Proposal would ease rules for small mortgage lenders; restrictions are hurting community banks

The Consumer Financial Protection Bureau has proposed changes "to its mortgage rules to encourage responsible lending by small creditors in rural areas, that if approved could increase the number of small institutions able to offer mortgages and help small creditors to comply with business practice rules set forth by the agency," Ashlee Kieler reports for Consumerist.

"Currently, there are restrictions on lending mortgages to borrowers whose debt would exceed 43 percent of their pretax income," Kieler writes. "The proposed changes would free more banks and credit unions to offer riskier loans to borrowers above this 43 percent debt-to-income ratio. As a result of that change, the CFPB says it could increase the number of small lenders, which includes banks and credit unions, to 10,400 from around 9,700."

The CFPB proposal "would allow more banks and credit unions to achieve small-lender status, freeing them to make riskier loans by giving mortgages to borrowers above the 43 percent threshold," Alan Zibel reports for The Wall Street Journal. "Small lenders and many in the mortgage industry say the riskiness of such mortgages is limited, in part because they will have to hold these loans in their investment portfolios. The firm would be on the hook for the losses when borrowers default, giving the banks an incentive to make only good loans."

The Independent Community Bankers of America said they 73 percent of community bankers it surveyed "say that new mortgage regulations are keeping them from making more residential mortgage loans in their communities," Trey Garrison reports for Housingwire. ICBA president and CEO Camden Fine told Garrison, “The results show that Congress should act quickly on ICBA’s Plan for Prosperity legislative platform, which would implement common-sense reforms to support continued access to credit without compromising consumer protection or safety and soundness.”

The survey also found that 66 percent of respondents "said they do not provide loans that are outside the Consumer Financial Protection Bureau’s Qualified Mortgage definition or would only do so in special cases," Garrison writes. "Just 25 percent of community bankers said they are providing loans that do not fit the CFPB’s QM definition, showing that the new restrictions have shrunk the credit box and taken away lender discretion in granting credit. Meanwhile, half of all rural banks said they do not qualify for the QM rule’s 'rural' exception, which demonstrates that exemptions from the standard are too narrow, limiting access to credit for consumers who need it."