Community banks believe that new mortgage rules proposed under the Dodd-Frank Act and Basel III requirements will negatively impact lending because many financial institutions would be unwilling to make home loans unless they were classified as “qualified mortgages,” National Mortgage News reported April 17.
Additionally, the banking industry said that it feels that the Consumer Financial Protection Bureau’s definition of a “qualified mortgage” is too strict.
Community bankers raised these concerns during testimony before a House Financial Services subcommittee April 16.
“We have a concern that the box is becoming too small for people to fit into, and the risks are becoming so high to be outside that box from our standpoint that depending on how this all comes out, we'll have to make a decision about whether to stay in the mortgage lending business,” Ken Burgess, chairman of First Bancshares of Texas, told the subcommittee, National Mortgage News reported.
Preston Pinkett III, president and chief executive of City National Bank of New Jersey, told lawmakers, “It becomes more [like a] factory, as opposed to a customized consumer product. The challenge of all the regulations that dictate what the products look like is that they also dictate what the customer looks like, and that leads to less flexibility,” National Mortgage News reported.
Prime QM loans have a safe harbor from litigation should borrowers default while other loans could be challenged given that the CFPB’s new regulations require lenders to ensure that borrowers have the ability to repay loans.
While some bankers said they still were considering whether it was feasible to lend outside the QM rule, Burgess told lawmakers his bank had already decided it would not make loans outside the rule. “In our mind, we make about 1,000 loans or so a year, and to have that much unmeasured risk that we cannot evaluate for the ongoing life of the loan, that's just not something we think we can do,” he said, National Mortgage News reported.
Bankers also told lawmakers that the tighter credit standards could decrease their ability to make loans under the Community Reinvestment Act, which provides for lending to less creditworthy borrowers.
“There's a continual friction between safety and soundness regulation and then the need to make loans in underserved markets,” Charles Kim, executive vice president and chief financial officer at Commerce Bancshares, told lawmakers. “In fact, the QM rule probably makes it harder to make loans in underserved markets,” he said, National Mortgage News reported.
Community bankers also said they believe that small financial institutions should be exempt from the proposed Basel III regulations or at least be given a simplified version of the capital and liquidity requirements given that the rules were written for world banks, not small players.