Banks, credit unions scramble to meet new federal mortgage rules

There's QRM, the acronym for qualified residential mortgage, and QM for qualified mortgage. ATR for ability to repay. GSE for government-sponsored enterprises such as Fannie Mae and Freddie Mac. And then there's CFPB, the new Consumer Financial Protection Bureau that's overseeing a host of mortgage industry reforms intended to improve accountability and transparency and ultimately protect consumers from the kinds of risky lending practices that led to the 2008 Wall Street collapse.

These and other acronyms spawned by the 2010 Dodd-Frank Act and its 850 pages of reforms represent new layers of responsibility and complexity for Maine's 32 state-chartered banks and credit unions, which are scrambling to meet a Jan. 10 compliance deadline for several sweeping new mortgage lending requirements. Complicating matters is the fact that CFPB spent much of 2013 amending those requirements — sometimes more than once, albeit in response to stakeholder concerns.

“I worry that there is significant confusion out there,” says Yellow Light Breen, executive vice president and chief strategic officer for Bangor Savings Bank, acknowledging that the alphabet soup accompanying mortgage reform rules and regulations hasn't helped.

In mid-November the Maine Bankers Association joined 54 other banking groups from across the country in seeking more time to comply with the new rules, citing difficulties in getting mortgage offerings and software programs updated for compliance and having employee training in place in time to meet the deadline. CFPB Director Richard Cordray so far hasn't budged, leaving mortgage lenders across the board scrambling as they evaluate how the new QM and ATR standards will impact their current underwriting practices.

In some cases, the answer isn't self-evident.

A controversial QRM rule, for example, which had been floated by the Federal Reserve, Federal Deposit Insurance Corp. and several other federal agencies, would have required a minimum 20% down payment for a qualified residential mortgage. For Bangor Savings Bank — which has been offering a 10% down payment loan program called the Welcome Mortgage for first-time homebuyers — that would have been a troublesome complication.

Breen says regulators decided at the end of October to forego QRM in favor of the CFPB's more flexible QM underwriting standard of a 43% debt-to-income ratio as the upper limit for qualified mortgages. For the moment, then, QRM=QM. Even so, it's still not clear how that might impact Bangor Savings' specialty loan for first-time homebuyers.

“I'm not sure what proportion [of Welcome Mortgage borrowers] might fall under the new QM standard,” Breen says. “We haven't finished our analysis yet.”

The new QM standard also requires that the loan term be no longer than 30 years and specifies that the points and fees paid by the borrower cannot exceed 3% of the total loan amount.

While these and other mortgage reform regulations are intended to prevent a recurrence of the housing meltdown of 2008, Breen says Bangor Savings and the other community banks in Maine essenially are incurring new regulatory burdens and costs for risky lending practices they never had engaged in.

“Community banks weren't part of the problem,” he says. “It's death by 1,000 cuts. With the Dodd-Frank Act, you're talking about 200 rules, each one with its own costs and obligations.”

Assessing risks

With almost $3 billion in total assets and 57 branches throughout the state, Bangor Savings is Maine's largest state-chartered bank and roughly the 300th largest bank in the United States, says Breen. In 2013, it originated approximately 1,500 new mortgage loans, and the bank carries about 6,000 first mortgages on its books. For the fifth year in a row, it was Maine State Housing Authority's top lender for first-time homebuyers.

Breen says Bangor Savings retains half of its originated mortgages on its own books, and sells the other half in the secondary mortgage market. And of the mortgages it sells, half are still serviced by the bank.

While the new QM guidelines offer protections for lenders that verify their borrowers' ability to repay their mortgage loans, Breen says the level of documentation that will be required is enormous. Likewise, he worries that the art of lending — based on a deep local knowledge of borrowers and the community's needs — could carry greater risks and uncertainties in the new Dodd-Frank regulatory environment.

“It comes down to what a bank's appetite for risk is,” he says. “Loans inside a certain box are going to be safe. The question becomes, 'What amount of risk will there be if you step outside the box?' … Some banks will do that, for sure. Whether any banks decide it's too complex and risky to do loans that don't fit the rule, I don't know if we'll know that until we get to the deadline.”

Adding complexity to those ability-to-repay calculations, Breen says, is the Community Reinvestment Act, a 1977 law updated in 2005 that requires banks to meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods.

Those are precisely the mortgage loans where the art of lending often comes into play.

Likewise, fair lending laws historically have spurred banks to create innovative and flexible lending programs particularly designed to meet the needs of low-to-moderate income home buyers. If such mortgage programs now fail to meet the QM underwriting standards, does a bank play it safe and scrap them, or continue to make them available to fairly meet a local need?

“My concern about this whole arena is whether we've started to create an environment where people feel they can't make any exceptions anymore,” he says.

Given all these complexities, Breen estimates at least two dozen Bangor Savings employees will have spent “hundreds, if not thousands of hours” reviewing the new mortgage underwriting standards, meeting with software vendors, rewriting internal lending documents and training co-workers to meet the January compliance deadline. Much of that prep work is under way.

National groups seek delay

Breen's concerns echo those voiced in a Nov. 12 letter from 55 bankers' associations across the country, including Maine's, asking the CFPB to delay the January 2014 implementation of the ATR/QM rules.

“While we recognize and appreciate the efforts that CFPB has undertaken to clarify the final rule and to provide guidance, the fact remains that key details of the rule have been undergoing nearly constant change over the course of the last year,” the letter states. “Software vendors and other compliance specialists are in various stages of product development. Some are only now beginning to release necessary products and programs; others have given banks uncertain future time-frames. This leaves banks with only weeks to test software and systems, train employees and ensure that quality control mechanisms are in place.”

The bankers' associations ask CFPB's Cordray to delay implementation of the new mortgage rules by six months to a year. Credit unions also have voiced concerns about the fast-approaching QM implementation date.

The National Association of Federal Credit Unions, in an Oct. 30 letter to the Department of Housing and Urban Development, cites several differences between the HUD's QM proposal and CFPB's rule as another reason to delay the Jan. 10 effective date. In a separate letter to the Federal Housing Finance Agency — which illustrates just how complicated the QM/ATR guidelines have become due to multiple federal agencies revising their home mortgage standards because of Dodd-Frank — the national credit union association singles out the 43% debt-to-income limit for a qualified mortgage as being too exclusionary.

“An arbitrary debt-to-income limit creates far more distress and costs than the benefits it seeks to attain,” the credit union group's letter states. “First, it would exclude many otherwise creditworthy borrowers. These include many highly educated individuals and families who have accumulated significant student debt but in the beginning of their careers would not be able to build wealth and pursue financial independence through the purchase of a house and building of equity.”

Committed to compliance

Notwithstanding the headaches and costs incurred in meeting the CFPB's new QM/ATR guidelines, Rick Vail, president and CEO of Auburn-based Mechanics Savings Bank, says his team is working to meet the Jan. 10 deadline.

“We're committed to be in compliance,” he says.

Vail, who earlier this year was elected chairman of the Maine Bankers Association, isn't expecting any extensions. He says Cordray, during a July meeting with Maine bankers, told them there was little likelihood the compliance deadline would be delayed.

Reporting total assets of $335 million and loans of $280 million in FY 2012, Vail says Mechanics Savings has 1,767 first mortgages totaling $170 million. Of those, 923 loans totaling $106 million were originated by the bank, but then sold to Fannie Mae. Vail says the bank continues to service those loans.

Although his bank's numbers would qualify it for “small creditor” status under the new CFPB guidelines, he notes that just before the 2008 crash the number of mortgage loans originated by Mechanics Savings exceeded the yearly 500-loan benchmark.

That creates a question in his mind of which compliance level — large or small creditor — his bank's mortgage loan decisions should be based upon.

“It's going to be a learning process for everybody,” he says. “Banks, consumers, all the stakeholders, are trying to digest this. I think the CFPB has been very good in issuing clarifying statements as questions have been raised about their rules. Unfortunately, the questions and the updates keep happening.”

Vail estimates as many as 77 full-time bank employees have put in 1,300 hours so far in making sure his bank's policies, its vendor-provided services and software and all its other mortgage-related details will be ready for the compliance deadline. The goal, he says, is to be compliant while insulating customers from the bank's internal challenges in meeting the new guidelines and regulations.

Even so, he says, the standard closing package for a home loan includes 36 documents totaling 129 pages. Twenty-nine documents need to be signed by the borrower; 28 documents are required by various federal regulations or state law.

“When you put 129 pages in front of a consumer, you are not really helping them,” he says. “It's just evolved over time. My concern is that these documents keep building up.”

Like Bangor Saving Bank's Breen, Vail says even during the “go-go days” before the 2008 crash his bank maintained prudent underwriting standards and did not engage in risky lending practices such as sub-prime loans. He worries that new rules and regulations designed to prevent a similar crash inadvertently will create new risks and liabilities for his bank and others.

“There really isn't going to be a net benefit to Maine bank consumers as a result of these new rules and regulations,” he says. “The only thing that's going to happen is that it's going to increase the cost and risks for Maine banks when it comes to their mortgage business lending activities.”

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