Mortgage Rules: Back to Basics or 31 Flavors?
Yes, the headline probably has everyone thinking about ice cream. Perhaps that is a good thing considering the complexity and uncertainty surrounding credit union mortgage lending. Unfortunately, the truth is the CFPB’s mortgage regulations have been causing “brain freeze” for credit unions throughout the country.
CFPB Director Richard Cordray has described the new mortgage requirements as a back-to-the-basics approach to mortgage lending. In some sense, Cordray is correct. Credit unions have historically underwritten mortgage loans using clear documentation of a member’s ability-to-repay the loan. On the servicing side, credit unions have used a high-touch member service model focusing on working with members directly and upfront.
In that sense, yes, the new mortgage regulations forced other mortgage lenders to adjust their business models to align with long-standing credit union practices. However, the regulations – thanks to the detailed requirements of the Dodd-Frank Act – did not stop there. The combination of the Mortgage Disclosure Improvement Act, the SAFE Act requirements, the Department of Housing and Urban Development’s RESPA reform and the new regulations created mortgage lending 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 is the natural consequence of having numerous mortgage requirements located in various regulations – each with their own scope and special set of exemptions. For example, home equity lines of credit are exempt from many of the new mortgage requirements.
However, the requirement to provide an appraisal disclosure notice applies if the HELOC is in first lien position (rare, but it happens). Similarly, HELOCs are covered by the new homeownership counseling 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 are limited to closed-end mortgage loans.
I’m pretty confident that reading through those requirements, exceptions and caveats did not remind too many credit union executives of back-to-the-basics mortgage lending. Unfortunately, the above only covers HELOCs.
A similar analysis needs to be completed for closed-end home equity loans. If a member owns his or her home free and clear and obtains a closed-end home equity loan that is higher-priced, the credit union is required to establish an escrow account for the loan.
Imagine explaining to your member that escrowing for their closed-end home equity loan is simply a back-to-basics requirement. The end result is a rigid, mandatory escrow requirement due solely to the fact that this higher-priced, closed-end home equity loan would be in first lien position on a member’s principal dwelling. I’ll stop there as those examples provide a pretty good idea of the complexity of the mortgage rules.
Read more: 4 Types of Qualified Mortgages? ....
4 Types of Qualified Mortgages?
Let’s be clear, having a presumption of compliance with the ability-to-repay requirements for qualified mortgages is great. However, the nuts and bolts of the four various types of qualified mortgages and the two separate levels of legal protections are very complex.
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 their loans to the GSE guidelines. Credit unions that meet the definition of a small creditor can also obtain qualified mortgage status for loans they hold in portfolio as well as certain balloon payment loans.
Qualified mortgages – regardless of type – can obtain either a safe harbor of compliance or a rebuttable presumption of compliance. However, even here, the nuances of the mortgage rules rear their ugly head. The threshold for determining whether a qualified mortgage obtains safe harbor status depends on the type of qualified mortgage. For example, a credit union meeting the definition of a small creditor can obtain safe harbor status for a larger portion of their first lien mortgage loans – if they are held in portfolio.
The complexity of the qualified mortgage requirements highlight the need for credit unions to clearly document the qualified mortgage status of each of their loans and, just as importantly, the level of legal protection afforded to those qualified mortgages.
Rather than the back-to-basics approach, the mortgage lending environment has never been more complicated. And, we did not even discuss the new mortgage servicing requirements and the accompanying 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 they demand.