The 10 Golden Rules of Mortgage Lending and Why They Hurt Credit Unions
To understand just how bad Dodd-Frank’s mortgage lending regulations are for credit unions, imagine a world in which the legislation passed but without its regulations. What you would have is a series of legislative commandments that are so basic it’s embarrassing to consider that some of the nation’s biggest lenders violated these requirements in the first place.
What are these legislative golden rules?
- Don’t give mortgages to people who can’t afford them. Document the reasons why your credit union believes a mortgage loan can be repaid.
- Keep members informed about how much they owe on their mortgages.
- Don’t make members navigate a bureaucratic maze in order to get accurate information about their mortgages. Make sure that member inquiries are quickly responded to and that the people they speak to are knowledgeable about their mortgages and empowered to speak for the credit union if questions about modifications are ever asked.
- Reach out to delinquent members and see if there are steps that can be taken to keep the member in his or her home while insuring that the credit union is made whole. Make sure you document these steps so that a judge can see that a foreclosure is a last resort for your credit union and not the primary option for insuring that loans get repaid.
- Don’t make members pay two different people for the same services.
- Provide members with advance notice of rate changes on adjustable rate mortgages.
- Make sure that appraisals reflect a good faith estimate of what a house is actually worth.
- Don’t make delinquent members pay more for force-placed insurance than they would have to if the credit union simply pays the premiums on existing insurance and makes the member pay repay them.
- Set up long-term escrows to assist persons taking higher priced mortgages.
- Make sure first time home buyers or people contemplating taking on higher priced mortgages have information about housing counselors who can educate them about buying a house before they sign on the dotted line.
Credit unions already comply with all of these. So why are the new mortgage regulations so bad for credit unions? Because all credit unions providing mortgages – even those eligible for the partial exemptions for credit unions below asset and transaction size thresholds – have to go through the expense of first documenting that they have a program to do what it is they are already doing; second they have to comply with highly specific regulations meaning that staff has to be trained and/or hired; third, a raft of new disclosures must be provided; fourth, costs associated with mortgage lending will increase; and fifth, legal risks always increase when new rules and laws are implemented for the first time.
Exemptions will help, but if one credit union has to choose between complying with this burden or cutting back on mortgages that’s one credit union too many. Elizabeth Warren famously argued that a country that would never allow stores to sell defective toasters shouldn’t allow banks to sell defective mortgages. It sounds good, but the CFPB hasn’t done enough to separate the bad guys from those who have always followed the rules and should be allowed to earn a profit for doing the right thing.