CFPB Should Expand ‘Small Lender’ Definition

Qualified mortgage rules should reflect bigger credit unions as part of the solution, not part of the problem.

The CFPB recently published proposed changes to ease rules for small mortgage lenders. The changes are intended to relax the qualified mortgage (QM) rule to allow more credit unions and community banks to make mortgage loans that are not subject to the QM rules.

On the surface this is great news. Many have been arguing that the bureau’s 2014 rules are putting a constraint on lending. One of the key aspects of the QM rules is to verify that a borrower can afford to repay the loan (a great idea), but it also set an arbitrary debt-to-income (DTI) ratio to determine the affordability, in this case 43%.

Under the current rule, a small lender exemption exists that permits lenders with less than $2 billion in assets and who make less than 500 loans in a year to put mortgage loans on their balance sheet and thereby avoid the QM designation.

The new proposed rule increases the 500 loans per year to 2,000 loans per year, and also excludes those loans kept on the balance sheet. That’s awesome! That would cover probably 90% to 95% of the credit unions that are working to be memberlicious.

Proponents hail the proposal because it allows community-based, smaller lenders to help their members/customers. But that’s where the problem comes in. The proposal adjusts the number of loans but doesn’t adjust the asset size threshold for the exemption.

In a recent press release, CFPB Director Richard Cordray said, Responsible lending by community banks and credit unions did not cause the financial crisis, and our mortgage rules reflect the fact that small institutions play a vital role in many communities.

Thanks Director Cordray. I appreciate the kudos to credit unions, but what the rule and your comments are really saying is that community banks and credit unions with less than $2 billion in assets or who made fewer than 2,000 loans per year did not cause the financial crisis.

Are we to assume that the CFPB thinks our friends at Navy Federal, PenFed, State Employees’, BECU, my credit union (Wright-Patt), and probably 100 other credit unions were partially responsible for the financial crisis just because we are bigger than $2 billion in assets? That’s what it says to me.

Are we to assume the director thinks these well-run, philosophically sound credit unions made mortgage credit available to their member-owners in an irresponsible manner? Apparently so. If that’s not what the CFPB and Director Cordray thinks then the easing of the QM requirement should be based on structure not on size. (just like the argument for why credit unions maintain our tax status).

Now I don’t believe that the director really thinks these member focused institutions caused the financial crisis. But if not, why doesn’t the regulation extend to all credit unions and (gasp!) even all community banks?

If you’re from one of the big bad credit union lenders out there, let the CFPB know what you think and tell the bureau how it will stop your credit union from being memberlicious!

Tim Mislansky is senior vice president and chief lending officer at Wright-Patt Credit Union in Fairborn, OH, and president of its myCUMortgage CUSO. He shared this column from his Mortgages are Memberlicious blog.

February 13, 2015

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