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Community Bankers Call for More QM Flexibility

Expansion of "rural" definition requested

May 10, 2013

By Mortgage Daily staff

Mortgage rules implemented by the Consumer Financial Protection Bureau will reduce access to credit, according to a survey of community banks. Residential originations by the sector are mostly maintained as portfolio loans outside the secondary mortgage market.

The CFPB's Qualified Mortgage regulation excludes loans with balloon payments. Loans deemed to be QMs enable compliance with the Ability to Repay rule, which goes into effect in January 2014.

However, fixed-rate loans made by small creditors operating in rural or underserved areas are exempt from the balloon prohibition as long as the financial institutions have less than $2 billion in assets and fewer than 500 first mortgages originated annually.

But the Independent Community Bankers of America says provisions for balloon mortgages and rural community banks need to go further.

The Washington, D.C.-based trade group surveyed community financial institutions and found that, of the three quarters who currently make balloon payment loans, less than half would qualify for the rule's balloon mortgage provision. Many in the unqualified group were excluded because of the definition of "rural."

The survey was conducted from Feb. 7 until Feb. 14 and generated 380 responses. The response rate was around 8 percent.

The report indicated that that community banks make portfolio loans that aren't marketable in the secondary mortgage market because of the unique nature of rural properties. An average of 64 percent of residential loan originations are maintained as investments for the life of the loan. A majority of all who participated in the survey hold at least 80 percent of loans they originate until maturity.

Although some bank respondents indicated that their companies are rural, 44 percent of those banks would not qualify as rural on QM basis.

"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," the report said.

An increase in the number of loans to a thousand per year from 500 is proposed by the ICBA, as is a change in the definition of "rural" to metropolitan statistical areas and towns with fewer then 50,000 residents.

ICBA also wants the QM definition expanded to include additional portfolio loans held by small creditors that are not in rural markets.

One thing ICBA would like changed is QM safe harbor protection for refinancing balloon mortgages after the effective date of the rule. This will ensure that borrowers who have balloon payments coming due would still have refinancing options.

Loan originator compensation should be excluded from the total points and fee calculations for QM designation, according to the organization.

An extension of the safe harbor conclusive presumption of compliance is proposed for portfolio loans with annual percentage rates based on the higher of either 350 basis points over the average prime offer rate or 400 BPS over the community bank cost of funds. The proposed extension would be subject to the threshold established in the Home Ownership and Equity Protection Act.

The survey found that just a third of banks hold adjustable-rate originations in their portfolios.

Close to two-thirds of survey participants said they make higher-priced mortgage loans. The report specified that escrow accounts are maintained as required by federal regulations.

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