Bank of the West said Monday it will continue to offer interest-only mortgages to borrowers even though such loans are excluded from the Consumer Financial Protection Bureau's qualified mortgage rule that goes into effect Jan. 10.
The $65 billion-asset San Francisco bank, a unit of France's BNP Paribas, said it will hold the loans on balance sheet, as it has done for many years. The bank said it reviewed its underwriting criteria to ensure that borrowers have the ability to repay the loan once the interest-only period has expired.
"A well-underwritten, interest-only mortgage can be a good choice for our customers and they are safe for us to hold on our balance sheet," Paul Wible, senior executive vice president and head of Bank of the West's national finance group, said in a press release. "Even though they do not fit the CFPB's definition of a QM, we will continue to offer them as before."
Interest-only loans, as the name implies, allow a borrower to pay just the interest on a loan for five to seven years before they are required to start paying down the principal.
The CFPB's qualified mortgage rule, which establishes legal protections for lenders that make loans with certain underwriting criteria, restricts interest-only loans because they have a higher risk of defaulting. During the run-up to the financial crisis, some lenders steered consumers into loans because of their low monthly payments but often the borrower was not able to repay the loan once the higher rate kicked in.
Most of the largest banks are continuing to offer interest-only loans to their best borrowers that have high down payments, great credit scores and plenty of cash flow. Though interest-only loans vanished for a time during the housing crisis, they have regained popularity in the past few months as interest rates have increased.
"Interest-only loans meet the needs of certain customers such as the self-employed or those interested in cash flow," Karen Mayfield, national sales manager for the bank's mortgage division, said in a press release.