CFPB officials write rules, push small banks out of mortgages and take market share

Speaking of picking winners and losers in the private sector, sometimes government officials get to choose someone familiar to be the winner: themselves.

Speaking of picking winners and losers in the private sector, sometimes government officials get to choose someone familiar to be the winner: themselves. 

Raj Dates left the Consumer Financial Protection Bureau in April, a few months after he helped the agency write new rules to govern the mortgage market. Now the once deputy director of the bureau has launched Fenway Summer, a firm he plans to make into the leading originator of nonqualified mortgages, according to tweets by Date on the company’s twitter page

Watching this type of thing happen brings out the cynic in me. Look at the progression of events:

First the CFPB, led by Date and Richard Cordray, finalized its ability-to-repay and qualified mortgage rule on Jan. 10. The rules say that community banks’ balloon mortgages will only be considered a qualified mortgage and receive a safe harbor from litigation so long as the loan is made by a “small rural bank.” A lender qualifies as a small rural bank if it has no more than $2 billion in assets and makes no more than 500 mortgage loans per year. It also must originate at least half its first-lien mortgages in counties defined by the CFPB as rural.

Unfortunately for community banks in states like Minnesota, while the bureau has defined 50 of the state’s 87 counties as rural, the great majority of the mortgage loans are not in those counties. Only 16 percent of Minnesotans live in areas defined as rural by the CFPB, according to Craig Foss, associate counsel for the Minnesota Bankers Association.

So for the majority of customers and mortgages in Minnesota, community banks cannot provide balloon mortgages and receive a legal safe harbor. According to the Independent Community Bankers of America, this is true across the country. “The new ability-to-repay regulations will expose lenders to litigation risk unless their loans meet the definition of a qualified mortgage. However, a staple of community bank mortgage lending, balloon loans, are explicitly excluded from qualified-mortgage status unless they are made in rural areas under an unreasonably narrow definition of rural,” said ICBA Chairman William A. Loving, Jr., president of Pendleton Community Bank, Franklin, W. Va., when he testified before the House Committee on Financial Services on April 13.

So now there are small banks, which serve markets not on the CFPB’s “rural” county list or which make more than 500 mortgage loans a year, that are discouraged from making balloon mortgage loans because they receive no safe harbor from litigation risk. Who’s going to make those nonqualified mortgages now?

“Fenway Summer is committed to rebuilding consumer finance on a foundation of trust,” the firm’s about page says. “For too long consumer finance has been seen as a zero-sum game: either banks win or consumers win. At Fenway Summer we take a different approach. Our work is guided by the principle that products designed to actually serve consumers will be simultaneously profitable and sustainable.”

It won’t be very hard to meet this mission statement if the firm is making the balloon loans previously provided by community banks. Community banks are not foreclosing on their customers. In recent years, the delinquency rate of mortgages held by community banks never exceeded 4 percent, compared to 22 percent for fixed-rate subprime mortgages and 46 percent for subprime variable rate mortgages. “In fact, community bank mortgages have outperformed fixed-rate prime loans, thought to be the best performing category of all loans,” according to Loving’s testimony before the House Committee on Financial Services.

For those small banks still competing in nonqualified mortgages, the new competitor on the block will be a firm consisting of the top ranking CFPB staff who wrote the new mortgage rules. Date just recruited Garry Reeder, CFPB chief of staff; Chris Haspel, senior adviser for mortgage servicing and securitization at the CFPB; and Mitchell Hochberg, the bureau’s regulatory senior counsel, to Fenway Summers this month. Sean O’Mealia, a program manager on the Card Markets team in Office of Research, Markets, and Regulations at the CFPB; and Alison Miller, the bureau’s Deputy Executive Secretary, also have joined the firm.

Community banks under $10 billion in assets hold approximately $412 billion in balloon payment mortgages for as many as 5.5 million borrowers, Loving said. That’s a large segment of the industry. No wonder it has attracted CFPB officials away from the large salaries they are known to collect at the bureau; one can only imagine the amount of money they expect to make by moving into the industry for which they wrote the rules.

Fredrikson & Byron Law