4 I Mississippi Business Journal I January 24 2014
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requirements in 2014 and the possible negative effect on mortgage lending, particularly as some mortgage lenders exit the mortgage lending business altogether or change their business models because of the added risks.” Some lenders, according to the Federal Reserve report, indicated they are shifting their focus from residential loans to small business and commercial real estate loans. The move away from residential lending was among the predictions longtime Mississippi banker and current chair of the Mississippi Bankers Association Odean Busby made three months ago. “Most banks aren’t going to accept the liability at that level,” Busby, chairman of Priority One Bank, said in October. While Busby said his $510-million, Magee-based community bank and its 11 locations from Brandon to Hattiesburg would continue making mortgage loans, no longer could it make non-conforming loans. “Those are going to be essentially eliminated,” he said, and noted Priority One’s home county of Simpson did not make the list of “under-served” counties the federal government for the time being exempted from the qualified mortgage rules.
Concern on the Potomac Flack is already starting to fly in Congress, with some lawmakers questioning whether the rules over-reach and will shut too many borrowers out of the home-buying market. Reacting to the worries, the Consumer Financial Protection Bureau insisted the qualified mortgage rule “strikes a careful balance between providing bright lines to give certainty and clarity to creditors while also allowing flexibility for the mortgage market evolve and innovate in ways that encourage the provision of responsible credit.” In a nod to lawmakers, lenders and borrowers who worried the mortgage reforms were too much too soon, the CFPB wrote in exemptions for banks with assets of $2 billion or less for mortgage lending in
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under-served counties, at least for the time being. Approximately 50 of Mississippi’s 82 counties are among those exempted. While the final rule specifies minimum requirements for creditors making good faith determinations of consumers' ability to repay their mortgages, it does not dictate that they follow particular underwriting models. In fact, the guidelines are also almost wishful in expressing hope that lenders will continue to make non-traditional loans to borrowers they deem deserving. The catch is that such loans won’t enjoy the “safe harbor,” or protection from borrower lawsuits, that the conforming variety will have. Without safe harbor, lending executives must justify to boards of directors the added risks they are bringing aboard, lawyers and bankers say. By contrast, the protections qualified loans get from borrower lawsuits calm board jitters and also make them attractive to investors in the secondary market. The CFPB said it wrote the safe harbor rules in following a mandate in DoddFrank to strengthen borrower protections, For instance, loans can’t have features that often have harmed consumers in the past, such as excess points and fees. Community bankers in interviews last fall worried that courts may invoke the safe harbor rules to order banks to pay a host of costs, including punitive damages and, ultimately, having to forgive the loan without foreclosing on the property that secured it. You can still make loans but you’re leaving your bank wide open, they said. That’s just one of the risks, according to the American Bankers Association. It warned last fall that a single non-conforming loan deemed in violation could have a ripple effect through a bank’s loan portfolio by raising fears that other loans in the portfolio bear the same defects. More than six months ahead of the Jan. 10 official start of QM era, the U.S. House Financial Services Subcommittee voiced fears that the mandates will reduce access to credit that qualified borrowers need to buy homes. “Banks and credit unions have already pulled back on extending mortgage credit and have tightened underwriting standards in re-
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gage products and underwriting practices to protect credit availability. The final rule includes a “qualified mortgage” standard broad enough to encompass most current types of mortgages, the ABA said in a statement. The ABA has less success when it joined its community banking counterpart, the Independent Community Bankers of America, and other groups back in November to seek a nine-to-12-month delay in implementing the qualified mortgage rules that went into effect Jan. 10. The rules set a host of new loan standards, among them an income-to-debt ratio of 43 percent, limits on points and fees and bans on non-conforming loans such
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we know we don’t have the ability to resell and we have to live with them.” The loans it does pass on for resell are HUD’s Federal Housing Administration mortgages, he credit unions can offer loan programs for the said, which have underwriting standards that fall down payment as well. within the QM rules. Most of the home mortgage loans issued by The 30-year fixed is the predominant home loan Mississippi credit unions have 15-year fixed rates, at Hope Credit, according to Bynum, and a debtElliott said. to-income ratio in the 40s has been required all Generally, loan applicants meet the 43-percent along. “We do not do balloon loans,” he said. “But debt-to-income ratio, but “a lot of the people live we do participate in several mortgage down day to day and are carrying debt loans in excess of payment assistance programs.” 43 percent of their income,” he added, referring to While Bynum is determined to maintain current debts beyond home mortgages. loan levels despite the new, more stringent The Consumer Financial Protection Bureau underwriting standards, the CEO of Orion Federal exempted non-profit lenders from the QM rules, Credit Union in Memphis is preparing to turn way but the state’s credit unions designated for lowmany credit worthy borrowers. and-moderate income lending did not get the Historically low interest rates, legal liabilities and exemption. Their lending to borrowers above the narrow profits provided by QM loans make those income levels kept them from it. them no longer worthwhile, Orion CEO Daniel Un-exempted lending entities in Mississippi Weickenand said in testimony last week to the include Hope Federal Credit Union, an arm of House Financial Services Subcommittee. Jackson-based Hope Enterprise Corp., even “While some institutions may start charging a though 75 percent to 80 percent of its loans go to premium on their margins on the QM loans, we do low-and-moderate income borrowers. The QM not feel this is in the best interest of our credit rules raised the bar considerably, but “we are union members and our community,” he said. absolutely going to go ahead and continue to Weickenand, whose testimony was reported by lend,” said Bill Bynum, CEO of both the Hope the National Association of Federal Credit Union’s Federal Credit and Hope Enterprise Corp. website, said the decision to limit lending at He said he thinks the QM standards “are Orion’s half dozen Memphis-area locations did not absolutely on point,” but conceded the pressing come easy. “Orion takes great care in placing our need for home loans by Hope Federal Credit members with the right mortgage product, and Union’s limited-income members will make the QM standard will inevitably force us to turn operations at the more than one dozen Hope many creditworthy borrowers away,” he said. Credit offices in Mississippi, Louisiana and More than 900 credit unions have closed since Arkansas more difficult from here on. 2009. Look for more of them to disappear, Since the Great Recession, dysfunction in the Weickenand predicted, as the pressures of the QM secondary market has forced Hope Credit to keep lending standards and other new federal around 60 percent of its loans, “We have been regulations begins to take force. very prudent about the loans we make because Continued from Page 2
sponse to the financial crisis,” the subcommittee said in a press statement. “The qualified mortgage rule may well exacerbate this reduction in access to credit.” Similar bipartisan concern over a weakening of American home-purchasing power came at a hearing of the subcommittee Jan. 15. Rep. Spencer Bachus, an 11-term Alabama Republican, said the new regulators reflect a far too “extreme” reaction to the
as balloon mortgages. In its pleading, the community bankers, the ABA and a coalition of other partners said they understood the CFPB’s urgency, given the past abuses that have occurred in the mortgage market leading to the financial crisis. “Nevertheless, our members have provided safe and solid mortgage loans to consumers in their communities for decades and were not responsible for the abusive mortgage practices that led to these new requirements,” they said. The new requirements demand significant changes for community banks and the mortgage industry’s third-party participants, including the software providers on which community banks rely, the coalition said. “Extending the mandatory compliance deadline will better enable community banks to fully comply
lax mortgage underwriting that led to the collapse of the housing market near the close of the last decade. “Making mortgage credit scarcer through a ‘one-size fits all’ regulatory policy will negatively affect the very people it allegedly purports to help,” he said. “Regulators must be careful about overreach that denies financial opportunity.”
with the requirements.” While bankers didn’t get the delay they wanted, federal regulators did give assurances that following the more stringent underwriting standards of the qualified mortgage rules will not likely get banks in trouble over compliance with the Community Reinvestment Act, which seeks to prevent discrimination in lending. In a December joint statement to bankers and their lawyers, the Board of Governors of the Federal Reserve, the FDIC, the National Credit Union Administration and the Office of the Comptroller of the Currency said: “From a consumer protection perspective, the agencies responsible for conducting CRA evaluations do not anticipate that institutions’ decisions to originate only qualified mortgages, absent other factors, would adversely affect their CRA evaluations.”