Cheat Sheet: How CFPB's Mortgage Changes Will Help Small Banks

WASHINGTON — The Consumer Financial Protection Bureau, and specifically its massive rewrite of mortgage rules, has been a continual source of banker angst since they took effect a year ago.

But the CFPB on Thursday again sought to give smaller financial institutions' more comfort with the new regime, unveiling a series of proposed relief measures to allow potentially thousands of more community banks and credit unions to more easily make "qualified mortgages."

Industry representatives immediately hailed the move.

"It is a very big deal and a very positive outcome," said Camden Fine, president and chief executive of the Independent Community Bankers of America.

The centerpiece of the plan would expand the definitions of both "small" and "rural" lenders, which are less bound by some of the toughest QM requirements, including a debt-to-income cap and limits on charging balloon payments. The proposal, which gives the industry until March 30 to comment, would also adjust compliance grace periods for lenders that fall outside the "small" and "rural" spectrum, and prolong a transition period for allowing non-rural creditors to make balloon-payment loans.

"Responsible lending by community banks and credit unions did not cause the financial crisis, and our mortgage rules reflect the fact that small institutions play a vital role in many communities," CFPB Director Richard Cordray said in a press release.

Small institutions and those in underserved areas already get added flexibility to comply with the QM standard as well as a CFPB rule curbing high-cost mortgages. Small lenders can attain QM status — which means presumed compliance with the agency's "ability-to-repay" underwriting requirements — if loans are held in portfolio, even if a loan's debt-to-income ratio exceeds QM's normal limit of 43%. Creditors meeting the criteria for "small" institutions that also operate in rural or underserved areas are similarly allowed flexibility under QM's ban on balloon payment loans, and a similar balloon payment ban in the agency's restrictions on high-cost mortgages.

But the problem — from lenders' standpoint — is that those advantages are available to too narrow a slice of the industry. For example, "small" lenders are currently those with less than $2 billion in assets which originate fewer than 500 first-lien loans per calendar year. But the proposal would raise that origination limit to 2,000 loans. It would also exclude loans that a bank keeps in its portfolio from the amount that counts against the limit.

"The number, effectively, is really bigger than 2,000, because it only applies to loans they transfer. That is a significant broadening," said Richard Andreano, a partner at Ballard Spahr.

The revisions, meanwhile, would also allow more institutions to be recognized as "rural," expanding the definition to include areas simply not defined as urban by the Census Bureau.

"We applaud the bureau for listening to community bankers who struggle to serve rural and underserved areas," said Bob Davis, executive vice president of mortgage markets for the American Bankers Association. "These proposed changes are sensible measures that will make it easier for certain hometown bankers to meet the mortgage credit needs in their communities."

Not all of the changes would provide relief. While the CFPB has allowed a three-year "lookback" period for creditors qualifying for rural or underserved status, the agency is now proposing that that period be reduced to one year.

But other proposed steps would be more positive. If, during the previous calendar year, a creditor exceeded either the asset-size limit or origination limit for being recognized as "small," it would get a grace period up to April 1 of the current calendar year to comply with the more rigorous version of the QM rule. Lenders no longer meeting the criteria for operating in rural or underserved areas would get a similar grace period.

Meanwhile, the proposal would also extend a temporary period during which small creditors — which do not meet the rural or underserved criteria — can still make balloon payment loans under QM. That period currently ends in January 2016, but the agency is now calling for it to be extended by three months to April of that year.

While industry groups said the agency still needs to do more to tweak the rules, they said the steps announced Thursday were a step in the right direction.

"Raising the origination limit from 500 first-lien mortgage loans to 2,000, excluding loans held on portfolio, and several other proposed changes announced today all represent significant improvements to the rules," Jim Nussle, president and chief executive officer of Credit Union National Association, said in a press release.

Some suggested the changes reflect a realization that the QM rules currently may be having a more negative effect on smaller institutions' ability to provide mortgage credit than was intended.

"Despite overly optimistic predictions, the qualified mortgage rules have made it harder for many consumers to get mortgages. The CFPB is trying to counter this problem by expanding the number of smaller banks given some flexibility, because the agency believes that traditional banking relationships reduce defaults," said Ronald Rubin, a partner at Hunton & Williams and a former CFPB enforcement attorney.

It was not the first time the agency has won praise for adjusting the mortgage requirements. A revised final ability-to-repay rule issued in the spring of 2013 made revisions pleasing both consumer groups and financial institutions, including allowing small lenders to still earn QM designation for balloon loans until January 2016. Small creditors could also make QM loans with higher annual percentage yields than other institutions. The CFPB similarly proposed a series of limited changes last year that were hailed by the industry.

"It's important that the bureau continue to look at the rules and fine-tune them," said Pete Mills, senior vice president of residential policy and member services at the Mortgage Bankers Association. "We appreciate the fact that they have expanded the rural and small lender provisions so that more borrowers can get access to QM loans."

But many industry insiders, including Mills, said the CFPB mortgage rules still need work. For example, he said institutions continue to call for greater relief on QM's restriction on points and fees. Currently, lenders must comply with a 3 point limit if the loan is above $100,000. But Mills said that threshold should be raised.

"We think that needs to start at a higher level," Mills said.

With the mortgage rules still relatively new, observers said the bureau is likely to continue making changes.

"We can expect to see further tweaks as the years go by. They will continue to refine the concept," said Andreano.