Because credit unions already generally abide by new finalqualified mortgage and ability-to-repay rules released Jan. 10by the ConsumerFinancial Protection Bureau, the most difficult complianceburden will be to document the process, said John Bundy, compliancemanager for CUNA Mutual. 

“Credit unions may already have underwriting that looks likethis, but now they'll have to document it, and formalize those goodpractices so they can prove they're in compliance,” he said.

However, he said the “added layer of bureaucracy” may makecredit unions think twice about entering the mortgage business orincreasing market share.

The CFPB's final qualified mortgage rule essentially createsthree types of mortgages.  Qualified mortgages, which areprovided a legal safe harbor, require both product and underwritingstandards that mandate upfront points or fees be less than 3% ofthe total loan amount, and prohibit interest-only payments,negative amortizations and terms longer than 30 years. Theborrower's debt-to-income ratio may not exceed 43%, and lendersmust verify and document income and determine that eight ability torepay standards are met.

Another qualified mortgage category created by the rule wouldonly provide a legal “rebuttable presumption” and would apply toriskier loans that charge higher rates. However, the mortgages willstill be required to meet the safe harbor requirements listedabove.

The third category would be nonqualified mortgages, which couldinclude some of the forbidden product qualities, such as negativeamortization or interest-only payments, and wouldn't be subject tounderwriting requirements, such as the debt ratio limit. However,even these mortgages would be subject to the new ability to repaystandards.

A proposed rule issued along with the final rules would create afourth QM category that at first glance appeared to exempt mostcredit unions altogether. The rule would provide a qualifiedmortgage safe harbor to lenders with less than $2 billion in assetsthat originate fewer than 500 first mortgages per year.

However, upon further analysis, compliance experts said theproposed rule doesn't provide much regulatory relief to creditunions after all.

Andrea Stritzke, vice president of regulatory compliance for theDes Moines, Iowa-based compliance firm PolicyWorks, said the proposed rule eases the 43%debt-to-income ratio requirement for qualified mortgages for smalllenders. However, the lenders must keep the mortgage in theirportfolio for at least three years to qualify and must also meetall other qualified mortgage product and underwritingstandards.

“We'd rather have this proposed rule adopted rather than not atall, but [the CFPB] could have eased the burden on credit unions alot more than in just that one piece,” Stritzke said.

Bundy said he thinks the rule might allow credit unions to offernew mortgage products that were previously restricted under currentrules, such as closed-end home equity products. Most credit unionsfall well within the 43% debt-to-income ratio for first mortgages,he said, but borrowers who own their homes outright and have enoughequity to qualify for home equity lending are often older memberson fixed or lower incomes.

Bundy added that the proposed rule and its increased flexibilityto small lenders is a sign the bureau recognizes credit unionsdidn't cause the financial crisis.

“But, it remains to be seen how much effect it will have oncredit unions,” he said.

The rule included a footnote explaining the CFPB's choice of $2billion as a threshold for the proposed rule does not imply that itwill use the mark to distinguish “small firms” for other purposes.Comments on the proposed rule are due to the CFPB by Feb. 25.

The CFPB also issued final rules Jan. 10 for high-costmortgages, which are defined as riskier loans having annualpercentage rates that exceed the average prime rate by 1.5percentage points or more for first liens, or by 3.5 points or morefor loans secured by a subordinate lien.

The new rules ban balloon payments, prepayment penalties,modification fees and limits late fees. Charging for providing apayoff statement and encouraging consumers to default on existingloans so they can refinance to a higher priced loan are also out.

The CFPB also issued a new rule that requires higher pricedmortgages maintain escrow accounts for a minimum of five years, anincrease from the current requirement of one year. Unlike the otherrules, which don't take effect until early 2014, the escrow rulegoes into effect in June 2013.

Stritzke said most credit unions don't offer higher pricedmortgages because, among other things, they didn't want to maintainan escrow program.  However, when the CFPB finalizes rulesthis fall that could redefine what is included in annual percentagerate calculations, some fees credit unions charge could boostmortgages into the higher priced category and trigger the escrowrequirement.

An exemption that excuses small lenders that serve rural orunderserved areas from the higher priced rule could become moresignificant, she said, after the new APR rule is released.

The bureau also implemented a rule that requires lenders providea list of homeownership counseling organizations to higher pricedmortgage borrowers shortly after they apply for amortgage. 

Lauren Calhoun, compliance manager for CUNA Mutual, said theCFPB will create a database for lenders that will produce a list ofcounselors located near the borrower's ZIP code that can be printedout and given to borrowers to comply. However, lenders areadditionally tasked with ensuring the borrower attends a counselingsession and collecting documentation in writing.

“The good news is, since credit unions don't do a lot of theseloans, very few would be required to do so,” Calhoun said of suchborrowers.

A final interagency rule released Jan. 15 increases higher risk mortgage appraisal requirements. The rule, whichincludes the NCUA among other federal regulators, will requirelenders who offer higher risk mortgages to use licensed orcertified appraisers who must prepare written reports, based onphysical inspections of a home's interior, when they determine thevalue of a given home. 

Mortgage lenders will also be required to provide homebuyerswith a free copy of the appraisal. In an attempt to addressfraudulent flipping, sellers who purchased the home for less thanthe current sale price within the last six month must also provideto the homebuyer additional documentation that details thedifference in sale prices, any changes in market conditions and anyimprovements that have been made to the property since it waspurchased by the current owner. Loans exempted from the ruleinclude mortgages secured by manufactured homes, mobile homes,boats or trailers, construction loans and loans with maturities of12 months or less if a bridge loan.

Other rules expected soon from the CFPB include regulations forloan servicing, and rules that will limit compensation to loanoriginators.