New CFPB Rule Aids Mortgage Borrowers

The Consumer Financial Protection Bureau’s (CFPB) final rule amending Regulation Z, which will take effect Jan. 10, 2014, requires mortgage lenders to make a reasonable, good-faith determination of a borrower’s ability to repay the loan. The rule, which implements several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also limits prepayment penalties.

The 800+ page rule requires lenders to consider certain underwriting factors — for example, the borrower’s income, assets, and debt and credit history — and to verify this information with “reasonably reliable third-party records.” It also provides detailed guidance on how to evaluate these factors.

Regulation Z also provides a safe harbor under which lenders that offer “qualified mortgages” are presumed to be in compliance with the ability-to-repay requirement. Qualified mortgages must meet a number of requirements. For instance, they can’t:

• Have terms that exceed 30 years
• Provide for negative amortization, interest-only payments or balloon payments
• Charge points or fees that exceed 3% of the total loan amount (with certain exceptions)

In addition, qualified mortgages must have debt-to-income ratios over 43% and they can’t be “no-doc” loans.

OCC warns about inappropriate risk-taking

The Office of the Comptroller of the Currency (OCC) issued its Fall 2012 Semiannual Risk Perspective report, reflecting data as of June 30, 2012. Banks’ efforts to increase profitability may lead to inappropriate risk-taking, and that’s a key threat, according to the report.

For example, some community banks are responding to low market yields by increasing the maturities of their investment portfolios and purchasing more complex products, which can increase interest rate risk. Banks taking these actions should carefully analyze their vulnerability to interest rate shifts.

Other key risks include revenue growth challenges stemming from a slow economy, heightened market volatility, and the aftereffects of the housing-driven credit boom and bust (including a high number of distressed sales). 

FDIC publishes Community Banking Study

In December, the FDIC published the results of its Community Banking Study. The report begins by defining “community bank” and, rather than apply an asset threshold (traditionally, under $1 billion), the FDIC defined the term based on a bank’s limited geographic scope and engagement in traditional community banking lending and deposit activities. As a result, the study encompassed 330 banks that wouldn’t have been classified as community banks based on asset size alone.

The study addresses structural change, the geography of community banking, comparative financial performance, balance sheet strategies and capital formation.