I have a colleague that is also the President of a small lender. They have about 8 branches. Members of his communities rely upon his bank because it is a local community bank and customers have pretty good access to him. He is involved in every loan transacation and he approves loans that pther lenders would not (and they rarely go into default). He advised me this week that new mortgage rules that took effect last week could further hamper small lenders’ ability to issue loans. This was widely reported in the Wall Street Journal.
Under the new rules, lenders must ensure that borrowers can pay back their loans. Loans that meet “qualified mortgage” (QM) standards will provide a safe harbor to lenders from future lawsuits, while loans issued outside of QM standards will carry more legal risk.
The Consumer Financial Protection Bureau defines “qualified mortgages” as loans that meet the ability-to-repay rule and in which borrowers spend no more than 43 percent of their income on debt. Furthermore, fees and other charges may make up no more than 3 percent of the loan.
Small lenders reportedly will tread cautiously in the new lending environment because they are worried about the legal risk of making loans that don’t meet new standards, according to The Wall Street Journal.
“We’re going to be very conservative just to make sure that we’re in compliance and don’t get into trouble,” says Mark Walker, chief executive of Michigan Mutual Inc., a lender with 300 employees based in Port Huron, Mich. “There are going to be loans that we did in 2013 that we are not going to be able to do in 2014.”
As reported, any lender who falls outside of the new rules may be unable to sell the loan to investors such as Fannie Mae and Freddie Mac. Large lenders—such as Wells Fargo and Bank of America—already have said they plan to continue issuing loans outside of CFPB’s Qualified Mortgage standards and will hold those loans on their own books.
Will smaller lenders even consider? Non-bank lenders will be particularly cautious since they often don’t use their own investment portfolios to hold the loans on their books, The Wall Street Journal reports.
For example, Linda Sweet, president and CEO of Big Valley Federal Credit Union in Sacramento, Calif., says her credit union will mostly stop making mortgage loans in 2014. Her credit union made about 30 mortgage loans in 2013.
“The burden of trying to comply with the regulation is just overwhelmingly costly for a small financial institution,” Sweet says.
CFPB announced it is monitoring the new rule’s impact closely on loan availability to see if any tweaks need to be made.
“I think we got the rule right,” says Peter Carroll, CFPB’s assistant director for mortgage markets. But he adds that “we don’t want to see credit get unduly cut for people, where there are responsible loans being made.”
http://www.realestatemoney.com/new-rules-for-lenders/#ixzz2r9WjXGKI
Paddy Deighan J.D. Ph.D
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