On Thursday, January 28th, 2015, the Consumer Financial Protection Bureau (CFPB) proposed rules for small mortgage lenders to offer loans to borrowers with higher debt levels than previously acceptable. The Wall Street Journal notes, “The Consumer Financial Protection Bureau is the latest victory in Washington for the community lending sector, a powerful lobbying presence on Capitol Hill” (2015). The need for flexibility amongst community bankers has been present for some time, ever since the CFPB put forth stringent mortgage lending rules on small lenders just a year ago. The rules have created limitations on the community bankers to make loans to borrowers with high levels of debt.
The need for these rules to be in place was sparked at the time by the financial crisis. After the sub-prime mortgage crisis, regulators did not want to see anymore less-than-perfect borrowers enter the market as they would be less likely to repay their mortgages, and thus more risky for all parties involved in that loan. The rules meant that the borrower’s ability to repay had to be verified by the lender, and the lender also had to make sure that the borrower’s total debt to income ratio did not exceed 43% of their pretax annual income. The CFPB’s recent proposal could extend that debt to income ratio, and free lenders to make riskier loans, which is always a point of controversy amongst regulators who are working hard to avoid another financial crisis — rightly so. But the Wall Street Journal notes, “Small lenders and many in the mortgage industry say the riskiness of such mortgages is limited, in part because they will have to hold these loans in their investment portfolios. The firm would be on the hook for the losses hen the borrowers default, giving the banks an incentive to make only good loans…Responsible lending by community banks and credit unions did not cause the financial crisis, and our mortgage rules reflect the fact that small institutions play a vital role in many communities” (2015). The proposal would help lenders extend help to those that are qualified, but are seen as risks from a regulatory perspective.
Under the current rules in place, a lender must only make up to 500 loans a year and have less than $2 billion in assets to be considered a small lender. The new rules would get rid of the 500 loan per year limit, but maintain the $2 billion in assets rule, which will also include holdings of mortgages within those asset limitations. The 500 annual loan limit was proving to hold back too many small lenders from boosting their business. Under the new proposal, the small lenders will be restricted in selling loans, and won’t be able to sell more than 2,000 loans a year to mortgage investors. The Wall Street Journal cites the CFPB reporting that this will increase the number of those defined as small lenders from 9,700 to 10,400. Small lenders include banks, credit unions, and nonbank lenders. This news is exciting for smaller lenders throughout the United States, and will be able to boost the housing market substantially.