Federal regulators have eased the definition of a qualified mortgage — a presumably safe and affordable home loan — to enable small banks and credit unions to help more marginal borrowers.
The changes, announced this week, help fine-tune Consumer Financial Protection Bureau regulations proposed in January to crack down on loose lending. Community lenders generally welcomed the revisions, although one credit union leader said it would still overly restrict lending.
At the heart of the new rules was spelling out what constitutes a qualified mortgage — one that shields lenders from lawsuits by borrowers claiming they were stuck with unaffordable loans.
Loans that require borrowers to make large balloon payments at the end generally do not qualify. Also generally excluded are home loans that would bring consumers' total monthly debt payments, including housing expenses such as property taxes and insurance, to more than 43% of their gross incomes.
One change this week created a two-year exemption period in which banks and credit unions with less than $2 billion in assets can originate balloon-payment qualified mortgages regardless of whether they serve rural or underserved areas. That broadens a previous exemption allowing small rural financial firms to continue making the loans.
The bureau also said that community lenders that make fewer than 500 mortgages a year can exceed the 43% debt-to-income ratio as long as the firms keep the loans in their portfolios and don't sell them.
Diana Dykstra, who heads an association of California and Nevada credit unions, said the exemption "still creates issues." Bank and credit-union examiners — who work for regulators other than the consumer bureau — will still limit the number and dollar amount of high debt-to-income loans on grounds they are too risky, she said.
And the rule still does not allow credit unions to sell the loans to limit their risks should interest rates rise, Dykstra said.
"I do applaud CFPB for attempting to provide some assurances to these lenders that it is OK to not follow these rules to the tee," she said. "I guess only time will tell what the long term ramifications will be."