After testifying before the Senate Committee on Banking, Housing and Urban Affairs on Feb. 14 that community banks and credit unions did not cause the recent mortgage meltdown, Consumer Financial Protection Bureau Director Richard Cordray told credit union mortgage lenders yesterday they should not fear writing loans which fall outside the “qualified mortgage” protection of the Bureau’s ability-to-repay rule.
“Community banks and credit unions did not engage in the kind of misdeeds that led to the mortgage crisis,” Cordray said at the Senate hearing. “The Bureau knows these institutions may be more likely to retreat from the mortgage market if the regulations implementing the Dodd-Frank Act are too burdensome.”
Cordray took this message a step further at the Credit Union National Association conference in Washington, D.C., on Feb. 27. “Of course, we understand that some of you – or your boards or lending committees – may be inclined to lend only within the Qualified Mortgage space,” he told the small mortgage lenders. “But you should have confidence in your strong underwriting standards, and you should not be holding back. Those that lend responsibly — like credit unions — have no reason to fear the ability-to-repay rule.”
Cordray said the traditional model of reputation and relationship lending coupled with the tendency of community institutions to retain mortgage loans in portfolio deserves special treatment under the law. To address the concerns of community bankers regarding the narrow scope of the ATR rule’s “rural” exception for balloon mortgage loans held in portfolio, the Bureau has proposed a new, fourth type of qualified mortgage. (The comment period for a proposed rule just ended on Feb. 25.)
If the proposal is finalized in its current form, both balloon loans and other loans held in portfolio and made by small lenders will receive a safe harbor from ability-to-repay liability as a qualified mortgage – including those operating outside of rural or underserved areas. (Currently, the ATR rule only allows a small creditor operating in a rural or underserved area to originate balloon mortgages as qualified mortgages.)
Under the proposed rule a bank will only be considered a small creditor if it:
• Has total assets of $2 billion or less at the end of the previous calendar year; and
• Together with all affiliates, originated 500 or fewer first-lien covered transactions during the previous calendar year.
Qualified mortgages of this fourth type also must conform to all of the requirements under the general definition of a qualified mortgage except the 43 percent limit on monthly debt-to-income ratio, Cordray said. The loan also must have an interest rate within 3.5 percentage points of the average prime offer rate.
“As you can see, there are certain big pieces of our new mortgage rules where the end result may be that most credit unions [and community banks] will be covered by special provisions,” Cordray said.