CFPB offers changes to mortgage rules for smaller lenders

A top government regulator on Thursday proposed several changes to its mortgage rules aimed at providing more leeway for smaller financial institutions to make loans.

The Consumer Financial Protection Bureau (CFPB) suggested expanding the definition of rural areas and increasing the number of loans an institution can make before falling out of the designated small-lender category under year-old ability-to-repay rules.

The agency said the proposal would boost the number of financial institutions able to offer certain types of mortgages in rural and underserved areas while giving them extra time to comply with the qualified mortgage rules.

"Responsible lending by community banks and credit unions did not cause the financial crisis, and our mortgage rules reflect the fact that small institutions play a vital role in many communities,” said CFPB Director Richard Cordray in a statement.

"Today’s proposal will help consumers in rural or underserved areas access the mortgage credit they need, while still maintaining these important new consumer protections,” Cordray said.

The proposal represents a lobbying victory for credit union and community banking groups that have clamored for changes to the rules, which they said would hamper their ability to make loans.

Smaller community banks and credit unions have repeatedly argued that they know their customers and are able to make low-risk home loans, many of which they maintain in their own portfolios.

Since qualified mortgage rules went into place a year ago, the groups have argued they did not contribute to the 2008 financial crisis and should be exempt from regulations in the Dodd-Frank financial reform law aimed at clamping down on shoddy mortgage practices.

“We strongly urged the bureau to set a more realistic exemption level for small creditors and appreciate CFPB’s listening to our concerns and seeking to make its rule more workable,” said Carrie Hunt, senior vice president of government affairs and general counsel for the National Association of Federal Credit Unions.

Hunt said her group “continues to believe all credit unions should be exempt from rules implemented to address abuses in which credit unions did not participate."

Under the proposal, the loan origination limit would be raised to 2,000 from 500 and would exclude loans held in portfolios by the creditor and its mortgage affiliates. 

In addition, the proposal expands the definition of what areas are considered rural, which allows for greater flexibility for lenders in those areas.

The proposal maintains the current $2 billion asset limit for small-creditor status but would include the assets of the creditor’s mortgage-originating affiliates in calculating whether a creditor is under the limit.

“These proposed changes are sensible measures that will make it easier for certain hometown bankers to meet the mortgage credit needs in their communities,” said Bob Davis, ABA executive vice president of mortgage markets.

“ABA intends to maintain its constructive engagement with the bureau and the Congress to achieve broader relief for the more than 60 percent of the U.S. population not impacted by these changes," Davis said.

The ability-to-repay rule requires lenders to ensure that a borrower's total debt payment doesn't exceed 43 percent of pre-tax wages.

The CFPB said the proposal would increase the number of small lenders, which includes banks and credit unions, to 10,400 from around 9,700.

Comments on the proposal are due by March 30.

Jim Nussle, president and CEO of the Credit Union National Association, said "more work still needs to be done, but this is an important step in the right direction.”

Independent Community Bankers of America Chairman John Buhrmaster, president and CEO of 1st National Bank of Scotia, N.Y., said the "nation’s community bankers, their customers and their communities who have been hamstrung by tight rules, which inhibited needed access to home financing across the country."

“The CFPB’s proposed changes to its qualified mortgage rules will help ensure community banks can continue to actively and responsively make mortgage loans to their customers."