As soon as next year, many prospective home buyers in need of a mortgage loan may be heading to the local credit union or community bank for assistance instead of relying on a larger bank. This is because the government’s new mortgage rules released this past Thursday state that any consumer who has debt that exceeds 43 percent of their income will be unable to qualify for a mortgage. Smaller creditors are exempt from this rule, thanks to the Financial Protection Bureau, which means that they will in turn have a nice advantage when it comes to lower and moderate income borrowers. Many consumer advocates are saying that the new standards could exclude a large portion of first-time home buyers or home buyers with lower incomes, but the exemption could allow lower income borrowers a solution, as smaller banks and credit unions will now have more access to the mortgage market.
Richard Cordray, director of the consumer bureau stated during a speech made Thursday : “Community banks and credit unions did not cause the financial crisis. Their traditional model of relationship lending has been beneficial for many people in rural areas and small towns across this country.”
The way that banks with less than $2 billion in assets will be able to utilize this exemption is by keeping the loans on their own books instead of selling them to investors, a practice that has been quite common with smaller banks and credit unions in the past ten years.
Camden Fine, President and CEO of the Independent Community Bankers of America states, “A long-term consequence of this rule is it could shift at least a certain class of borrowers toward community banks and away from the big national players because community banks will have more flexibility.”
Fine also stated that although the industry trade group fought hard to exempt banks with less than $10 billion in assets, he was satisfied with the end result.
Smaller lending institutions have slowly but surely started to chip away at their larger competitors’ market share. While larger institutions like Wells Fargo, JPMorgan Chase and Bank of America currently hold a large share of the mortgage market, credit unions posted $88.5 billion in mortgage loans through September 2012, a nice hike when compared with $53.9 billion through 2011.
First United Bank & Trust in Oakland, Md. has had a rise in refinancing this past year, and Chief Executive Bill Grant stated that regulators have taken notice to the fact that most community banks have remained quite conservative through the years when it comes to their lending standards and practices.
The CFPB is also allowing smaller lenders increased flexibility with “balloon-payment loans.” These loans require borrowers to pay lower initial payments while saving some of the largest principal payments for the end of the life of the loan. Balloon payment loans are quite popular in smaller towns and rural communities, and currently are not subject to the 43 percent debt requirement.
With the combination of flexibility of balloon payment loans and the exemption from the new mortgage rules, smaller banks and credit unions will definitely see an increase in borrowers, allowing for a balance of the scales in the mortgage industry that at one point in time was dominated by the larger banking institutions.