Ben Giumarra

Community banks and credit unions have for the most part survived the regulatory changes of the past five years. This was a big shakeup for mortgage lending and servicing departments, but others were not completely spared. This first challenge was simply to be in compliance.

But the next challenge will be to thrive, not just survive. The challenge will be to operate efficiently and effectively in addition to just being in compliance.

Survival over this period has required many quick decisions with imperfect information. The regulations changed again and again, systems vendors tweaked technological tools until the eleventh hour and business managers struggled to understand how to correctly revise department processes and structure. As a result, any institution that survived made some decisions that were over-conservative, unnecessarily affecting customer service and/or efficiency.

This new challenge will be to go beyond mere compliance, but rather to go back to operating departments efficiently and effectively. Why now? A number of reasons. First, inefficient procedures simply cannot be allowed to continue forever, even if they were an effective short-term solution. Second, we have more information now. Better and more complete regulatory interpretations. Better explanations of how rules apply in specific situations. This should include taking full advantage of any regulatory exemptions that might apply and eliminating instances of over-compliance.

Small Creditor Exemption

So you don’t think this is just theoretical nonsense, let’s look at one specific issue. Let’s look at the regulatory exemption for small creditors regarding the Ability-to-Repay/Qualified Mortgage Rule implemented in 2014 under the Truth in Lending Act.

Many institutions have disregarded this exemption. Now, armed with better information and more time, those institutions should look to maximize this exemption (if available) to improve efficiency and customer service.

First, a basic reminder of the ATR/QM Rule. Imagine a traffic law that required drivers to travel at a “reasonable” speed, with stiff penalties for exceeding that limit. What might be considered reasonable is highly subjective – it’s hard to know when you’re safe. Imagine also the law protects drivers that travel at 43 miles per hour or slower, guaranteeing that such a speed will be considered “reasonable.” That’s how the ATR/QM Rule works; you don’t need the protection of QM, but you sure want it!

With the ATR rule prohibiting any mortgage loan that the borrower cannot reasonably afford, several different categories of QM provide a clear safe zone from violations of this vague standard. The regular QM category requires both adherence to a maximum debt-to-income ratio of 43 percent and a rigorous set of underwriting standards found in so-called appendix Q. But there is another QM category available to smaller lenders only that requires neither; it is much easier to satisfy. Avoiding appendix Q frees underwriters to use common sense underwriting, resulting in more effective and efficient loan decisions, better customer service, and maybe even a few more loans. Avoiding the 43 percent cap also helps.

So why aren’t all small creditors using this exemption to the fullest? Why would a small creditor ever self-impose regular QM requirements on portfolio loans? Why are so many institutions originating so-called “non-qualified mortgages” and assuming the additional regulatory and civil liability risks associated with them instead of following small creditor standards?

Years ago when lenders “survived” the ATR/QM Rule, I think the decision to play it safe by avoiding the small creditor exemption was reasonable, given the need to make quick decisions with imperfect information. But on closer look, in an effort to go beyond mere survival and start to thrive again, this is the type of decision we need to rethink to survive this next challenge.

Note that the original ATR/QM Rule was changed so more institutions will qualify as small creditors. The current limits are $2.06 billion and 2,000 first lien mortgages originated per year (but only sold loans count, portfolio loans are not included in the 2,000 count). The original rule limited originations to 500. 

Ben Giumarra is a risk management consultant with Spillane Consulting. He may be reached at BenGiumarra@SCAPartnering.com.