By Monica C. MeinertIn May, Congress passed S. 2155, an important first legislative step toward reforming the nation’s financial regulatory framework. The law includes several regulatory relief provisions related to residential and commercial real estate that will help community bankers better serve their loan customers. We asked bankers what some of the key changes would mean to them.
1. Qualified Mortgage designation for mortgage loans held in portfolio
What it does:
For banks with less than $10 billion in assets, this provision creates a special designation for mortgages held in portfolio as Qualified Mortgages, eliminating certain restrictions and giving more creditworthy borrowers access to mortgages while maintaining incentives for strong underwriting.
“We operate in a rural area that has a lot of self-employed individuals. Many of these people are in agriculture-related businesses where their income varies substantially from year to year. They generally have sufficient assets and other sources of funds, but may not have consistent year-to-year income to fit in the ‘QM box,’” says John Snider, vice chairman of $302 million-asset Shelby Savings Bank in Center, Texas. “We are not willing to take on the risk of non-QM mortgage loans. If portfolio loans are more easily designated as Qualified Mortgages, we would be able to make them.”
The CFPB will need to ensure clarity on asset calculation and how the exemption fits in with other specialized safe harbors that already exist in regulation.
2. Removal of the three-day waiting period in the TILA/RESPA integrated disclosure rules
What it does:
This provision ensures that consumers do not have to wait for a lower rate by removing the delay period mandated by the TILA/RESPA mortgage rules for amended offers of credit.
“TRID has really slowed down the home buying process for customers. Loans are taking longer to close and borrowers are losing the house of their dreams because of timing requirements,” observes Gary Kuter, SVP and chief compliance officer at Capitol Bank in Madison, Wis. “Letting borrowers waive the timing requirements of the three-day closing disclosure at their discretion would really help the matter.”
CFPB will need to clarify technical compliance issues and clarify that new provisions apply to all mortgages across the board—not just high cost mortgages.
3. Exception for TILA escrow requirements
What it does:
Banks with less than $10 billion in assets that have originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year will receive an exception to TILA escrow requirements.
“The decision for a community bank to maintain escrow accounts or to allow the property owner to manage their payments is now back in the hands of the bank’s customer instead of being mandated by regulation,” says Shan Hanes, president and CEO of Heartland Tri-State Bank in Elkhart, Kan. “This provides more options to the consumers, and allows them to have more control over their financial futures.”
The CFPB will need to write regulations exempting some community banks and credit unions from mortgage escrow requirements. At press time, no timeframe for implementation had been set.
4. Exemption from certain appraisals in rural areas
What it does:
This provision waives the requirement for independent home appraisals in rural areas on portfolio transactions under $400,000 in instances where the lender has contacted three state-licensed or state-certified appraisers who could not complete an appraisal in a reasonable amount of time.
“In our area, we have witnessed a steady decline in the number of state licensed or certified appraisers, and have found ourselves having to engage appraisers from as far as 70 miles away from our offices, adding time to the financing process, and cost to the borrower,” says Daniel Yates, president and CEO of Brattleboro Savings & Loan, a $180 million mutual in Brattleboro, Vt. “S. 2155 will allow us to better meet the needs of our applicants in a timely manner, and in a safe and sound fashion.”
The FDIC, OCC and Federal Reserve Board must ensure that supervised mortgage lenders are not evading the requirements for obtaining appraisal relief. The documentation to demonstrate compliance with the “three appraiser” requirement and the “five day” limitations will call for definitions and interpretations. Guidance will be necessary.
5. Commercial real estate designation for acquisition, development or construction loans.
What it does:
This provision allows acquisition, development or construction loans for commercial properties to be classified as regular commercial real estate exposures instead of high volatility commercial real estate.
“Clarify[ing]the definition of loans subject to HVCRE ADC will level the playing field between banks in our determination as to what it means,” says Roger Shumway, EVP and chief credit officer at Bank of Utah in Ogden, Utah. “The results will be not only more uniformity in practice, but also the extension of more acquisition, development and construction loans by banks to foster the economy.”
The FDIC, OCC and Federal Reserve will need to revise and reissue existing HVCRE rules to conform to the statutory changes.