How would expansion of "small creditor" QM affect your company?
Here's the "skinny" on the CFPB's new proposal that relaxes some of its major rules, including the ATR/QM Rule.
Hey good news in the compliance newsletter for once! .... at least for some folks. The CFPB has issued a proposal that is relatively friendly to the mortgage company. We wanted to specifically address the expansion of the Small Creditor definition (for QM purposes) because it will affect so many clients.
Basic Facts
The CFPB's proposal, which can be found here, proposes to make some major changes. Here are some of the basic facts:
Comments due by March 30
Effective Date - January 1, 2016 (generally to loans closed after January 1, 2016).
Major Change = The big change under the proposed rule is that the definition of "small creditor" for QM purposes would expand from 500
- 2,000 1st lien residential loan and loans held in portfolio would not be counted toward the 2,000 (as opposed to the current rule where all count towards the cap)
This would be a huge change for depository lenders under $2 billion (the $2 billion requirement is still part of the definition of small creditor).
Likelihood of Success
Pretty high. The CFPB has generally been sticking to its proposed rules ... not changing them much in response to comments received (and this is one case where 90% of the comments will support this rule change). There was a lot of internal debate within the CFPB leading up to this ... and it passed because of the sway of Director Cordray himself. Odds look good this will pass and become a final rule.
Benefits of Small Creditor QM
The Small Creditor QM enjoys relaxed underwriting standards and greater protection from ability-to-repay challenges.
No appendix Q- underwrite to your own standards, or follow the secondary market if you prefer ... making this a business decision again, not a compliance decision.
No numerical debt-to-income requirement- just a requirement to "consider" DTI, making it very difficult to challenge (unlike a numerical DTI that can be poked full of holes).
Easier to get full safe harbor- instead of having to stick within 1.5 points of APOR, the APR on a Small Creditor QM needs only to stay within 3.5 to qualify as a full safe harbor (as opposed to mere rebuttable presumption).
Drawback of Small Creditor QM
Don't forget, it's not all pretty roses with this type of QM, there are also some important drawbacks.
A Small Creditor QM can't be sold within 3 years (and can't be subject to commitment either) except to another Small Creditor. So for mortgage companies and depositories that sell largely to the secondary market, this isn't such great news. If anything is this now a competitive disadvantage?
Of course, after the 3 years have passed, the loan could be sold as a full "QM" to any investor and retain its QM status.
Other Parts of this Rule
The definition of "small creditor" is not the only thing affected by this particular proposal. The CFPB also proposes to do the following:
Add a Grace Period - Here a Small Creditor that exceeds the threshold can continue to operate as a Small Creditor until April 1 ... this would ease the concern many small creditors face now of "What do we do if we're close? What if we go over the threshold by 1 loan?
Include affiliate assets in the $2 billion limit on the Small Creditor test
In terms of how the CFPB defines "Rural and Underserved" for QM purposes ...
This proposal would adjust the time period used in determining whether a lender is rural or underserved, from currently more than 50% in any of the preceding 3 years to the preceding calendar year.
The proposal would also expand the definition of "rural" to include either: (1) a county that meets the current definition of rural county, or (2) a census block that is not in an urban area as defined by the U.S. Census Bureau
For lenders still offering balloon mortgages (believe it, there are still a few!) .... The temporary 2-year period permitted for certain small creditors to make balloon-payment QMs (and balloon-payment high-cost mortgages) would be extended to apps received before April 1, 2016.
In other news:
The FDIC's Doreen Eberly recently argued publicly that the FDIC should extend the examination interval to 18 months for well run and top rated banks of less than $500 million. Click here for her full statement, but she also had this to say:
While they hold just 14 percent of all banking assets, community banks account for about 45 percent of all of the small loans to businesses and farms made by insured institutions. Although 448 community banks failed during the recent financial crisis, the vast majority did not. Institutions that stuck to their core expertise weathered the crisis and are now performing well. The highest rates of failure were observed among non-community banks and among community banks that departed from the traditional model and tried to grow rapidly with risky assets often funded by volatile non-core and often non-local brokered deposits.
Adding factual to anecdotal evidence, a recent Harvard study showed that community banks under $10 billion in assets have lost 12% market share since the Dodd Frank Act was passed in 2010 -- reasons included technology advancements, low interest rates, low margins, heavy regulation and high compliance costs were all cited as contributors to the decline.
How important is empathy to customer service? In developing products, tweaking processes, in maintaining the motivation to deliver time in and time out? You yourself may have called in to your mortgage call center to gain empathy with clients. You may have empathy because of your personal experience in banking. What insight would you gain after a terrible experience closing on your own line of credit? If you suffered through a 2 month closing process, would you work to increase the speed at your own shop.
Talk about going great distances to gain empathy with customers. Did you hear this story about a personal trainer who purposefully gained 70 pounds only to lose it in an effort to better understand his clients. What's interesting to me is what he learned ... he learned to appreciate that overweight clients are nervous to go to the gym, that they feel humiliation when unable to perform a pushup. He didn't understand this before, as a personal trainer he felt at home in the gym. It's an easy analogy to mortgage lending ... do we forget that taking out a mortgage loan can be one of the most stressful events of the average Joe's life? Is it easy to misunderstand that because we're mortgage professionals, and that's what we're good at?
"If you knew how much work went into it, you would not call it genius."
- Michaelangelo on the Sistine Chapel paintings
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**These are our opinions. We're not authorized, or willing, to express those of others.**