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New Mortgage Rules for Balloon, Rural Lenders Would Limit Access to Credit in Rural Areas

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mortgage_rulesMany residents in rural America would have reduced access to mortgage credit despite accommodations included in new Consumer Financial Protection Bureau (CFPB) mortgage rules, according to survey results released recently by the Independent Community Bankers of America® (ICBA). ICBA’s Community Bank Qualified Mortgage Survey found that provisions for balloon-payment mortgage loans and rural community banks in the CFPB’s ability-to-repay and qualified mortgage regulations need to go further to adequately protect the customers of many Main Street community bank lenders.

“Community banks are responsible mortgage lenders that did not participate in the abuses that contributed to the financial crisis,” says Bill Loving, ICBA chairman and president and CEO of Pendleton Community Bank in Franklin, W.Va. “Nevertheless, ICBA’s survey shows that some Main Street communities could be cut off from a critical source of mortgage credit without adjustments to the CFPB’s new mortgage rules.”

Community banks help borrowers in rural communities where non-traditional loans such as balloon mortgages are prevalent due to the unique nature of rural properties. These loans are not eligible to be sold into the secondary market, and are kept in portfolio, which gives community banks a vested interest in the loans and allows them to work out a solution if repayment problems arise. Because of the nature of community bank mortgage loans and their vested interest in loan performance, restrictions on community bank balloon loans are unnecessary regulatory burdens. While balloon loans made by small creditors that operate predominantly in rural or underserved areas are deemed to be qualified mortgages under the CFPB mortgage rules, the bureau’s definition of rural is too narrow, leaving out too many communities and unnecessarily cutting off access to credit.

ICBA conducted the Community Bank Qualified Mortgage Survey to gather data on the impact of the accommodations for community banks in the CFPB’s new ability-to-repay and qualified mortgage rules. The survey found that:

• Among the 75 percent of respondent community banks that currently make balloon-payment mortgage loans, less than half (46 percent) would qualify for the rule’s provision for balloon mortgages.

• For respondent community banks that consider themselves to be rural banks, 44 percent do not qualify as “rural” under the rule’s definition.

• Among the community banks that do not qualify for the balloon exception, most are disqualified primarily on the basis of the definition of “rural” (43 percent).

• Respondent community banks hold an average of 64 percent of originated residential mortgage loans in their portfolio for the life of the loan. The majority of respondent banks (52 percent) hold at least 80 percent or more of the loans originated for the life of the loan.

• Only 33 percent of the respondents originate and hold adjustable-rate mortgages in portfolio.

• Most respondents (64 percent) indicate they make higher-priced mortgage loans and provide escrow accounts for them (as required by federal regulation).

To address concerns with the CFPB’s mortgage rules, ICBA is encouraging the bureau to:

• Expand the definition of qualified mortgage to include additional loans held in portfolio by small creditors, including balloon payment mortgages originated by small creditors in non-rural markets,

• Increase the limit for the number of mortgage loans originated and retained in portfolio to qualify as a community bank lender to 1,000 per year,

• Expand the definition of “rural” for balloon mortgage loans and escrow requirements to include all counties outside metropolitan statistical areas and all towns with fewer than 50,000 residents,

• Extend the safe harbor conclusive presumption of compliance for community bank mortgage loans held in portfolio with annual percentage rates up to the higher of the average prime offer rate plus 3.5 percent or the community bank cost of funds plus 4 percent, subject to the Home Ownership and Equity Protection Act threshold,

• Grant qualified mortgage safe harbor protection for refinancing balloon mortgage loans after the Jan. 10, 2014, effective date so borrowers with balloon mortgages coming due are not left without refinancing opportunities, and

• Exclude mortgage loan originator compensation from the total points and fees calculation for loans that receive the qualified mortgage designation.

For more information, visit www.icba.org.

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