Bankers share concerns about complying with new mortgage rules effective January 2014.
Bankers representing financial institutions of all sizes joined the Cleveland Fed at its 2013 Policy Summit on Housing, Human Capital, and Inequality, held in September, to share their knowledge and views with researchers, policymakers, and other bankers. In a special banker track, participants discussed the impact of the Dodd-Frank Act in terms of compliance and specifically on qualified mortgages and qualified residential mortgages (QMs and QRMs).
The bankers on the panel and members of the audience agreed that the Act, particularly the mortgage origination and servicing provisions that became effective in January 2014, will have significant, long-lasting effects on financial institutions of all sizes. Common themes were the possible, but unintended, consequences of Dodd-Frank, the direct and indirect costs of compliance with the Act, and the importance of having the right technology and operations for implementing it.
Bankers are concerned that qualified mortgage rules could limit available credit. Without legal protections for qualified mortgages, lenders’ hesitation to offer other types of mortgages could limit flexibility and discourage innovation. They feel that this could have a significant effect on lower-income borrowers. The 43 percent debt-to-income ratio and the points and fees limits, especially for smaller loans, could make it harder for lower-income borrowers to qualify. Further, bankers are concerned that excluding interest-only and, for some lenders, balloon loans, as qualified mortgages could hamper loans to borrowers who have had financial difficulties.
Both bankers and presenters discussed the potential of fair lending and Community Reinvestment Act (CRA) performance. The director of the Consumer Financial Protection Bureau, Richard Cordray, has stated that institutions already engaged in responsible lending practices and aware of fair-lending concerns should not be materially affected by the changes. However, presenters pointed out that financial institutions should maintain rigorous fair-lending assessments, testing, and processes to help identify and address potential risks. For the CRA, the presenters stressed the importance of monitoring mortgage lending to determine whether its volume declines significantly because of qualified mortgages, especially for low- and moderate-income areas and borrowers.
The costs of implementing the entire Dodd-Frank Act, bankers agreed, are immense. Some are relatively transparent, including those associated with hiring more staff and changing or implementing systems. Other costs are harder to quantify, such as resources that need to be directed to compliance and could have been used elsewhere. Bankers stated that there is no easy way to measure the additional cost associated with complying with the law. One banker on the panel stated that larger banks may have an advantage in implementing these changes because they can spread out the costs to achieve economies of scale, but all bankers indicated that the cost of Dodd-Frank, whatever the size of the institution, is significant.
The importance of technological and operational initiatives that have been or will be established to support the regulatory consequences of the Dodd-Frank Act was another hot topic. All three of the institutions represented on the banker panel—PNC, FirstMerit, and First Federal Community Bank--have made changes to accommodate the law and noted that employees have been added and/or responsibilities have been shifted to implement the regulatory changes. One of the panel members also discussed the importance of testing and quality control/assurance activities, especially after the changes have become effective. Other technology initiatives to support the changes brought about by Dodd-Frank include multiple system modifications to identify qualified mortgages and to generate proper disclosures, along with reporting and tracking to help ensure compliance with the rules.
Although the bankers acknowledged the hurdles associated with Dodd-Frank, including the time needed to understand the rules and the resources required to implement them, there was a general agreement that the changes are needed to address some of the issues that came out of the housing crisis. Several participants pointed out that the true costs of the law will not be apparent for several years. Stay tuned.