Pub. 2 2011 Issue 4

www.wvbankers.org 16 I n April 2011, the Federal Reserve proposed regulations to implement the ability-to-repay requirements of the Dodd-Frank Act. These provi- sions prohibit a creditor from making a mortgage loan unless the originator makes a reasonable determination, in good faith, based on verified and docu- mented information at the time the loan is consummated, that the consumer has the ability to repay the loan, all appli- cable taxes, insurance and assessments. Jurisdiction for writing these regu- lations shifted to the Consumer Financial Protection Bureau (CFPB) in late July, and indications are that the CFPB will roll out the new regula- tions early next year. The CFPB may have a different perspective than the Federal Reserve and the final rule may bear little resemblance to the origi- nal proposal. One critical area where the CFPB could grant more relief to community bankers than the initial proposed rules without sacrificing the important public policy concerns ad- dressed by the Act is in the proposed treatment of balloon mortgage loans. Generally, the proposed rule provides four options for creditors to comply with the ability-to-repay requirements, including one which permits a qualify- ing creditor in a predominately rural or underserved area to originate a balloon-payment loan meeting certain criteria that will meet the definition of “qualified mortgage.” In interpret- ing Dodd-Frank, the CFPB could revise the proposed balloon mortgage exemption to allow all banks hold- ing these types of loan in portfolio to take advantage of either a safe-harbor (Alternative 1) or presumption of com- pliance (Alternative 2) under the Act. Currently, the proposed criteria for a balloon loan to be a “qualified mort- gage” include: 1. Bank operates in predominantly rural or underserved areas. The creditor, during the preceding calendar year, must have extended more than 50% of its total covered transactions that provide for balloon payments in one or more counties designated by the Federal Reserve as “rural” or “underserved.” 2. Total annual covered transactions. Under Alternative 1, the creditor and its affiliates extended covered transactions of some dollar amount or less during the preceding calendar year. Under Alternative 2, the creditor and its affiliates extended some number of covered transactions or fewer during the preceding calendar year. 3. Balloon loans in portfolio. Under Alternative 1, the creditor must not sell any balloon-payment loans on or after the effective date of the final rule. Under Alternative 2, the creditor must not have sold any balloon-payment loans during the preceding and current calendar year. 4. Asset size. The creditor must meet an asset size threshold set annually by the Federal Reserve, which for calendar year 2011 would be $2 Billion. While the proposed rules acknowledge the important differences between the business models of locally owned community banks and larger national financial institutions, they significantly undermine the unique role community banks play in mortgage financing. For several reasons, the CFPB should allow a total exemption for balloon mortgage loans that are held in portfolio for the life of the loan without requiring the additional criteria. First, community banks hold balloon- payment loans in portfolio primarily because of the lack of an outlet to the secondary market. With proper under- writing, use of this product is driven by interest rate risk, which institu- tions bear along with the heightened Ability to Repay: CFPB Should Grant Complete Exemption For Balloon Loans Held in Portfolio By Sandra Murphy, Partner, Bowles Rice McDavid Graff & Love LLP