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QM rollback could spur more small-bank lending

In terms of the impact on mortgage lending, credit unions and smaller banks were the big winners in the lender regulatory-relief bill signed by President Donald Trump last month, according to most analysts.

That’s because most community banks and credit unions will now have a freer hand in making loans that stretch the boundaries of what federal government technically defines as a safe mortgage.

qmloansThe bill known as the Economic Growth, Regulatory Relief and Consumer Protection Act, or S. 2155, extended an exemption to the qualified mortgage (QM) rule to most community banks and credit unions. Previously, the exemption was once only available to the smallest depository institutions.

It means that smaller banks and credit unions with assets under $10 billion are now free to stretch areas of the QM rule in loans that they hold in portfolio, but still retain QM status and the reduced legal liability. Previously, only banks and credit unions with assets under $2 billion had this flexibility.

Some of the old QM standards will still apply. These institutions won’t be able to do interest-only loans or negative amortizing loans, in other words, loans where the borrower pays just the interest for a number of years or loans where the principal payment increases despite regular payments. 

Banks and credit unions will still have to verify that the borrower has the ability to repay the loan. The loans could potentially carry higher debt loads than allowed previously.

Also, the exemption makes it possible for a greater array of banks and credit unions to experiment with riskier features. These smaller depository institutions can originate QM loans with a balloon payment at the end of the loan term, for example, or potentially extend the loan term past 30 years.  

Larger banks and nonbank lenders won’t be able to do similar loans and gain the status of QM. 

The majority of institutions will now have this flexibility, however. At the end of 2017, just 122 bank and financial services holding companies supervised by the Federal Reserve had assets greater than $10 billion, according to the Fed. The new law will add 300 institutions to the roster of regional banks eligible for the QM exemption, the Independent Community Bankers of America said.  

About 3,800 of the America’s nearly 6,000 credit unions will now qualify for the QM exemption, according to the Credit Union National Association. These credit unions held 2.3 million mortgages in portfolio in 2017, and originated 595,603 first lien loans with a balance of $113 billion last year, CUNA said. 

The Community Home Lenders Association (CHLA), which represents small nonbank lenders, said the changes contained in the act water down some of the consumer protections that grew out of the Obama-era Dodd-Frank Wall Street Reform and Consumer Protection Act and also give the affected depository institutions an unfair competitive edge.  

“From a competitive perspective, this further exacerbates the unlevel consumer regulatory playing field,” CHLA Executive Director Scott Olson said.

More flexibility, more lending

Trade groups representing credit unions told Scotsman Guide News that the changes should translate into more lending by smaller depository institutions, but won’t lead to risky loans. They say credit unions and small banks never made the exotic subprime loans that caused the last financial crisis. The lending practices of small banks and credit unions also remain tightly supervised by federal and state banking regulators.

“This just releases the valve a little bit, and allows credit unions more flexibility to try to make some of those loans that they did prior to the financial crisis,” said Carrie Hunt, executive vice president of government affairs and general counsel for the National Association of Federally-Insured Credit Unions.

“Credit unions are extremely susceptible to frivolous litigation, and have concerns about making a loan that doesn’t fit this mortgage standard,” Hunt said. “One of the things that credit unions do best is try to reach as many people as possible. Some people are just outside of that qualified mortgage standard.”

Credit unions vary in size and purpose, but they are all member-owned nonprofits and serve a specific member community. Many operate in small towns and rural areas.

“Yeah, it absolutely can lead to additional lending,” said Elizabeth Eurgubian, deputy chief advocacy officer and senior counsel for the Credit Union National Association.

Eurgubian said another provision of S. 2155 waives some of the recently enacted heightened data-reporting requirements under the Home Mortgage Disclosure Act, meaning that smaller banks and credit unions won’t be required to report as much information about the borrowers and loans. This, she said, could indirectly encourage more credit unions and smaller banks to do mortgage lending because of the lowered origination costs. 

“There are a lot of provisions in here [S. 2155],” Eurgubian said. “Each provision, in and of itself, may not seem like a major change, but there are a lot of changes in here that cumulatively will help credit unions and smaller financial institutions quite a bit in mortgage lending.”

Hunt said that credit unions have been looking for relief on the debt-load requirements of QM and some added flexibility for borrowers. Even so, depository institutions must still ensure a borrower has the ability to repay the loan.

“Every dollar that a credit union lends out is a dollar that comes from its members,” Hunt said. “Credit unions have inherent protections against making bad loans. If they make a bad loan, it comes right out of their balance sheet, and would cause the institution to fail.” 


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