Helpful hints for lending in a goldilocks economy

by. Henry Meier

Lehman Brothers collapsed a little more than five years ago.  Dodd-Frank was passed in 2010 and well over half of its regulations still have to be implemented.  In this post-meltdown world, the big challenge for regulators, credit unions and banks is how to implement mortgage reforms attempting to address a lending crisis which is fading in an environment that is vastly different than it was five years ago.  Too hard a line and we run the risk of complying with regulations at the cost of denying credit to qualified members; too soft a line and we run the risk of doing nothing to prevent a similar financial crisis from welling up in the future.

The challenge is particularly acute for credit unions which didn’t cause the crisis but still have to comply with many of its strictures.  There are many credit unions that don’t hold on to mortgages for three years and almost all will have to comply with most of the servicing requirements.  One of the big questions is going to be is your credit union going to write exclusively to the qualified mortgage standard?  In the short term, you shouldn’t see much of a change to existing mortgage practices.  According to one estimate, 95% of existing mortgages would qualify as QM mortgages, but remember, this statistic reflects the fact that as of right now, if you can sell a mortgage to Fannie and Freddie it will be a qualified mortgage.  We don’t know how much more difficult the standards for qualified mortgages will be if and when Congress gets around to disbanding the GSEs.

And even under the existing standards, you all have loans that don’t meet secondary market standards that you may wish to make anyway.  Yesterday, Richard Cordray stressed in his speech to the mortgage bankers that lenders should feel free to continue to make non-qualified mortgages.  Lenders that have sound underwriting practices “have little to fear from the Ability-To-Repay law.  The long performance of their loans demonstrates the care they have taken in underwriting to borrowers who have the ability to repay.  Nothing about their traditional lending model has changed, and they should continue to offer the same kinds of mortgages to borrowers who are being evaluated as posing reasonable credit risk – whether or not they meet the criteria to be classified as a qualified mortgage.” [emphasis added]

At the same conference, Deputy Comptroller Darrin Benhart was looking back at the crisis from the perspective of a regulator whose agency had dropped the ball in preventing the financial crisis from happening in the first place.  So whereas Mr. Cordray’s concern that the CFPB not be seen a regulating too much, most post-Lehman regulators are stressing that there is a new Sheriff in town.  One bit of helpful advice was for lenders to keep in mind that even though they are understandably preoccupied with implementing the new mortgage rules, they shouldn’t let more traditional problems go unaddressed.

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