WASHINGTON-The Consumer Financial Protection Bureau amended its latest rules to exempt small credit unions and banks that originate and service fewer than 5,000 mortgage loans, and while both CUNA and NAFCU are pleased with the amendment, CUs are still concerned about the new rule.
John Murphy is not a fan of the mortgage rules recently released by the Consumer Financial Protection Bureau.
Murphy, manager of the mortgage department for $407-million Consumers CU, Kalamazoo, Mich., bluntly described the new regulations as "a tremendously expensive exercise in futility."
Murphy's reaction is part of a wide range of reaction to the new rules aimed at addressing mortgage servicing failures and other issues related to disclosures. The CFPB issues rules on qualified mortgages and final rules on restricting fees and lump-sum payments for certain high-cost loans. The credit union trade associations have been generally neutral on the new rules, although "concerns" were raised over the regulatory burden. The National Consumer Law Center, meanwhile, last week called the new servicing standards "utterly inadequate."
Murphy said of the new rules, "It probably cost about $100 million (to develop the rule), and what we got out of it are things credit unions were doing anyway-check the income and make a loan only to someone with a good debt-to-income ratio," he assessed.
Murphy believes the provision that will have the most significant effect on CUs is the high-priced mortgage definition.
"Once a loan crosses the threshold of 1.5% over the average prime offering rate on a first lien, which today would be just 5%, it is considered a high-priced mortgage," he said. "If the borrower defaults down the road, they can rebut the presumption of the ability to repay. The borrower can sue, even though they had a higher rate due to a poor FICO score."
A related flaw, Murphy told Credit Union Journal, concerns rural mobile home loans. He said lenders typically like to get a point-and-a-half or two points to reflect the risk on such loans, "but the CFPB is telling us there is no safe harbor" if they do.
"The people who made the rules live in the Beltway, and they don't understand real estate," he declared. "This is an unintended consequence that stems from naïveté."
Well-Intentioned, But...
Between mobile homes and foreclosure purchases, Consumers Credit Union receives numerous requests for mortgages with a loan amount of less than $40,000. Murphy said his credit union no longer will be able to make those mortgages because of the fee caps and the interest rate caps included in the new rules.
"Overall it was well-intentioned, but it wasn't really thought out by people who have deep industry knowledge," Murphy assessed. "Their thinking is skewed by urban markets that had a lot of stated income loans. Rural markets, where prices are lower, will see an impact on small institutions that portfolio mortgages. They won't be able to portfolio high-risk loans at a sufficient premium."
Glen Ogden, chief lending officer for $618-million Tulsa Federal Credit Union, Tulsa, Okla., told Credit Union Journal he finds it "disturbing" that the new mortgage rules do not take into account a borrower's mortgage history.
"So there is no difference between a new borrower and one who has financed a mortgage multiple times," he observed. "A borrower might have the ability to pay today, but might lose their job the next month, so that qualified mortgage goes out the door."
Ogden said it surprised him that the CFPB "moved so quickly" on the mortgage regulations.
"Overall my reaction is credit unions will not be largely impacted," he said. "We did not cause the problem in the first place, and that is reflected in the rules."
Balloons Are Not 'Scary'
Tulsa FCU does write "some" 10-year balloon loans, which are the target of one provision of the new rules, "so we are analyzing if we can continue to write that product or will have to discontinue," Ogden said. "We do not see the balloon product as 'scary' or 'bad,' either for us or for our borrowers, so it surprised me to see the CFPB take a broad approach that all balloon loans are bad."
For the most part TFCU has been a portfolio lender, and in 2013 is "just starting to look" at the secondary market,
"We have a year to figure out the impact of the new rules, but don't believe it will have a drastic impact."
Required To Be 'Smarter'
Bob Dorsa, president of Las Vegas-based American Credit Union Mortgage Association (ACUMA), said he likewise sees a limited impact on CUs.
"Credit unions have always been compliant, meaning the new rules probably will cost them money and require them to be smarter, but they have to do it," he said.
One fear Dorsa expressed is some CUs might use the new rules as a reason to curtail their mortgage activities or outsource in an effort to "run away" from the requirements. This would be a mistake, he asserted, because "at the end of the day people want to own homes, and research by Raddon and Callahan has proven time and again those are the most profitable members."
If there is a silver lining, Dorsa noted competing lenders also will have to comply with underwriting standards, which should level the playing field.
