Independent Banker - October 2018 - 19

prime mortgage debacle. Unfortunately, as many
community bankers and their supporters point
out, many of these regulations placed disproportionate
pressure on the wide swath of banks
with less than $10 billion in assets-banks that
contributed relatively little to the financial crisis
of 2008-09.
In particular, many community bankers saw
Dodd-Frank's so-called qualified mortgage rule
as far too restrictive. In addition to requiring
significantly more reporting on the processing of
every home mortgage-which could add weeks
and dozens of employee hours to the process-the
core of this rule states that the borrower's debt
should not exceed 43 percent of their income.
As community bank lenders know, that can be
a challenge in dealing with major customer segments,
such as small-business owners or retirees,
who may have a limited or diverse income but
boast other assets and collateral.
For community banks, this legislation created
a dichotomy in their mortgage business: Some
borrowers met the qualified mortgage rule, and
others did not. Those in the latter camp, whose
income did not allow them to meet the qualified
mortgage standard, were often very responsible
borrowers. But under this legislation, their mortgage
options were more limited. Community
bank lenders were also forced to accommodate
the greater amount of working, tracking and
monitoring this fast-growing segment of non-QM
loans demanded. Indeed, mortgage-backed securities
that do not meet the qualified mortgage
standard have grown more than tenfold from
$369 million in 2015 to $3.9 billion last year,
according to Nomura Securities.
" It limited banks from making reasonable
credit decisions for borrowers that exceeded
the 43 percent debt-to-income threshold, " says
Todd Hopkins, president of the mortgage subsidiary
of $852 million-asset CorTrust Bank in
Mitchell, S.D. " Lending on character went out
the door. Banks simply wouldn't make these
loans because of the risk associated with having
a non-qualified mortgage loan on their books. " In
the long run, Hopkins adds, this had a " detrimental
effect on many smaller community banks, as
well as the communities they serve. "
Ron Haynie, ICBA senior vice president for
mortgage finance policy, agrees that " all comQuick
stat
$3.9
billion
MBSs that did not
meet qualified
mortgage rule
in 2017
munity banks were negatively impacted " by
Dodd-Frank's qualified mortgage requirements.
" If you wanted to be a community bank mortgage
lender, there were limitations on how many
[mortgages] you could sell and how big your
bank could grow, " Haynie says. In particular, the
higher level of review for exceptions to the QM
rule forced many community banks to ignore
their better judgment.
" Even if you knew the borrower and it was a
good risk, and maybe the bank was already lending
to the [borrower's] business, it was difficult
" [The qualified mortgage
rule] limited banks from
making reasonable
credit decisions for
borrowers that exceeded
the 43 percent debtto-income
threshold. "
-Todd Hopkins, CorTrustBank
to approve them, " Haynie adds. " And that loan
might be an exception to the policy, and so there
would be a lot of caution about making that loan,
and the bank might be exposed to legal liability. "
Indeed, says Hopkins, " Currently, a lot of
smaller community banks in rural areas won't
originate mortgage loans because of the risk and
complexity of complying with Dodd-Frank rules
related to mortgage lending. "
Loosening the QM rules
But with the shift to a more bank-sympathetic
administration and Congress after the 2016 election,
there has been more focus on changing the
qualified mortgage rule, at least to take the bulk
of the regulatory pressure off community banks.
In a presentation at the National Association of
Realtors conference in Washington, D.C., earlier
this year, the acting director of the CFPB, Mick
Mulvaney, commented, " Our duty is to look at
independentbanker.org Q 19
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Independent Banker - October 2018

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