The Consumer Financial Protection Bureau believes the final
The only problem is that lenders don’t believe it. They believe the QM rule will force them to curtail current lending practices.
And many congressmen aren’t buying it either. There are 34 House members supporting a bill (H.R. 1077) that would rewrite the 3% points and fees cap in the QM rule. The industry-backed bill would eliminate title charges, double counting of loan officer compensation and other items from the 3% cap so that more loans can meet the ability-to-repay standards in the QM rule that was issued in January.
A recent poll of federal credit unions found that 44% of respondents said they will cease originations of non-QM loans. And another 44% said they would reduce originations of loans that fall outside the QM guidelines.
The National Association of Federal Credit Unions claims it can’t support the QM rule in its current form.
In a letter to Congress, NAFCU notes the 43% debt-to-income limit on QM loans will curtail lending to otherwise creditworthy borrowers.
“NAFCU believes this arbitrary threshold will prevent otherwise healthy borrowers from obtaining mortgage loans,” according to the association’s general counsel Carrie Hunt.
At a House Financial Services subcommittee hearing last week, CFPB assistant director Kelly Cochran tried to make a case that the bureau is prepared to exempt small banks and credit unions from many of the QM requirements, including the 43% DTI limit.
Cochran stressed the QM rule doesn’t dictate what underwriting models lenders should use. And lenders wanted a bright-line test for determining QM-compliment loans. So the bureau came up with the 43% DTI ratio as a bright-line indicator. The CFPB estimates that 75% of loans being originated today don’t exceed the 43% DTI threshold.
However, the CFPB is in the process of finalizing changes to the QM rule that give small creditors with no more than $2 million in assets more underwriting flexibility—provided they originate no more than 500 first-mortgage loans per year.
“We will not impose the 43% DTI ratio” on the customers of small banks and credit unions, Cochran testified.
The mortgages these small creditors originate and hold in portfolio would be considered QM loans that meet the CFPB’s ability-to-repay standards. The consumer bureau estimates this provision would benefit 9,200 small banks and CUs.
“We know that these institutions use a highly individualized relationship lending model. We don’t feel in that circumstance that it is necessary to provide a bright-line threshold as long as they are considering the consumer’s debt, income and assets,” she said. The CFPB also believes portfolio lenders have an incentive to protect consumers.
The CFPB assistant director for regulations noted several times that the bureau expects to finalize the small credit exemption very soon. Some sources say it could be issued before June 1.
But NAFCU doesn’t feel this small creditor exemption doesn’t go far enough. Hunt said there are concerns about the ability of small credit unions to sell their QM loans in the secondary market. And the QM proposal could create a divide between small and large CUs.
“We don’t want a rule that divides the industry. It may exempt small CUs but not a large volume of CU loans,” Hunt said.
NAFCU is supporting H.R. 1077, which is known as the Consumer Mortgage Choice Act. Consumer groups strongly oppose this bill.
The CPFB also is trying to carve out an exemption in the QM rule so that lenders in rural areas can continue to make balloon mortgages. But the CFPB’s proposed definition of rural areas excluded 43% of banks that make balloon mortgages, according to a survey by the Independent Community Bankers of America.
At last week’s hearing, subcommittee chairman Marcy Caputo, R-W.Va., noted that most of her state is considered rural. But under CFPB’s definition, 26 of West Virginia’s 56 counties are not considered rural, she said.
ICBA wants the consumer bureau to change the definition so all areas outside of metropolitan statistical areas are considered rural and all towns with fewer than 50,000 would be rural, too.
ICBA senior vice president Ron Haynie also wants the consumer bureau to expand the small creditor exemption to include balloon mortgages.
Small banks prefer five-year and longer-term fixed-rate balloons because they don’t want 30-year mortgages on their balance sheets and adjustable-rate mortgages are harder to service.
The community banking group also wants the CFPB to increase the asset threshold to $4 billion and the 500-loan limit to 1,000 loans. And this loan limit s should apply to portfolio loans—not loans sold to investors.
Banks with $300 million in assets can bump up against the 500-loan-per-year threshold “pretty easily,” Haynie told NMN.
ICBA is neutral when it comes to H.R 1077. However, the SVP for mortgage finance policy said the CFPB has to clarify the points and fees.
The loan-level price adjustments that Fannie and Freddie charge should “not be in points and fees,” he said.
