While the housing sector ever-so-slowly regains its footing following a catastrophic collapse, regulators are walking a fine line on new regulations to reshape how mortgage credit is provided. The Consumer Financial Protection Bureau has a particularly arduous trek. The agency is working to develop regulations that require mortgage lenders to have certain underwriting standards when determining a consumer’s ability to repay a mortgage loan.
While the concept of defining what's considered to be a good loan, or "qualified mortgage," would seem easy, it really is not. Underwriting mortgage loans is more art than science. And the more rigid the rules, the harder it will be for average consumers to get a home loan. The impact will be particularly significant for community banks, which did not engage in the risky behavior that led to the mortgage crisis.
Community bankers make high-quality loans that match their customers' personal financial situation. Because of the unique characteristics of the borrower or the property, these loans typically don't fit the cookie-cutter standards of Fannie Mae and Freddie Mac, but they perform well and provide mortgage financing to small towns and rural communities that are not served by larger lenders. Overly strict regulations will greatly reduce the types of mortgage loans they can make and, in some cases, force them out of the mortgage market entirely.
To ensure that mortgage credit is not excessively restricted in Main Street communities, the CFPB should implement a broad legal safe harbor to protect community bank portfolio lenders under the new qualified mortgage standards. Otherwise, borrowers could challenge in court a bank's compliance, even for loans that are deemed qualified. Without a legal safe harbor, community banks will face increased risk of litigation they cannot afford. While larger national financial institutions can absorb a docket of cases from consumers, one or two pending litigation cases would be too costly for community banks. Ceasing to provide mortgage loans, or greatly limiting their mortgage business, would be the only viable alternative — one that would harm community bank customers.
It would be a shame to reach such a conclusion. Community banks work directly with their customers to reach an agreement before any dispute reaches that point. Further, community banks hold most of their mortgage loans in portfolio for the life of the loan rather than sell them off to the secondary market. As a result, they have a vested interest in the risk and performance of the loans, so they work one-on-one to resolve disputes in a way that is mutually beneficial for lender and borrower alike.
By involving outside attorneys and creating a litigious environment, community banks would lose their ability to work directly with their customers and quickly resolve potential issues. Without a legal safe harbor, many community banks would leave the mortgage business altogether, which would negatively affect their customers, particularly lower-income and rural consumers. With the housing market just beginning to regain its footing, Main Street communities cannot afford a regulatory misstep that would drive a vital source of credit out of the market.
Karen Thomas is senior executive vice president of government relations and public policy with the Independent Community Bankers of America.