Joe Gendron, Director of Government Relations 5555 Bankers Avenue, Baton Rouge, LA 70808 (225) 214-4837, gendron@lba.org February 15, 2013 Comment Letter Ability-to-Repay Standards under TILA Docket No. CFPB-2013-0002 RIN 3170-AA34 Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street, NW Washington, DC 20552 Ladies and Gentlemen: The Louisiana Bankers Association appreciates the opportunity to comment on this very important proposal. We appreciate the time and effort that the CFPB (hereafter referred to as the Bureau) has put into the development of the ability-to-repay rule and the Qualified Mortgage (QM) determinations. As you know, the development of sound QM legal protections is essential to ensuring availability of credit to borrowers across the country. Without sufficiently broad QM protections, many lenders may not continue to make certain types of loans their customers want and need due to potential liability concerns, and such customers may be left with few, if any options for obtaining credit. With respect to the Bureau s Concurrent Proposal, the LBA strongly supports extending safe harbor QM protection for all balloon loan QMs that are made with an interest rate up to 3.5 percent above the average prime offer rate (APOR). We do not see why a balloon loan QM within such an interest rate range, which must meet a lengthy list of requirements to become a QM, should provide any less legal protection than other QM mortgages. We also strongly encourage the Bureau to consider increasing the interest rate threshold amount for obtaining safe harbor status. One LBA member bank has indicated that 4.5 percent above APOR would be more appropriate to ensure that rural bank customers continue to have access to this type of credit. LBA hopes the Bureau will carefully consider that suggestion and other suggestions made for increasing such threshold amount. As has been well documented by the Bureau and other sources, loans held within portfolio of community banks are generally subject to very strict underwriting and have low default rates. The 1
explanation for this is simple: if a community bank retains 100% percent of the credit risk they have every incentive to only make loans to creditworthy borrowers who are fully capable of making all mortgage payments and fulfilling all other debt obligations. We believe the Bureau itself makes a good case for broadening the scope of the QM under the concurrent proposal for loans held in a community bank s portfolio in the commentary to the final rule on page 476. The Bureau states: because small portfolio lenders retain a higher percentage of their loans on their own books, they have strong incentives to engage in thorough underwriting. To minimize performance risk, small community lenders have developed underwriting standards that are different than those employed by larger institutions. Small lenders generally engage in relationship banking, in which underwriting decisions rely at least in part on qualitative information gained from personal relationships between lenders and consumers. This qualitative information focuses on subjective factors such as consumer character and reliability which may be difficult to quantify, verify, and communicate through the normal transmission channels of banking organization. Aside from the concurrent proposal, LBA would also like to take this opportunity to comment on aspects of the final ability-to-repay rule that was released on January 10. Despite the QM legal protection in the rule given to lenders for many types of loans, LBA has serious concerns about the lack of QM legal protection for many community banks in Louisiana, and around the country as a whole, that make balloon payment loans that they hold in their portfolios. As a general proposition, LBA strongly believes that the most sensible and helpful approach to community banks and their customers would be to give all balloon loans held in portfolio QM status. As stated above community banks having complete skin-in-the game are strongly incentivized to prudently underwrite loans and ensure their customers can repay all loan related obligations. However, if the Bureau is to maintain the current requirement that lenders originate more than 50 percent of their loans in rural or underserved areas in order for loans made in such rural areas to be eligible for QM status, LBA has serious concerns with the definition of rural adopted by the Bureau. The rule states that the Bureau will designate a list of rural or undeserved counties (parishes in Louisiana) each year. However, the commentary provided in the final rule states the determination of rural areas will be based on the USDA Economic Research Service (ERS) urban influence codes (UICs) 4, 6, 7, 8, 9, 10, 11, and 12. Under this criteria, counties (parishes) excluded from the definition of rural are those in metropolitan statistical areas or micropolitan statistical areas adjacent to a metropolitan statistical area, as those terms are defined by the U.S. Office of Management and Budget. Based on current UIC codes, only 19 out of 64 Louisiana parishes would qualify as rural parishes under the Bureau s current definition. LBA finds this extremely troubling as Louisiana is a very rural state, yet less than a third of our parishes would qualify as such under the rule. It was truly shocking for LBA and many of our member banks to discover that many of the least affluent and least populated areas of the state were not included in the definition of rural. 2
Because of the very narrow definition of rural many community banks in the state will not qualify for the balloon loan QM, and such result will be a strong disincentive for those banks continuing to make these loans in the future. If these banks stop making these loans, what will their customers do? Many of these customers do not qualify for secondary market loans for various reasons and will be left with few, if any, credit options. This is especially problematic for those currently in balloon loans that will mature in the next few years. Generally, community banks would renew or refinance these loans so the customer would avoid making the balloon payment. However, if banks know they will not receive QM status on the new balloon loans, many may decide to not renew or refinance such loans. This could leave bank customers in a very difficult spot. LBA strongly encourages the Bureau to fully consider the impact this rule will have on bank customers trying to renew or refinance balloon loans from lenders that will not obtain QM status under the current rule. In order to help rural area bank customers have adequate availability to credit, LBA believes it is necessary for the Bureau to greatly expand the definition of rural by adopting the definition used by the USDA Rural Housing Loan Program. CFPB states in the rule that this option was considered but ultimately not adopted. LBA strongly encourages CFPB to reconsider using this definition in light of the serious impact failing to do so will have on community banks and their customers. As mentioned above, many rural area customers do not qualify for secondary market loans. Poor credit history can be one reason, but other factors can limit secondary market availability to those with good credit as well. One reason frequently cited to LBA is lack of acceptable comparables (comps) for use in the appraisal process. For years we have heard from our rural banks of the difficulty in finding comps that are acceptable to Fannie Mae and Freddie Mac, as well as private secondary market investors, for many rural properties. For example, a secondary market investor may require comps that are less than six to twelve months old. Due to the low sales volume in rural areas, this may not be feasible, especially for irregular or large tracts of land that are common in these areas. Further, even if acceptable comps are obtained, LBA has heard from member banks that secondary market investors may still pass on certain loans due to their lack of marketability. This could be due to the ultra-low value of the property, lack of zoning, or a combination of factors that may make the property unattractive to the investor. The Bureau, in its commentary provided on page 476 of the rule, seems to understand the situations often encountered in rural areas, which make balloon loans a logical and viable option for both the community banks that offer them and the bank customers that receive them. The Bureau states: On the other hand, in rural and other underserved areas, it is not uncommon for consumers to seek a mortgage loan of a type that cannot be sold on the secondary market, because of special characteristics of either the property in question or the consumer. Many community banks make mortgages that are held in portfolio in these circumstances. To manage interest rate risk and avoid complexities in originating and servicing adjustable rate mortgages, these banks generally make balloon-payment mortgage loans which the banks roll over, at then current market interest rate, when the balloon-payment mortgage comes due... Again, LBA respectfully requests the bureau to expand the definition of rural included in its final rule to track the definition of rural used by the USDA Rural Housing Loan Program. Based on numbers 3
provided by the Bureau in its final rule, expanding the definition of "rural" as requested would include 37% of the U.S. population. The Bureau's current definition includes just 9.7% of the U.S. population. We believe such an expansion is necessary for community banks across the nation to continue to effectively serve their rural area customers, whose credit options are often limited for the various reasons discussed above. LBA also has strong concerns with the requirement that a lender originate, along with their affiliates, no more than 500 first-lien mortgages per year. This requirement is overly restrictive and another potential roadblock for rural lenders continuing to offer loans that their customers want and need. LBA believes the limitation that a community bank be less than $2 billion in assets is sufficiently restrictive without having to also set a maximum number of loans that banks can originate in a given year to qualify for QM status. LBA does not believe it is appropriate to distinguish between a lender that originates 499 firstlien loans per year, and one that originates 501 first-lien loans, if all other requirements are met by the lender to obtain QM status. If the Bureau is committed to maintaining this 500 first-lien loan threshold, which again LBA strongly disagrees with, LBA respectfully suggests that the Bureau only include first-lien balloon loans, as opposed to all first-lien loans. It seems hard to understand why a bank s branches or affiliates located in more urban areas that make non-balloon loans should impact the ability of branches in rural areas to make balloon loans to their customers. Changing the threshold criteria would not have a negative impact on consumers, but instead should be a benefit to rural area customers. Again, the Bureau consistently acknowledged in the final rule that small lenders making and holding balloon loans in portfolio adhere to sound underwriting principles because they keep the credit risk of such loans. Further, the Bureau recognizes that when certain consumers do encounter trouble paying their mortgage debt obligations; whether attributable to a job loss or other unforeseen factors, small lenders have significant incentives to work with their customers. Specifically, the CFPB acknowledges on page 477 of the final rule: Moreover, where consumers have trouble paying their mortgage debt obligations, small portfolio creditors have strong incentives to work with the consumers to get them back on track, both to protect the creditors balance sheets and their reputations in their local communities. Market-wide data demonstrate that loan delinquency and charge-off rates are significantly lower at smaller banks than larger ones. The Bureau s faith in the underwriting of balloon loans by small creditors also appears to have been a significant factor that lead the Bureau to exempt balloon loan QMs from the requirement applicable to other QMs that the consumer s debt-to-income ratio be below 43 percent. The Bureau believes that small creditors excel at making highly individualized determinations of ability to repay that take into consideration the unique characteristics and financial circumstances of the particular consumer...and that portfolio loans made by small creditors are particularly likely to be made responsibly and to be affordable for the consumer even if such loans exceed the 43 percent threshold. 4
Based on the Bureau s own acknowledgment of the quality underwriting of balloon loans made by community banks, and on the strong need to keep credit options available for rural area consumers, LBA respectfully asks the Bureau to remove the arbitrary qualifying requirement that a lender make no more than 500 first-lien loans per year. LBA is also concerned about the requirement that a balloon loan must have a loan term of 5 years or longer to qualify for the QM protection. Eliminating balloon loans with durations below 5 years would present banks with difficulty in effectively managing interest rate risk. As one of our member banks has previously commented to the Bureau: How can we effectively manage interest rate risk matching 90 day, 6 month and 1 year CDs to 5 year fixed rates within our loan portfolio? This is reminiscent of the Savings and Loan Crisis that ended in the failure of so many Savings and Loan and real estate lending institutions. Interestingly, the Bureau in the commentary to the final rule seems to understand the necessity for small creditors to effectively manage their interest rate risk with shorter-term balloon loans, and that such creditors generally have fewer non-performing loans. CFPB states on page 477 of the rule: There are also substantial data suggesting that the small portfolio creditors that are most likely to rely on balloon-payment mortgages to manage their interest rate risks (or to have difficulty maintaining escrow accounts) have a significantly better track record than larger creditors with regard to loan performance. LBA understands that the five year or longer requirement is not imposed by the Dodd-Frank Act, but instead is imposed at the complete discretion of the Bureau. Accordingly, we ask the Bureau to remove this requirement and allow balloon loans of all terms to qualify for QM status if all other requirements are met. Finally, LBA requests that the suggested change to the definition of rural and the suggested removal of the first-lien loan requirement also be applicable to the Bureau s final escrow rule (RIN No. 3170-AA16). This would promote uniformity in the rulemakings and further provide needed relief to rural area community banks and their customers. Thanks for your consideration in these important matters. We hope our comments are helpful as you proceed with the above discussed rulemakings. Sincerely, Joe Gendron Director of Government Relations 5