five years, a fixed interest rate, and would be required to adhere to other qualified mortgage standards.  Furthermore, these small bank provisions are not subject to the 43% debt-to-income ratio.  The CFPB has stated that this option is available to lenders who originate 50% of their first lien mortgages in counties that are rural, have less than two billion dollars in assets, and do not originate more than 500 mortgages a year.  The other requirement is that these loans must be held in the lenders' portfolio for at least three years.5   This is typically not a problem for the small community bank, as it rarely assigns its mortgages.  Providing these exceptions and exemptions that the larger mortgage companies are not offered, might give the smaller bank additional opportunities to lend to its community.

    Overall, the CFPB is recognizing the difference between the larger mortgage companies and those smaller banks who issue loans to its local community by making exceptions where appropriate.  Both of these new rules will go into effect on January 10, 2014 and Weltman, Weinberg & Reis, Co. LPA will continue to follow the CFPB rules, enactments, and proposals to provide you with regular updates.

    1 http://www.consumerfinance.gov/regulations, January 2013
    2 www.washingtonpost.com/business/economy, January 10, 2013.
    3 http://www.consumerfinance.gov/regulations, January 2013.
    4 www.washingtonpost.com/business/economy, January 10, 2013.
    5 http://www.consumerfinance.gov/regulations, January 2013.