New mortgage rules could help credit unions & small banks

January 11, 2013 at 11:42 am 2 comments

Yesterday, we blogged about the new “ability-to-repay” mortgage lending rule announced by the Consumer Financial Protection Bureau. The rule sets forth stipulations to help ensure that borrowers can actually afford the loans that they qualify for. Again, it’s just common sense. But some in the banking industry warned that some of the stipulations, particularly those regarding “qualified mortgages” would tighten the credit market and make getting loans harder for certain borrowers like first-time buyers and  low-income people. But in fact, the new rule creates an exemption for small lenders, which may open up the market.

CFPB’s rules state that to be a certified qualified mortgage, borrowers must be evaluated on a range of criteria, including their income, credit history, debt, and others. The loan can’t have any of the more risky features like balloon payments or interest-only loans. In exchange, the lender would gain greater protection from consumer lawsuits. The biggest sticking point seems to be that the borrower must not have a debt-to-income ratio of more than 43 percent. This is a measure of how indebted borrowers are, comparing their income with the debt that they already have prior to taking on a mortgage. Banks say that this will significantly restrict the pool of eligible borrowers, and thus will tighten the credit market.

The catch is that there is an exemption for small banks and lenders with less than $2 billion in assets. If banks and credit unions that are below this threshold, and keep loans on their books rather than selling them, they could get the exemption to the stipulations laid out for qualified mortgages. Smaller lenders also have more flexibility with the types of loans that they can make.

What this means is that, while the larger banks may find that their pools of eligible borrowers shrinks, other lenders will be able to step in. This makes sense. For low-income and underserved borrowers, the type of hands-on financial counseling and training that credit unions and smaller banks and lenders provide is critical. Community banks, credit unions, community development financial institutions (CDFIs), and other lenders are better positioned to take on the risk associated with these borrowers, as they are designed to provide additional support to ensure borrowers’ long-term success. As discussed in a report we released last month, community lenders like CDFIs step in to fill gaps in lending and financial services, reaching individuals not served by the financial mainstream. With the new mortgage lending rules, these lenders will continue to do so.

So in the end it seems that the concerns expressed by some in the banking industry may be a bit over stated. The market will no doubt shift. The new rules create a new playing field that all providers will have to adjust to. But as some consumers find that they no longer can access credit at the major banks, other lenders will step in to create new pathways.




Entry filed under: Banking, Banks, CDFI, Credit Unions, Economy, Financial Reform, Housing. Tags: , , , , , , , .

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  • 1. Erik  |  January 24, 2013 at 4:35 pm

    I would most definitely rather have a mortgage originated at a credit union. This after working for Countrywide, yep, and Regions in their mortgage departments.

    Would like to see more things like this initiated for small community banks in order for them to remain competitiveness and for the actual development of stronger communities not based on a faulty system.

    DTI is the biggest factor holding most things back. Sure credit scores are always hit and miss, but it’s income and debt related matters putting the squeeze on people.

    I always felt like after-tax income should be the figure used in creating a more accurate financial picture. Won’t help DTI purposes, but would create a better representation of what people can “really” afford on a month to month basis. And it would lower the speculative sales prices to a less inflated number due to this.

    • 2. The Support Center  |  January 25, 2013 at 1:48 pm

      It would be great to see more initiatives to expand the capacity of small community banks and credit unions to do more mortgage lending. As you said, this should be about building stronger communities. That said, the foundation of strong communities is strong households– and making sure that people can actually afford their homes is essential. As we’ve seen with the foreclosure crisis, entire neighborhoods and communities suffer when there are widespread foreclosures.


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