Tuning the Mortgage Machinery

The CFPB makes progress adjusting its ‘qualified mortgage’ standard, but there’s more work to do

By Karen Thomas

It took nearly five months, but the Consumer Financial Protection Bureau has finished some important details for community banks in its final rule establishing ability-to-repay requirements for mortgage loans.

Last month, the CFPB announced new amendments to help shield community banks and other small lenders from the brunt of new mortgage-lending standards. Most importantly, the bureau’s new amendments create a separate category of “qualified mortgages” for community bank portfolio loans and provide a two-year transition period for community bank balloon payment loans.

While the CFPB’s amendments will help preserve access to mortgage credit in many communities, regulators need to go further to adequately protect many customers of community banks. The good news is that although the bureau’s mortgage rules are final, ICBA’s efforts to refine them even further are nowhere near done.

First, amendments

As required by Congress, the CFPB is charged with implementing laws that require residential mortgage lenders to consider the ability of borrowers to repay the loans they are offered before approving such credit to borrowers. However, if lenders provide consumers the new qualified mortgage (QM) loans consistent with the CFPB regulations, those lenders will receive a legal presumption that those mortgages have satisfied the ability-to-repay requirements.

Generally, QM loans that are priced up to 1.5 percentage points over the average prime offered rate (APOR) will receive a conclusive presumption that the loan meets the ability-to-repay requirements, providing the lender a secure legal safe harbor. QM loans priced above that threshold will receive a legally rebuttable presumption of compliance.

Under its final rule released in January, the CFPB structured QM loans to include certain balloon-payment loans made by small creditors operating predominantly in “rural” or “underserved” areas. ICBA has protested that the bureau’s definition of rural areas is much too narrow.

However, the bureau’s amendments adopted last month establish a new QM category for community bank loans held in portfolio. Creditors that have less than $2 billion in assets and make 500 or fewer first-lien mortgages per year will now receive QM safe-harbor status for their loans held in portfolio. These QM loans may be priced up to 3.5 percentage points above the APOR and still receive the safe harbor. Additionally, these loans need not meet the 43 percent debt-to-income ratio limit that applies to QM loans made by other lenders.

Importantly for balloon-payment loans, the amendment established a two-year transition period during which small creditors that do not meet the rural definition can offer balloon QM loans if they are held in portfolio. Further, the bureau will study whether the definitions of rural or underserved should be changed, as strongly advocated by ICBA. The bureau also plans to work with small creditors to allow other types of QM products, such as adjustable-rate mortgages.

Finally, the CFPB adjusted its QM loan pricing standards so that originator compensation will not be included in the 3 percent cap on points and fees for those loans.

These adjustments are in line with what ICBA requested in its February comment letter to the CFPB. In the letter, ICBA encouraged the bureau to expand the QM definition to include additional loans held in portfolio by small creditors; to expand the definition of rural markets; to extend the safe-harbor conclusive presumption of compliance; and to exclude loan originator compensation from the calculation for loans that receive the QM designation.

The amendments are scheduled to take effect with the ability-to-repay rule on Jan. 10, 2014.

Room for improvement

While the CFPB’s amendments make much-needed progress, ICBA remains concerned about the final rule’s overall impact on the Main Street mortgage market.

ICBA continues to work with the CFPB to ensure its regulations adequately protect community banks and their customers while also working the legislative avenue to make further adjustments for Main Street.

ICBA’s Plan for Prosperity agenda for the 113th Congress includes several provisions that would provide community banks important relief from the QM rules. Among its provisions, the plan would:

– provide QM safe-harbor status for all loans originated and held in portfolio for the life of the loan by banks with less than $10 billion in assets;

– exempt banks with assets below $10 billion from escrow requirements for loans held in portfolio;

– increase the “small servicer” exemption threshold to 20,000 loans from 5,000; and

– reinstate exemptions for independent appraisals for portfolio loans of $250,000 or less made by banks with assets below $10 billion.

Fortunately, ICBA’s proposals are making progress in Congress. For example, the Community Lending Enhancement and Regulatory Relief Act of 2013 (H.R. 1750), sponsored by Rep. Blaine Luetkemeyer (R-Mo.), would provide QM status for any mortgage originated and held in portfolio for at least three years by a lender with less than $10 billion in assets. It also would exempt from escrow requirements any first-lien mortgage held by a lender with less than $10 billion in assets.

Additionally, the Terminating Bailouts for Taxpayer Fairness Act of 2013 (S. 798), sponsored by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), would broaden the definition of rural lending markets the CFPB has developed.

Providing community banks reasonable relief from the new mortgage regulations will help ensure they are not driven out of the mortgage market, which would only make it harder for Main Street consumers to access credit and continue the nation’s housing recovery. Main Street communities have already paid enough because of the financial crisis of 2008-10. ICBA is working to ensure they do not suffer even more.

Karen Thomas is senior executive vice president of government relations and public policy at ICBA.