Small bank advantages under Dodd- Frank?
On one hand, the pile-on of compliance costs is a disadvantage to smaller shops unable to spread those costs across a larger volume. But the Dodd- Frank Act also gives small banks a couple of major exceptions that translate into significant advantages. Here are some thoughts for small banks using these advantages, and for larger institutions who compete with them.
If you're a small bank, articles from national experts may be misleading for your specific needs--lengthy white papers on appendix Q and "QM-only" policies likely just waste your time.
If you're a larger bank, it may be helpful to understand the situation that smaller banks find themselves in--perhaps banks whom you're purchasing loans from, or banks that you're selling loans to.
Aside from the general comment that smaller institutions may tend to be (not all!) more easily overwhelmed by increasingly complex regulatory burdens, here are two specific advantages that Dodd- Frank provided to smaller institutions.
Small Creditor
Lenders with less than $2 billion in assets that originate 500 or fewer 1st lien residential mortgages per year are considered "small creditors" under the ATR/QM regulations. (Note: How you count this 500 is different than the scope of ATR/QM, which is not limited to 1st lien transactions).
Small creditors can essentially originate non-QM loans as fully protected QM loans. If willing to hold a loan in portfolio for 3 years (unless sold to another "small creditor"), small banks have the advantages of originating loans protected by QM status while avoiding both (#1) any numerical DTI requirement, and (#2) appendix Q's rigorous underwriting standards.
For "small creditor portfolio QMs", the loan must meet the following requirements--
Term no greater than 30 years
Regular, periodic payments--no interest-only or neg am.
Meets QM points + fees test
Consider DTI (but not restricted to 43% or any other limit)
So the trouble spots for small creditor with QM will be meeting the points + fees test and the increased documentation burdens. Small creditors should not feel the pain of appendix Q or see the arbitrariness of the 43% DTI limitation.
Small creditors selling loans
The catch with this type of QM is that the small creditor must hold it in portfolio for 3 years. It can be sold within 3 years to anyone, but it
will lose its QM-status if sold to anyone other than another small creditor. After 3 years, a small creditor portfolio QM can be sold to any entity and the loan will retain its fully-protected QM-status.
Now-small creditors do not need to rely on this special QM category. They can originate "regular" and GSE-eligible QMs and sell those to whomever and whenever they please. Of course- the small creditor will then need to meet the full requirements if originating loans under these normal categories, e.g. they will have to meet appendix Q standards if originating a regular QM.
Note: Selling more profitable loans
Non-small creditors are limited to QM's standard higher-priced test, which normally limits 1st lien transactions to 1.5 APR over APOR.
For lenders willing to wait the 3 years after origination, however, small creditors could sell them more profitable loans because the "higher-priced" test is more flexible for small creditors. Small creditors can go up to 3.5 APR over APOR before triggering QM's higher-priced rule.
Staying within the 500-limit
The question becomes, "How valuable is this 'small creditor'exemption?" Is it worth one extra loan if that brings you to 501? Does that mean lending will be shut off at 500? Is there an incentive to go after a greater proportion of jumbos? (the limit is 500 loans, doesn't matter what size).
There are two options available to small creditors that may be interesting to larger institutions:
1. Buying
A small creditor could buy closed loans--those loans would not count towards the 500 limit. If you're a larger institution, this may develop into a profitable outlet for your loans. This will depend on how hard lenders are working to remain a "small creditor"-- will a lender that could originate 800/year originate 500 and seek to purchase 300?
Note that a small creditor cannot purchase a non-QM and transform it into a QM...a QM has to be originated as such.
2. Brokering
A small creditor could also fight to keep small creditor status by brokering more loans. The 500-limit only includes loans that you close; you do not close loans if you are simply a broker. This may be an interesting option for larger lenders frustrated with rising LO compensation and decreasing production. And the playing field is clear--a small creditor has no incentive to broker loans to an affiliate--such a loan would still count towards the 500-limit.
Small Servicer
There is also an exemption for "small servicers" from many of the new federal servicing regulations. An in-depth look is probably better left for another day, but here are some highlights.
Defined. "Small servicer" is not the same as "small creditor." Small servicers are institutions that (a) service 5,000 or fewer mortgages and (b) service not even a single loan for another entity--the small servicer must either own or have originated every loan it services. Therefore- the small servicer can service a loan that it originated and sold to Fannie. It can also service a loan that it purchased from another bank. But a small servicer loses its exemption if it services any loan that it neither originated nor currently owns.
Importance. Of the 2014 federal servicing changes, the small servicer is exempt from the following:
Periodic statement provisions
Requirements for servicing policies and procedures (which include extremely elaborate and specific demands)
Early intervention provisions
Continuity of contract rules
Some (but not all!) of the loss mitigation requirements.
But Note: Small servicers are not off the hook!
Many other new requirements fully apply to them. With the new regulatory microscope on servicing-and much of the complaints to the CFPB concerning servicing-this probably is something to take seriously.
In other news:
Some say the NSA is the only branch of government that will listen to us...Not true! The CFPB will take your complaints (assuming "you" are a borrower).
Looking for love and work in the real-estate industry? Well-I'm not sure if this was just an April Fools joke, but there appears to be a matchmaking website just for you!
Remember the CFPB official who left and set up an investment firm to deal in non-QMs? Well- the firm acquired a mortgage lender and will start making home loans in a couple of months.
Director Cordray had this to say at the ABA conference, "My colleagues and I are blessed with responsibility for a mission that seeks to further our society's noblest aspirations. We are the first federal agency ever created with the sole purpose of protecting consumers and seeing that they are treated fairly in the financial marketplace."
When the CFPB's cost for its new headquarters soared to $140 million (originally $50 million), it held any information "close to the vest" and refused to release details--now, it faces a lawsuit under the Freedom of Information Act. Costs for the renovation are expected to reach $80,000 per CFPB employee.
We've shared our opinion on the importance of building trust before
... and that we try and do so by "under-promising and over- performing." But what about consistency? There are people I trust and admire because of their consistency--people who consistently go to work early and stay late, consistently turn assignments in on time, people who will call you back when they say they will, and who consistently put others' interests before their own. I don't blink any eye when that person occasionally sleeps in late, or does something for himself/herself, because their consistency has already proven to me that they are someone I can count on, someone that I can depend on, and not just a fair-weather fan.
In essence, if we want to direct our lives, we must take control of our consistent actions. It's not what we do once in a while that shapes our lives, but what we do consistently.
- Tony Robbins
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