Decisions, Decisions

While creating new opportunities, the Consumer Financial Protection Bureau’s new mortgage lending standards will likely require more focus, adjustments and quick work

By Howard Schneider

The Consumer Financial Protection Bureau earlier this year issued an array of final landmark rules for residential mortgage lenders. New standards for loan underwriting and servicing will require community banks to review their processes and make necessary changes.

The bulk of the mortgage lending rules released by the CFPB cover ability-to-repay/qualified mortgage standards; appraisals for higher-priced mortgage loans; escrow requirements for higher-priced loans; high-cost mortgages regulations; mortgage loan originator compensation and qualification standards; and mortgage servicing requirements. Most of the rules take effect January 2014.

“There’s not much time” for community bankers to prepare for the guidelines, says Ron Haynie, ICBA’s vice president of mortgage and finance policy. Some of the modifications will require system upgrades and staff training, he notes.

The CFPB isn’t done with its mortgage rulemaking. New Truth in Lending Act/RESPA integrated disclosure forms are expected to come out this fall. Dealing with repeated waves of new rules will require community banks to consider “the total impact of all the regulations” on their business, Haynie observes.

Implementing these standards by next January should be doable for most community banks, but “it will require some extra effort on our part,” adds Jack Hartings, president and CEO at The Peoples Bank Co., a $400 million-asset community bank in Coldwater, Ohio, that originates just under 500 home loans per year.

Mandated early notification of rate and payment changes on adjustable-rate mortgages is causing The Peoples Bank to curtail its production of one-year adjustable mortgages. Estimating what a new payment will be months before it resets “will add to consumer confusion,” Hartings predicts.

Notices about initial ARM rate and payment modifications must be sent to borrowers at least 210 days before they occur. Subsequent adjustment notifications for mortgages in a bank’s servicing portfolio must be provided at least 60 days before new payments take effect.

Mortgage lenders with fewer than 5,000 accounts are exempt from other new servicing guidelines, however. And such reduced federal requirements provide community banks with a potential advantage in profitably increasing their servicing portfolios up to the 5,000-loan threshold.

Market changes

While some community banks may need to adjust their residential mortgage lending policies and make investments in response to recent regulatory announcements, most should find that providing home loans remains a solid revenue source, Haynie says. A strengthening market for home purchases in most areas makes it easier for community banks to capitalize on the competitive advantages they have.

“Huge opportunities are out there,” he points out.

Mortgage brokers most likely will surrender market share due to new CFPB rules limiting points and fees on home loans. Typically brokers are compensated by these charges. Part-time brokers who don’t originate a large volume of loans and those working in rural communities where mortgage amounts are smaller will be most affected by these changes.

Community banks can fill this void by expanding their relationships with real estate agents and homebuilders, Haynie suggests. A community bank that provides developmental financing for builders can offer mortgages for its buyers as well.

To capitalize on this potential market growth opportunity, however, some community banks may need to ensure that their underwriting more strictly adheres to Fannie Mae and Freddie Mac standards, Haynie adds. Mortgages that qualify for sale into the secondary market through the housing government-sponsored enterprises are granted “qualified mortgage” status under the CFPB rules, which provides much greater legal protection for lenders against potential consumer lawsuits that might try to claim they received an inappropriate mortgage.

Yet, committing to produce agency-qualified mortgages can be a big step for some community banks, Haynie cautions. “It’s a very different world,” he says, compared to originating loans for portfolio.

Important exemptions

Balloon mortgages are “qualified” under the CFPB rules if they’re granted by lenders with less than $2 billion in assets that originate no more than 500 first-lien residential mortgages annually. Financial institutions that generate more than half of their home loans from properties in rural or underserved counties, as designated by the CFPB, can issue balloon qualified mortgages. Additionally, these loans must be held in a bank’s portfolio for at least three years. Balloon mortgages that meet these criteria will receive qualified mortgage safe harbor legal protection against borrower litigation.

ICBA is encouraging the CFPB to broaden its definition of rural communities, so more community banks qualify for that exemption. Originating balloon mortgages “is an accepted practice” at community banks, Haynie points out. Yet, by not broadly classifying balloon loans as qualified mortgages, the bureau would be “putting a cloud over” these assets. Community banks looking to originate balloon loans must check whether the county where the loan is originating is deemed to be “rural” or “underserved.” Secondly, says Haynie, community banks must determine if they qualify under the institutional size rules.

The CFPB released a list of rural and underserved counties this spring, which will be updated on a yearly basis. “A lot of folks think they’re rural, but they’re not according to the bureau,” Haynie says. For example, The Peoples Bank’s main branch is in a county that the CFPB says is rural. However, three other counties the bank serves aren’t given that designation. Hartings is working to determine how the new rules will apply in his situation.

Community banks can also elect to originate non-qualified mortgages under the CFPB rules. But in that scenario they’ll need to focus on meeting the CFPB’s new ability-to-repay underwriting guidelines. ICBA is urging regulators to deem all home loans held in portfolio by banks of any size as being qualified mortgages.

Read “Compensating Loan Officers,” “The New Servicing Frontier,” “Statements after Closing” and “The Unconventional Lending Path” to learn more about these specific aspects of the rules from regulatory experts.

Howard Schneider is a financial writer in Ojai, Calif.