A special thanks to Joseph Schuebert for inspiring and co-authoring this blog article.
Following the passage of the Dodd-Frank Act in 2010 and the establishment of the CFPB, many, if not most, “non-chain” consumer finance companies that previously made residential mortgage loans, exited the consumer real estate loan market. Some took a wait and see attitude and are still making real estate mortgage loans. However, many decided to pack shop and move out of the market altogether based upon the compliance risk and cost.
Well, it is 2015 and it may be time for those who exited the market to re-visit that decision. But, first, a little history lesson:
In January 2013 and May 2013, the CFPB issued several mortgage rules, most of which took effect in January 2014. Among these rules, the Ability-to-Repay rule required that lenders generally make a reasonable and good faith determination that a prospective borrower has the ability to repay his loan. Under the Ability-to-Repay rule, a category of loans called “Qualified Mortgages,” prohibits certain loan features in consumer lending and are presumed to comply with Ability-to-Repay requirements. In addition to heightened underwriting requirements, escrow, appraisal and other servicing requirements were layered onto the mortgage lender.
However, since the initial QM rules were adopted, the CFPB has begun to recognize the importance of mortgage lenders that are considered small, or just servicing rural or underserved areas. On January 29, 2015, the CFPB offered amendments to its mortgage rules. If finalized, the proposal would increase the number of financial institutions able to offer certain types of mortgages in rural and underserved areas and help finance companies adjust their business practices to comply with the new rules.
There are a variety of provisions in the proposed rules that positively affect small creditors and creditors that operate predominantly in rural or underserved areas. For instance, a provision in the Ability-to-Repay rule extends Qualified Mortgage status to loans that small creditors hold in their own portfolios, even if consumers’ debt-to-income ratio exceeds 43 percent. Small creditors in rural or underserved areas can originate Qualified Mortgages with balloon payments even though balloon payments are otherwise not allowed within Qualified Mortgages.
Similarly, under the CFPB’s Home Ownership and Equity Protection Act rule, small creditors that operate predominantly in rural or underserved areas can originate high-cost mortgages with balloon payments. Also, under the CFPB’s Escrow rule, eligible small creditors that operate predominantly in rural or underserved areas are not required to establish escrow accounts for higher-priced mortgages.
The CFPB is proposing to provide additional implementation time for small creditors. Eligible small creditors are currently able to make balloon-payment Qualified Mortgages and balloon-payment high-cost mortgages, regardless of where they operate, under a temporary exemption scheduled to expire on January 10, 2016. The proposal would extend that period to include balloon-payment mortgage transactions with applications received before April 1, 2016, giving creditors more time to understand how any changes will affect their status, and to adjust their business practices.
The public comment ended on March 30, 2015. Perhaps these actions may bring you back to the home mortgage loan business. It may be time to find out.