WASHINGTON — Smaller financial institutions should lend outside of a new ultrasafe class of mortgages created by the Consumer Financial Protection Bureau, according to Richard Cordray, the agency's director.
Speaking during a credit union conference, Cordray acknowledged fears that lenders will not make mortgages that are not considered "qualified mortgages" under the agency's rule that requires lenders to ensure borrowers have the ability to repay a loan.
But he said such loans are meant to be a narrow category of very safe loans — and urged lenders not to restrict themselves to it.
"Plenty of responsible lending remains available outside of the qualified mortgage space, and we encourage you to continue to offer mortgages to those borrowers you can evaluate as posing reasonable credit risk," Cordray told the Credit Union National Association conference. "Those that lend responsibly — like credit unions — have no reason to fear the ability-to-repay rule."
Cordray encouraged financial institutions to step outside of the rules by making loans to low-risk borrowers as well as balloon loans. Even though the CFPB provides a specific exemption for smaller lenders in rural areas regarding balloon loans, banks and credit unions have feared the rules will indirectly become a common standard for them.
"You should have confidence in your strong underwriting standards, and you should not be holding back," he said.
Cordray noted that the agency has met with 28 state credit union associations in the last six months as well as conducting local hearings to better understand issues among credit unions of all sizes.
"The consumer bureau is well aware that credit unions were not one of the causes of the recent financial crisis," he said. "You were not underwriting the bad loans that brought down the housing market. Instead, you were sounding the alarm bells well before the sinking of the economy."
Cordray noted several provisions that were built into the recent mortgage rules to help smaller lenders lend outside of QM standards. He cited the rural small-lender exemption for balloon loans.
"This option is intended to preserve access to credit for consumers located in these areas, where creditors may offer balloon loans to hedge against rate risk for loans held in portfolio," Cordray said. "Many credit unions operating in these areas will be covered by this exemption."
The CFPB also proposed an amendment to its ability-to-repay rule exempting smaller lenders beyond just rural areas to make loans above the 43% debt-to-income ratio requirement so long as they take into account the DTI ratio and the loan meets other qualified mortgage features.
"This comprises the vast majority of the approximately 7,000 credit unions in our country," Cordray said. "All of these exemptions express our recognition and acknowledgement that the traditional credit union lending model is deserving of respect and should be treated differently under our rules."