Smaller banks, especially those serving rural and underserved areas, may catch a few breaks from the Consumer Financial Protection Bureau under a series of changes proposed for its mortgage lending regulations.
A slew of new mortgage regulations went into effect, mostly in January 2014, under the Dodd-Frank Act. These strictures included CFPB’s “Ability to Repay” rule and the related “Qualified Mortgage” standards.
CFPB expects that the proposed changes, if adopted, would increase significantly the number of lenders able to use the regulation’s special provisions for smaller lenders and for lending in rural and underserved markets.
“Today’s proposal will help consumers in rural or underserved areas access the mortgage credit they need, while still maintaining these important new consumer protections,” said CFPB Director Richard Cordray. He noted that responsible lending by community banks did not contribute to the financial crisis.
Both ABA and the Independent Community Bankers of America greeted the CFPB proposal, and credited association government relations work for the agency’s shifts.
“We applaud the bureau for listening to community bankers who struggle to serve rural and underserved areas,” said ABA’s Bob Davis, executive vice-president for mortgage markets. “These proposed changes are sensible measures that will make it easier for certain hometown bankers to meet the mortgage credit needs in their communities.”
“ICBA applauds the CFPB for responding to the nation’s community bankers, their customers, and their communities who have been hamstrung by tight rules, which inhibited needed access to home financing across the country,” said ICBA Chairman John Buhrmaster, president and CEO of 1st National Bank, Scotia, N.Y.
Highlights of ICBA’s mortgage survey
Shortly before the bureau proposal came out, ICBA published a lending study including responses from over 500 community banks. Among its conclusions was that exemptions under the QM rule for small and rural creditors were insufficient to provide robust credit in such markets. While 86% of the banks surveyed offered residential first mortgages, 9% of the sample said they were considering dropping these loans
“Though they meet the asset threshold test of $2 billion or less, two-thirds of banks with $500 million to $2 billion in assets make too many loans (more than 500 a year) to qualify (66%),” the survey report stated. The report added that half of banks serving rural areas don’t qualify for the current “rural” exception.
The survey found that only one out of four community banks routinely make non-QM loans, regarding them as a “significant risk.”
Details about CFPB’s proposal
The bureau’s announcement includes proposed adoption of the following:
• Expand definition of “small creditor.” The limit on loan originations would be raised to 2,000 first-lien mortgages from 500. Loans portfolioed by the lender or affiliates would not be counted.
• Expanding definition of “rural.” In addition to counties considered “rural” under current rules, the proposal would add census blocks not located in an urban area, as defined by the Census Bureau.
• Grace periods. Lenders in transition by origination volume or asset-size would be able to continue to enjoy exception status in the first quarter of the year they exceed either limit. A similar provision would cover lenders who cease to predominantly serve rural or underserved markets.
Additional provisions affect qualifying periods for small credit and rural or underserved status; provide added implementation time for small creditors; and include mortgage affiliates’ activities in calculation of small-credit status.