Pub. 3 2013-2014 Issue 2

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S September • October 2013 5 And the Consumer Wins…How? “The reality is it’s way too hard for good people to get loans today. It doesn’t need to be that way…” Few traditional bankers would argue with this sentiment, however, many would be surprised by the speaker and his profit plans. As reported by John Gittelsohn and Prashant Gopal in their article published in Bloomberg on July 18, 2013, “Raj Date helped write the new rules for U.S. mortgage underwriting as deputy director of the Consumer Financial Protection Bureau. Nowhe’s building a company that will offer loans to borrowers blocked by the agency’s standards.” In the Bloomberg article, Mr. Date correctly notes that “…there is a safe harbor for certain kinds of loans and not for others. If there is no safe harbor, then you have to be especially confident in your ability to calibrate and price for credit risk.” One of themany ironies in the Dodd-Frank mortgage rules (another is that the safe harbor guidelines appear to be essentially crafted to mirror that bastion of common sense and safety, the Federal Housing Adminis- tration) is the lending void, caused by QM and Ability to Pay standards, and is being filled by a former crafter of the rules who is now part of a new, rapidly redeveloping shadow banking industry. The shadow bankers plan to lend to what were previ- ously well qualified borrowers, but with the stroke of a pen these consumers are now outside of the safe harbor. This group of now unqualified borrowers can include: many first-time home buyers, retirees, small business owners, low-income borrowers, folks with variable income streams and even those with large down payments. In other words, these are the borrowers who don’t fit in the neat, checklist lending that is served by the secondary market. In fact, these are the very folks that community bankers have safely banked for years. The new regulations don’t simply attack sub-prime abuses, they do much more. A number of new rules, set to take effect in January of 2014, are especially problematic. They include: • A safe harbor cap of 43% debt to income ratio. Most bankers utilize debt service and residual income calculations, which provide a more meaningful and holistic view of the customer’s repayment ability. • Elimination of balloonmortgages from the safe harbor. Bankers cannot safely hold thirty-year, fixed rate mortgages in their loan portfolios. Generations of bank customers, who have difficulty qualifying for loans in the secondary market, have benefitted from well structured, balloon mortgages offered by their community bank. • The new safe harbor standards are essentially a proxy for FHA’s documentat ion and underwriting practices. When community banks portfolio their loans, they underwrite to their bank’s policy, not FHA’s. Failing to “paper” the file to FHA’s standard, cancause the loantobeoutside the safeharbor. This troublesome provision turns the local banker, who can apply common sense to each individual borrower’s unique underwriting issues, into a check-list lender. Under Dodd-Frank, borrowers’ asserting that their loan was granted outside the safe harbor standards may (among other remedies) collect up to three years’ interest, regardless of whether they are in default. This risk is real and potentially punitive, especially for community banks that lack volume and diversity in their loan portfolio. The new shadow banking firms are, quite logically, planning to compensate by calibrating their pricing and terms to manage the risk. Unfortunately for the consumer, some of the new lender’s plans include both increased pricing and larger down payments, some as high as 40%. One of Dodd-Frank’s goals was to eliminate the steering of con - sumers into higher priced mortgage loans. Another bit of irony for prime, but unconventional borrowers (estimated to encompass up to 15% of the mortgage market), is the regulations actually steer these borrowers away from local banks to the new shadow lenders. Fortunately, some of the most challenging aspects of Dodd-Frank are being recognized by a growing, and bi- partisan group of legislators. A number of bills, including HR 1750, are being crafted to address the most problem - atic provisions. One excellent, common-sense proposal included inHR 1750 stipulates that certainmortgage loans held in a community bank’s portfolio would automatically qualify for safe harbor status. This is an elegant solu- tion that will help to address a number of non-consumer friendly provisions in Dodd-Frank. Certainly, more tweaks and modifications are needed, but with common sense thinking, progress can be made. When Congress returns this fall, please support this bill and other surgi- cally targeted improvements to Dodd-Frank…and this is how the consumer wins. n Bruce Alexander, CBA Chairman President & CEO, Vectra Bank Colorado