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 Home > Advocacy
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ICBA Policy Resolutions for 2013
ICBA Priorities for 2013
MORTGAGE LENDING REFORM
Position
- As relationship lenders who underwrite based on firsthand knowledge of their customers and communities and who thrive based on the strength of their reputations, community banks have every incentive to make fair, commonsense, and affordable loans. They do not need prescriptive regulations to compel them to do so.
- The accommodations made for community banks in the Consumer Financial Protection Bureau’s final rule implementing the “ability to repay” provisions of the Dodd-Frank Act are appropriate and necessary to ensure that community bank customers continue to have access to mortgage credit. In particular, ICBA supports the final rule’s safe harbor presumption of compliance for loans meeting the definition of “qualified mortgage” and the inclusion within this safe harbor of balloon mortgage loans originated and held in portfolio by small creditors serving predominantly rural or underserved areas. ICBA urges the CFPB to further expand the definition of “rural” to capture a greater percentage of community bank loans.
- ICBA supports the CFPB proposal to create a new definition of qualified mortgage for certain loans originated and held in portfolio by small creditors. Such loans would be protected by a safe harbor and would not be subject to the same debt-to-income ratio requirements as non portfolio loans. Additionally, these loans would be subject to a higher threshold for the definition of “higher priced” loans. ICBA urges the CFPB to include balloon payment mortgages originated by small creditors in non-rural or underserved areas that are held in portfolio.
- ICBA strongly urges the regulatory agencies not to define “qualified residential mortgage” under the credit risk retention rules of Dodd-Frank so stringently that community banks would no longer have the ability to structure loan terms that fit a qualified borrower’s unique financial situation. As regulators implement the Dodd-Frank Act mortgage reforms, mortgage loans held in portfolio must be exempt from product restrictions such as limits on balloon loans and requirements to establish escrow accounts for taxes and insurance, among other terms.
- Efforts to stop abusive lending practices should not prohibit responsible, though not conventional, loan products created to meet the diverse needs of consumers, such as lower income borrowers, borrowers in rural communities, or first-time homebuyers. These are products that help community banks meet credit needs and support economic development in many communities.
- ICBA supports the integration of Truth in Lending Act (TILA) disclosures with the mortgage disclosures required by the Real Estate Settlement Procedures Act (RESPA), as long as any rulemaking to integrate these disclosures simplifies the mortgage lending process and does not provide additional regulatory burden. ICBA opposes revisions to the APR calculation which will entail costly system upgrades and more loans being classified as “higher-priced” or “high cost.”
- The Federal Housing Finance Agency, the housing GSEs, the Department of Housing and Urban Development, the Federal Housing Administration, and the CFPB should not develop or implement any rule or practice that by design or in effect would limit participation by community banks in the mortgage market or in government programs intended to promote housing.
- ICBA supports sensible compensation policies for community bank mortgage originators that include participation in qualified and non-qualified bonus, profit sharing and retirement plans.
Background
Community banks generally do not make mortgage loans with the characteristics that led to the mortgage crisis, such as “teaser” rates, lack of appropriate documentation, pre-payment penalties, or very high or unlimited reset payments and interest rates. As responsible community-based lenders, community banks require appropriate documentation of borrower income and do not make loans that compel borrowers to refinance or sell in order to remain solvent.
Community Banks Also Serve Non-Traditional Borrowers. Community banks do not have aggressive marketing programs targeting particular low-income areas or low-income borrowers. However, they do help borrowers with non-traditional credit histories or imperfect credit, as well as borrowers in rural communities where non-traditional loans are prevalent due to the unique nature of rural properties. Community banks often structure loans to meet the unique needs of the borrower based on their type of employment, type of property, amount of assets or net worth. These loans are not sold into the secondary market but are kept in portfolio. This gives the bank a vested interest in the loans, and permits the bank and the borrower to work out a solution if repayment problems arise. Because of the nature of community bank mortgage loans and community banks’ vested interest in loan performance, additional regulatory requirements, such as mandatory escrow accounts, or restrictions on certain types of balloon loans are unnecessary regulatory burdens.
Policy makers must take care to distinguish between non-traditional lending and predatory lending, as non-traditional lending is an important tool to help banks reach all types of consumers, particularly those in rural and underserved areas. Failure to recognize the distinction does a disservice to legitimate and responsible non-traditional borrowers and creditors.
“Ability to Repay” Determination. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) contains a number of provisions intended to improve underwriting and curb predatory lending in response to the financial crisis of fall 2008, which is widely viewed as rooted in the housing market. Lenders are required to document a borrower’s ability to repay a mortgage. Loans that meet the definition of “qualified mortgage” – generally 30-year, fixed rate, self amortizing loans with no prepayment penalties – shield the lender from liability in case of default. ICBA is encouraged that the final CFPB rule provides a safe harbor from liability (“conclusive presumption of compliance”) for most qualified mortgages, rather than a weaker “rebuttable presumption of compliance,” and allows balloon loans originated and held in portfolio by community banks (under $2 billion in assets and originating 500 or fewer mortgages annually) serving rural or underserved areas to meet the definition of qualified mortgage. Without this safe harbor, many consumers would be left without access to credit as many community banks would cease or significantly curtail their mortgage lending because of litigation risk. ICBA urges the CFPB to expand the definition of “rural” for the purpose of qualifying balloon loans.
ICBA strongly supports the CFPB’s proposal to create an additional definition of qualified mortgage for certain loans originated and held in portfolio by small creditors. Such loans would be subject to a higher threshold for the definition of “higher priced” mortgages, which are excluded from safe harbor protection and default to “rebuttable presumption.” The higher priced threshold would be set at 3.5 percent over the average prime offer rate as opposed to 1.5 percent for other lenders. This new definition of qualified mortgage would also allow for a debt-to-income ratio higher than 43 percent (which applies to large creditor-originated loans).
ICBA also supports the provisions of the Dodd-Frank Act that will subject non-bank mortgage providers to regulatory scrutiny to help ensure they do not engage in predatory lending practices.
Risk Retention. ICBA strongly supports the return to sound underwriting standards as reflected in the Act. However, as the banking regulatory agencies implement Section 941 of the Act, which requires mortgage originators to retain credit risk on non-qualified residential mortgages, ICBA strongly urges them not to define “qualified residential mortgage” too narrowly.
An unreasonably narrow definition of QRM will drive thousands of community banks and other lenders from the residential mortgage market, enabling only a few of the largest lenders to operate in it. Too narrow a definition will also severely limit credit availability to many borrowers who do not have significant down payments or who, despite high net worth, have relatively low incomes and high debt-to-income ratios. In ICBA’s view, the definition of QRM should be relatively broad and encompass the largest portion of the residential mortgage market, consistent with the stronger underwriting standards called for by the Act. An unduly narrow definition of QRM will disadvantage community banks because they lack access to the increased capital needed to offset risk retention requirements, despite conservative underwriting. What’s more, community banks operating in rural areas will be driven out of the market by Farm Credit System direct lenders supervised by the Farm Credit Administration who carry an exemption for loans or other financial assets that they make, insure, guarantee or purchase.
RESPA-TILA Integrated Mortgage Disclosures. ICBA supports the CFPB’s efforts to integrate mortgage disclosures required by both TILA and RESPA. However, the integrated disclosures and the rules governing their use should not impose needless new procedures, costs, system upgrades or changes that will result in increased costs to consumers. ICBA is particularly concerned about proposed revisions to the APR calculation that would include more fees. Because the current APR calculation is embedded in every loan processing system in use today, the proposed changes will require costly upgrades without providing useful information to consumers. The proposed changes will also result in more loans being classified as “higher-priced” or “high cost,” which triggers an escrow requirement that is not feasible for many community banks.
Mortgage Loan Originator Compensation. ICBA supports the CFPB’s sensible community bank mortgage originator qualification and compensation policies that include participation in qualified and non-qualified bonus, profit sharing and retirement plans. The CFPB’s final rule is consistent with ICBA’s position and provides for the exemption of community bank mortgage loan originators from NMLS state licensing requirements and testing.
Staff contacts: Elizabeth Eurgubian, Ann Grochala, Ron Haynie and Renee Rappaport
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