Smaller lenders could get bigger slice of mortgage market thanks to new rules

January 10, 2013

There may come a time next year when heading to a community bank or a credit union for a mortgage may be more attractive than approaching a large bank.

The government’s new mortgage rules, released Thursday, included a key standard — consumers can’t get a “qualified” mortgage if they have debts exceeding 43 percent of their income. But the Consumer Financial Protection Bureau proposed an exemption for small creditors, which could give them an advantage, especially when they lend to low- and moderate-income communities.

The consumer watchdog made clear the advantages of getting a qualified mortgage as it released the rules during a news conference in Baltimore. Homeowners with these types of loans have to meet stricter standards, but these mortgages will probably have lower rates and fewer fees. And banks will enjoy certain legal protections.

Consumer advocates say the new standards could shut out first-time home buyers or others with low income. But this exemption for banks with less than $2 billion in assets could provide a pathway for these types of borrowers and offer credit unions and other small lenders a bigger slice of the mortgage market, currently dominated by a few big banks.

“Community banks and credit unions did not cause the financial crisis,” Richard Cordray, the director of the consumer bureau, said Thursday during a speech in Baltimore. “Their traditional model of relationship lending has been beneficial for many people in rural areas and small towns across this country.”

In order to get this exemption, small banks with less than $2 billion in assets would have to keep the loans on their books, rather than sell them to investors around the world. The practice of packaging mortgages and trading them on financial markets has become common over the past decade and allowed banks to make a lot of money.

But this method also encouraged risky lending because banks didn’t have to worry about facing losses if homeowners defaulted on their loans, analysts say.

A majority of community banks keep their mortgages in-house anyway.

“A long-term consquence of this rule is it could shift at least a certain class of borrowers toward community banks and away from the big national players because community banks will have more flexibility,” said Camden Fine, president and chief executive of the Independent Community Bankers of America.

The industry trade group fought hard to exempt banks with less than $10 billion in assets, but Fine said he was nonetheless pleased that the consumer bureau accomodated so many of his members.

Smaller lenders have started to chip away at their bigger cousins’ market share. Behemoths such as Wells Fargo, JPMorgan Chase and Bank of America hold nearly half of the mortgage market. But credit unions posted $88.5 billion in mortgage loans through September 2012, compared with $53.9 billion a year earlier, according to the National Association of Federal Credit Unions.

In Oakland, Md., mortgage business has picked up at First United Bank & Trust in the past year, though most of the activity is on the refinancing side. Chief executive Bill Grant said he is encouraged that regulators recognized that community banks have long been conservative in their lending standards.

The CFPB is also giving small lenders flexibility with a more exotic type of mortgage called “balloon-payment loans.” These products, which require borrowers to pay lower amounts initially and save some of the biggest principal payments for the end of the life of the loan, tend to be popular in rural communities and small towns. These loans are also not subject to the 43 percent requirement but can still be considered qualified mortgages.

The criteria for these balloon-payment loans are pretty narrow. Lenders have to make at least 50 percent of their mortgages in counties that are rural or underserved, and these areas can have no more than two major mortgage lenders.

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