CFPB Proposes to Give Relief to Small Lenders
On January 29, 2015, in response to comments from industry groups and stakeholders, the CFPB proposed amendments to certain mortgage rules that were issued in 2013.  The CFPB will take comments until March 30, 2015 on these proposed rules.  The proposed rule expands the CFPB’s definition of “small creditor”, as well as loosens the definitions of what constitutes a “rural and underserved area”, for purposes of certain special provisions and exceptions from various requirements under the mortgage rules.  Specifically, the CFPB proposes the following significant changes:

  • To raise the loan origination limit from 500 to 2000 first lien covered transactions for determining eligibility for “small-creditor” status and excluding originated loans held in portfolio  by the creditor and its affiliates from the limit.
  • To calculate the asset limit for “small creditor” status by including the assets of the creditor’s affiliates that originate mortgage loans.
  • To provide a grace period from calendar year calculations to allow a creditor that exceeded (i) the loan origination limit or (ii) the annual asset limit in the preceding year to operate, under certain circumstances, as a “small creditor”, for applications received before April 1 of the current calendar year.
  •  To expand the definition of “rural”  to include either (i) a county that meets the current definition of rural county or (ii) a census block that is not in an urban area as defined by the U.S. Census Bureau and to conform the definition of “underserved” to take into account the new definition of “rural”.
  • To exempt “small creditors” that operate predominantly in rural or underserved areas from the requirement that they establish escrow accounts for higher priced mortgage loans.
  • To extend the temporary 2 year transition period that allows certain small creditors to make balloon-payment qualified mortgages and balloon payment high cost mortgages, even if they do not operate in predominantly rural or underserved areas, for applications that are received before April 1, 2016.

Increase the Number of Small Lenders Eligible for Special Rules
Under the CFPB’s 2013 mortgage rules, small creditors were given certain special provisions and exemptions, including permitting small creditors to lend (and hold in portfolio) loans which exceed the 43 percent debt-to-income ratio limit that applies to general qualified mortgage loans.  A first lien qualified mortgage that falls into this category also has a safe harbor from ability-to-repay claims, if the mortgage’s APR does not exceed the applicable Average Prime Offer Rate (“APOR”) by 3.5 or more percentage points.  If this proposal is adopted, the CFPB expects that it could increase the number of eligible “small creditors” from 9,700 to approximately 10,400.

Small creditors that operate predominantly in rural and underserved areas are entitled to originate qualified mortgages with balloon payment features as long as these loans are held in portfolio and other requirements are met.  These loans also get the benefit of the safe harbor from ability-to-repay claims as long as these loans have an APR of less than 3.5 percentage points over APOR.  Rural creditors are also permitted to originate higher priced mortgage loans without setting up an escrow account.  By defining rural areas as those counties that are neither in a MSA nor in a micropolitan statistical area that is adjacent to an MSA, the CFPB had a fairly limited definition of what constituted a “rural” area.  By using the new definition of “rural” as well as expanding the loan origination limit and asset limit, the CFPB expects to increase the number of small creditors from 2,400 to about 4,100.

Meanwhile, Back at the Ranch . . .
While the CFPB has been proposing these rules, the FHFA has been rattling the mortgage market with various proposals that, if adopted, would likely impact the secondary market.  First, the FHFA sent out a proposal to tighten membership rules for Federal Home Loan Banks by requiring institutions to go through ongoing mortgage threshold asset tests in order to keep their FHLB membership.  The goal of the FHFA’s proposal is to ensure that members remain focused on making mortgages by requiring banks and credit unions with less than $1 billion of assets to hold at least 1% of their assets in the form of mortgages, while larger institutions must hold at least 10% of their assets as mortgages.  This proposal has drawn criticism from a broad spectrum of industry groups as well as other regulators.  Rick Riccobono, the director of the Washington Department of Financial Institutions recently stated that “the proposed requirements are contrary to the safety and soundness efforts currently being put forth by federal and state bank regulators to improve liquidity and to mitigate interest rate risk in the banking system.”   Although banks are currently subject to a mortgage asset test when they join the FHLB system, they are not required to maintain a fixed percentage of their assets as mortgages.

Last week the day after CFPB proposed its amended mortgage rules, the FHFA also proposed that all Fannie Mae and Freddie Mac Seller/Servicers meet new minimum financial eligibility requirements.  The FHFA expects to finalize these requirements in the second quarter of 2015 and make the requirements effective six months after they are finalized.  As currently proposed, in order to be an eligible Fannie Mae and Freddie Mac Seller/Servicer, a bank or nonbank mortgage lender would need to meet the following tests:

* Minimum net worth of $2.5 million plus 25 basis points of the unpaid principal balance (“UPB”) for total loans serviced by such entity;

* Minimum tangible net worth to total assets ratio for all non-depository Seller/Servicers of 6%;

* Minimum liquidity requirement for all non-depository Seller/Servicers of :

  •    3.5 basis points of total Agency servicing (Fannie Mae, Freddie Mac, Ginnie Mae) plus
  •    Additional 200 basis points of total nonperforming Agency servicing in excess of 6% of the total Agency servicing UPB.

For many nonbanks, these capital and liquidity requirements are a significant change since it is a first step toward imposing “safety and soundness” type regulations on these entities.  Almost half of all first lien mortgage loans are made by nonbanks and in light of recent regulatory changes under the Basel III capital rules, the Dodd-Frank mortgage rules, and ongoing litigation against banks alleging foreclosure and mortgage origination abuses, it is not surprising that non-banks, rather than banks, are increasingly originating and servicing the lion share of mortgages.  While FHFA’s rule proposal is intended to reduce risk in the mortgage market, if adopted, it may result in higher mortgage costs for borrowers or decrease the availability of mortgages in the long run.  The FHFA hopes that the purported benefits in terms of reduction of risk and a more stable market is worth the cost.