| Recently enacted legislation to roll back some of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act is likely to have a negative impact on non-bank home lending.
In May, President Donald Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act into law. Among the provisions of the new law is allowing smaller financial institutions to take advantage of the QM safe harbor even though their loans don’t meet the same requirements as other lenders. According to a report Tuesday from Moody’s Investors Service, the new legislation allows small banks and credit unions to accept alternative loan documentation from prospective borrowers for loans they keep on their books. It also allows for higher debt-to-income ratios. In addition, a prospective borrower’s financial status doesn’t have to be supported by the third-party verification and documentation requirements of the Truth In Lending Act’s Appendix Q. With community banks originating lower quality mortgages, non-bank lenders could also look to poorer quality borrowers to maintain market share — weakening the quality of the residential mortgage-backed securities their loans wind up in. “Lower legal risk in tandem with their lower cost of funds may allow community banks to price loans lower than could non-banks,” the New York-based ratings agency said in the report. “Non-banks might then be prompted to originate loans of even lower credit quality to shore up their market share, negatively affecting their RMBS.” Moody’s went on to say that other provisions of the new law — such the exemption for appraisals of rural properties and the use of alternative credit scores — won’t have much impact on RMBS. |
