Pub. 2 2011 Issue 4

winter 2011 17 credit risk associated with the balloon payment within their portfolio. Accordingly, the only way the bank can safely and soundly extend credit is to structure the transaction as a higher interest balloon loan which is generally renewed at maturity. These traditional products require a sizeable down payment and may include a higher interest rate. Com- munity banks use this structure to match the maturity of their deposit base which provides funding for these loans. These mortgage loans are held in portfolio by community banks for the life of the loan. Second, these loans are crucial to consumers in rural com- munities where the atypical nature of rural properties and the associated challenges in getting comparable sales for appraisals that meet secondary market standards often make local community banks the single source of credit. Narrowly constructed rules could further hamper the housing market and the ability of community banks to serve their customers. Finally, financial institutions that retain mortgage loans in portfolio have a greater incentive to insure a borrower’s ability to repay and fund the total cost of home ownership. This fundamental principle of portfolio lending and the necessarily more conservative underwriting of these loans conducted by the banks retaining the credit risk should be considered as the CFPB determines the rules and standards that will apply to these loan transactions. Federal policy should not significantly alter the economics and desirability for traditional banks to make residential mortgage loans in their communities. The criteria to allow community banks to use the exemption for balloon loans embodied in the proposed rules is cumber- some and unnecessarily confusing, especially to community banks that do not have large compliance departments. A simple exemption for balloon mortgage loans held in port- folio by financial institutions would have the result desired by Congress: that access to credit for rural and underserved consumers not be negatively impacted by the additional mortgage requirements. The Federal Reserve’s current proposed exemption provides a limited amount of relief to community banks. A total exemption for balloon portfolio loans would be a more effective solution. n Should you require more information concerning the legal and business aspects of the above, please feel free to contact the author, Sandra Murphy, directly at (304) 347-1131 or via e-mail at smurphy@bowlesrice.com . Ms. Murphy is a partner in Bowles Rice McDavid Graff & Love LLP, specializing in banking and commercial law. Bowles Rice McDavid Graff & Love LLP is general counsel to the West Virginia Bankers Association.