Credit unions have long maintained that they were not to blame for the financial crisis and therefore should not have to endure Dodd-Frank rules designed to rein in large banks' risky behavior. The Consumer Financial Protection Bureau (CFPB) seems to agree. The agency recently announced exemptions to certain rules that will affect credit unions and other small lenders.
In May, the CFPB finalized amendments to the ability-to-repay rule. The amendments made three key changes to facilitate lending by small creditors, including community banks and credit unions that have less than $2 billion in assets and each year make 500 or fewer first-lien mortgages.
First, the rule generally extends qualified mortgage (QM) status to certain loans that these creditors hold in their own portfolios in which the borrowers' debt-to-income ratio is higher than 43%. Second, the final rule provides a two-year transition period during which small lenders can make balloon loans under certain conditions and still meet the QM definition. Third, the final rule allows small creditors to charge a higher annual percentage rate for certain first-lien QMs while maintaining a safe harbor for the ability-to-repay requirements.
Safe harbor refers to the legal protection a lender has against borrowers challenging the entity's compliance. ‘Without the changes, they could still be at a disadvantage if they are sued,’ explains Carrie Hunt, vice president of regulatory affairs and general counsel for the National Association of Federal Credit Unions (NAFCU) in Arlington, Va. ‘Small credit unions are the ones who are not in a good position to handle the legal risk. Your safe harbor as a small entity is more generous than other lending entities.’
Hunt says the NAFCU supports the CFPB's nod to small lenders but thinks the bureau could have done more. ‘It only affects a narrow band of credit unions,’ she says, adding that the 500-loans-a-year stipulation seems arbitrary. ‘That's great, but there is still a whole host of credit unions that would still benefit from protection.’
David Motley, president of Dallas-based CU Members Mortgage, says the exemptions make sense for credit unions. ‘The model of credit unions is we have relationships with members over long periods of time, and we are not so much focused on a transaction,’ he says. ‘Credit unions and small community banks historically made balloon loans to members because they made sense. They could do balloon loans and hold them in their portfolios.’
He explains that the amendment gives small lenders a two-year window within which they could renegotiate those balloon loans that might be coming due over the next two or three years and rework those loans. ‘The CFPB carved it out for small banks and credit unions who had that kind of lending,’ he says. ‘The CFPB just listened to them, which we applaud.’
If the CFPB had not made the rule change, smaller lenders might have exited the lending space, Motley says. ‘The effect of more regulation is it will reduce the amount of loans, and the cost of credit will be higher to consumers just because of compliance. You have checkers checking the checker.’
Barry Stricklin, vice president of real estate lending for Tower Federal Credit Union in Laurel, Md., says credit unions have a huge task ahead of them. ‘One of the biggest decisions a credit union, or any other lender, will need to make is whether or not to continue to make loans that would not be considered qualified mortgages or would be considered higher-priced qualified mortgages,’ he says. ‘An example would be a 40-year maturity that would qualify under ability-to-repay but not meet the requirements of a qualified mortgage. All lenders will be faced with the challenge of incorporating the new requirements in their processes, technology platforms and staff training.’
Stricklin, who sits on the board of directors for the Las Vegas-based American Credit Union Mortgage Association, notes that the exemptions are necessary for credit unions and other small lenders. ‘The effort and cost associated with complying would have been very difficult for smaller entities, even though they may be quite capable lenders,’ he says. ‘The challenge will be to implement and comply with the procedures with minimal impact to the time and effort it will take to provide a mortgage loan.’
The CFPB had issued a final rule in January 2013 and, at the same time, announced a proposed rule related to certain exemptions to the ability-to-repay requirements. The amendments address the issues that came up during the public comments. The new rules will take effect Jan. 10, 2014.
Nora Caley is a Denver-based freelance writer.