Will Mortgage Regs Drain Credit Unions’ Will To Lend?

Regulator moves give compliance pros a mixed view of what's happening and what's to come.

A couple recent articles in the trade news makes one mull whether the glass is half empty or half full in the credit union mortgage lending space.

The first was an Oct. 7 piece in Credit Union Times that says most housing finance executives pin declining mortgage lending on the regulatory burden. That was according to a survey by The Collingwood Group in which a large majority of the respondents say increased regulation has forced them to tighten mortgage credit.

The second was in the Credit Union Journal on Oct. 8 and titled What Regulators Plan to Target Next on the Mortgages Front. It included this quote from Department of Justice attorney Steven Rosenbaum at a conference the week before: We do not regulate you. We do not supervise you. We do sue you.

Rosenbaum was talking about redlining and about pricing loans based on investor desires, that article says. He also says his department has gotten 24 mortgage complaint referrals from other agencies in the past three fiscal years.

At the same conference, Consumer Finance Protection Bureau officials say they’ll be focusing on, among many other things, mortgage servicers. Observers point to the bureau’s $37.5 million settlement with Flagstar Bankas a very current example.

So, is the regulatory burden especially the need to understand and document compliance holding back lending? That result would make the glass seem half empty. Half full? While mortgage originations nationwide are down, the opportunity is there to build share of what’s still a lot of loans to make.

Callahan & Associates’ data point to that mixed picture. According to Trendwatch 2Q 2014, overall credit union loans grew 9.9% in the 12 months ending June 30 to $682.6 billion, compared with 5.4% in the year-ago period, and at its fastest annual pace since 2005. Mortgage loan originations, however, were down 55.3% in that same 12 months $41.4 billion compared with the $92.6 billion credit unions overall recorded in the 12 months ending June 30, 2013.

That said, the industry’s first-mortgage market share reached an all-time high of 8.4% in the 12 months ending June 30, 2014, almost double that at the same point in 2010.

Playing Field Level, Yet Bumpy

Regulatory specialist Andy Keeney agrees that fair lending compliance will be a priority in the months and years ahead, but is not all doom-and-gloom about the impact. Documentation is the key, says the attorney with Virginia-based Kaufman & Canoles. Most credit unions were in compliance when the regulations took effect in January and have sought an increased market share in this critical area of lending.

He says credit unions can use internal audits and coordinate with their compliance officers to minimize the risk of non-compliance. And he says, the playing field is really pretty level.

Yes, the regulations are a great burden, Keeney says, but they impact all financial institutions and mortgage brokers equally, so if credit unions seize the opportunity, they can make some very good loans.

Not so optimistic? This observation from former NAFCU vice president Steve Van Beek, now with Howard & Howard in Michigan: Credit unions are having to make tough decisions regarding whether they can continue to offer a full suite of mortgage products or if they’ll need to focus on a few products because of the intense demands related to mortgage lending.

And compliance attorney Michael Christians with PolicyWorks in Iowa, says effects already are being felt and could further dampen credit union mortgage lending.

Christians points to the integrated disclosure rule that takes effect next Aug. 1 that combines current Reg Z and Reg X application and closing requirements (the CFPB’s Know Before You Owe package.) He also says the new Ability to Repay rule and proposed changes to the NCUA’s current appraisal rules are and would be felt.

The net effect? The Reg Z rules have prompted many institutions to stop offering higher-cost loans altogether, Christians says, while the most sweeping effect on credit union mortgage lending operations has been from Ability to Repay requirements for balloon loans and adjustable rate mortgages.

And if growing regulations do indeed cause credit unions to tip their mortgage cup well, there’s more to come.

Credit unions should also be aware of proposed changes to the Home Mortgage Disclosure Act, Christians says, because once finalized, these promise to have a powerful impact on their real estate lending activities in 2015 and beyond.

October 23, 2014

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