Garnet Capital Advisors Blog

Archived news

February 4, 2015

Small banks could benefit from CFPB proposals

While many banks have bemoaned the industry regulations created by the Consumer Financial Protection Bureau, smaller financial institutions in particular could benefit from the government agency's latest mortgage proposal.

Last month, the CFPB suggested implementing several changes that would make it easier for community banks and credit unions to grant so-called "qualified mortgages" more easily, according to American Banker. One major component of the proposal would make it so a wider range of financial institutions could qualify as either "small" or "rural" lenders under the QM requirements.

Banks that fall into this category face QM rules - including limits on charging balloon payments and placing a limit on an applicant's debt-to-income ratio - that are less severe, American Banker reported. Industry representatives reacted positively to the proposal, immediately showing their support.

"It is a very big deal and a very positive outcome," stated Camden Fine, president and chief executive of the Independent Community Bankers of America, according to American Banker.

Ever since the CFPB's mortgage guidelines became effective in 2014, community banks and credit unions have advocated for looser restrictions, The Wall Street Journal reported. These financial institutions have contended that by restricting their ability to extend loans to borrowers with high debt burdens, the rules are hindering their lending activities.

If the government agency's latest proposal obtains approval, then financial institutions categorized as small lenders by the CFPB will be able to provide mortgages to borrowers whose total debt payment surpasses 43 percent of their pretax income, whereas before they could not, according to The Wall Street Journal.

If this particular restriction is lifted, smaller banks should have an easier time originating mortgages, buying loan portfolios and holding mortgages on their balance sheet.