Yes, the headline probably haseveryone thinking about ice cream. Perhaps that is a good thingconsidering the complexity and uncertainty surrounding credit unionmortgage lending. Unfortunately, the truth is the CFPB's mortgageregulations have been causing “brain freeze” for credit unionsthroughout the country.

CFPB Director Richard Cordray has described the new mortgagerequirements as a back-to-the-basics approach to mortgage lending. In some sense,Cordray is correct. Credit unions have historically underwrittenmortgage loans using clear documentation of a member'sability-to-repay the loan. On the servicing side, credit unionshave used a high-touch member service model focusing on working withmembers directly and upfront.

In that sense, yes, the new mortgage regulations forced othermortgage lenders to adjust their business models to align withlong-standing credit union practices. However, the regulations –thanks to the detailed requirements of the Dodd-Frank Act – did notstop there. The combination of the Mortgage Disclosure ImprovementAct, the SAFE Act requirements, the Department of Housing and UrbanDevelopment's RESPA reform and the new regulations created mortgagelending requirements more closely resembling a Rube Goldberg design than a back-to-the-basics approach.

Remember the image of credit unions having brain freeze? That isthe natural consequence of having numerous mortgage requirementslocated in various regulations – each with their own scope andspecial set of exemptions. For example, home equity lines of creditare exempt from many of the new mortgage requirements.

However, the requirement to provide an appraisal disclosurenotice applies if the HELOC is in first lien position (rare, but ithappens). Similarly, HELOCs are covered by the new homeownershipcounseling disclosure requirement and can now be considered“high-cost” mortgage loans if certain thresholds are met. But,HELOCs cannot be “higher-priced” mortgage loans as those arelimited to closed-end mortgage loans.

I'm pretty confident that reading through those requirements,exceptions and caveats did not remind too many credit unionexecutives of back-to-the-basics mortgage lending. Unfortunately,the above only covers HELOCs.

A similar analysis needs to be completed for closed-end homeequity loans. If a member owns his or her home free and clear andobtains a closed-end home equity loan that is higher-priced, thecredit union is required to establish an escrow account for theloan.

Imagine explaining to your member that escrowing for theirclosed-end home equity loan is simply a back-to-basics requirement.The end result is a rigid, mandatory escrow requirement due solelyto the fact that this higher-priced, closed-end home equity loanwould be in first lien position on a member's principal dwelling.I'll stop there as those examples provide a pretty good idea of thecomplexity of the mortgage rules.

Read more: 4 Types of Qualified Mortgages?….

4 Types of QualifiedMortgages?

Let's be clear, having a presumption of compliance with theability-to-repay requirements for qualified mortgages is great.However, the nuts and bolts of the four various types of qualifiedmortgages and the two separate levels of legal protections are verycomplex.

Credit unions can make a qualified mortgage by following the“general definition qualified mortgage” criteria or they can make a“temporary definition qualified mortgage” by underwriting theirloans to the GSE guidelines. Credit unions that meet the definitionof a small creditor can also obtain qualified mortgage status forloans they hold in portfolio as well as certain balloon paymentloans.

Qualified mortgages – regardless of type – can obtain either asafe harbor of compliance or a rebuttable presumption ofcompliance. However, even here, the nuances of the mortgage rulesrear their ugly head. The threshold for determining whether aqualified mortgage obtains safe harbor status depends on the typeof qualified mortgage. For example, a credit union meeting thedefinition of a small creditor can obtain safe harbor status for alarger portion of their first lien mortgage loans – if they areheld in portfolio.

The complexity of the qualified mortgage requirements highlightthe need for credit unions to clearly document the qualifiedmortgage status of each of their loans and, just as importantly,the level of legal protection afforded to those qualifiedmortgages.

Rather than the back-to-basics approach, the mortgage lendingenvironment has never been more complicated. And, we did not evendiscuss the new mortgage servicing requirements and theaccompanying small servicer exemptions.

One thing has not changed. Regardless of the challenges,successful credit unions will be the ones that find (compliant)ways to provide their members with the products and services theydemand.

Steve Van Beek is anattorney and counselor at Howard & Howard Attorneys in Royal Oak, Mich.
CONTACT: 248-723-0521 or [email protected].