BOSTON — The Consumer Financial Protection Bureau's qualified mortgage rule that limits closing costs to 3% of theloan balance will have such a big impact on Midwestern creditunions, one Minnesota-based executive said he'd lose money if hecomplied.

Jeff Schwalen, president/CEO of the $918 million Hiway FederalCredit Union, presented the problem during an afternoon breakoutsession on new mortgage rules July 10 at NAFCU's 46th AnnualConference here.

Schwalen said the 3% closing costs restriction won't cover hiscosts for mortgage loans under $135,000. That's a problem inMinnesota, where the average mortgage loan is just $180,000– HiwayFCU is headquartered in St. Paul–so he's going to make non-QMloans.

For example, for a $50,000 mortgage loan, Schwalen said actualcosts in Minnesota are $2,613. However, 3% of that balance is$1,500, resulting in a $1,113 net loss on the loan. A $135,000mortgage would bring in a maximum of $4,050 in closing costs, butcosts the credit union $75 more to make the loan.

In comparison, a $400,000 mortgage could generate up to $12,000in closing costs and still comply with the qualified mortgage 3%closing costs limit. That would produce a $3,307 net profit forHiway. However, mortgages of that size are more common on thecoasts than in the Midwest, he said.

“So you can see how this percentage thing works to ourdisadvantage,” he said. “But, it's an opening for us to fill thatvoid in the marketplace.”

Hiway FCU books approximately $10 million in mortgage loans permonth, and Schwalen said he currently holds about half of thoseloans on the books, and sells the other half to Fannie Mae. Whenthe GSEs stop purchasing non-QM loans next year, Schwalen saidhe'll hold the smaller dollar loans that aren't qualified mortgageson his books because they will pose less interest rate risk.

Barry Stricklin, vice president of real estate lending for the$2.65 billion Tower Federal Credit Union of Laurel, Md., also spokeduring the session. He agreed with Schwalen that non-QM loanspresent an opportunity for credit unions because they willrepresent about 25% of all mortgage loan production.

“I've heard Bank of America say they aren't going to make anynon-QM loans, and I hope they do that,” he said. “There is anopportunity here to fill that void. I'd encourage you to be part ofthat lending world that says you'll do it. You shouldn't be afraidto stand behind your underwriting.”

However, he also agreed with Schwalen that the decision to offerthe loans hinges on interest rate risk and a credit union's abilityto effectively manage it on the balance sheet. Stricklin said Towerhas created a matrix of real estate loan products that evaluateseach in regard to how each will be affected by the new mortgagerules, whether or not they will be purchased by GSEs, and if not,the effect on interest rate risk to hold them on the balancesheet.

In response to a question from the audience regarding apotential private market for non-QM loans, Stricklin said that RajDate, the former deputy director for the Consumer FinancialProtection Bureau, is in the process of building a firm that willcreate a secondary market for the loans. And, he said, the GSEs mayreverse or modify their decision to not purchase mortgages thatdon't fall into the qualified mortgage category.

“It's hard to say what they are going to do,” he said. “Twelvemonths from now, will they buy a 40-year loan? Because as rates goup, you're going to reach a point where a 40-year product will beimportant for first time homebuyers, and they'll face politicalpressure to support that. So you may see GSEs decide to buythem.”

However, he cautioned, credit unions can't count on anaccessible non-QM secondary market or a policy change from Fannieor Freddie.

“You have to be comfortable that if you're putting something inportfolio, you can keep it there. Sure, you may be able to sell itdown the road, but there's no guarantee,” Stricklin said.

Once the matrix is complete, Stricklin said management shouldshare the information with volunteers.

“If you're going to start eliminating products, it will probablyhave to go to the board. And, even if you're not going to eliminateanything, at a minimum at least present it to the board so theyknow what's going on,” he said.

Rules that require new disclosures and additional statementrequirements will make it impossible for credit unions that offerreal estate loans to continue providing combined statements tomembers, Stricklin said.

That will mean additional costs, he said, but added that eSignAct rules can make the process less painful.

“What the CFPB decided is that these statements don't have tocomply with the eSign Act,” he said. “They will allow presumedconsent, which means if a member has said they are okay withreceiving statements electronically, you can assume they are alsookay with getting these new statements electronically.”