Small Lenders to Bear the Brunt of Qualified Mortgage Rules

Small lenders are already struggling with rising interest rates and poor economic conditions. The new mortgage rules will further affect their ability to make a mortgage loan.

The new qualified mortgage rules are designed to fix major problems associated with the mortgage industry. Prior to the housing bust, lenders made loans without properly assessing the repaying capacity of the borrower. Under the new rules, the lenders have a legal responsibility to ensure that borrowers will be able to repay the loan.

Most analysts believe that the new rules will have no long term negative impact on the mortgage industry. However, small lending institutions say the new rules have made them wary of lending because they are afraid of offering loans that do not comply with the guidelines specified by the Consumer Financial Protection Bureau. These lenders are worried that loans that are outside the standards specified by CFPB may be liable to lawsuits filed by unhappy borrowers. Many of them even lament that they can no longer do the loans they did in 2013.

The new 'qualified mortgage' rules specified by CFPB clearly state that the borrower should not have to spend more than 43 percent of their total income on debt. Also the fees charged by the lender cannot exceed 3 percent of the loan amount.

The risks of not complying with these new rules are serious. Even if the lender commits a small mistake in assessing the eligibility of the borrower, they will not be able to sell the mortgage to Freddie Mac or Fannie Mae. This will force more and more lenders to stay within the rules.

The officials at CFPB say that they will closely monitor the impact of the guidelines on the mortgage industry. And if they feel that the new rules have affected the availability of mortgage loans, they will make tweaks here and there.

Large lenders, on the other hand, have said that they will make mortgage loans outside CFPB's guidelines because they have the financial capability to hold these non-qualifying mortgages on their books. These lenders are not afraid of the legal risks of making such a loan.

Many experts believe that the impact of the new rules on the mortgage industry is still not clear. The fate of middle-class borrowers who may fall outside the qualified mortgage guidelines in spite of having decent credit scores is also uncertain.

CFPB officials have made several changes to reduce the impact of the new rules on lending. For example, mortgages made to borrowers whose debt levels exceed 43 percent can still be considered as qualified mortgages if the lender can sell the loans to Freddie Mac or Fannie Mae or get them guaranteed by the FHA. Community lenders who make 500 or fewer loans a year are also allowed to make mortgage loans to consumers with relatively higher debt levels.

Small and midsize lenders have been capturing a greater share of the market as large lending institutions have sort of stopped buying mortgages from brokers. The new rules, however, will affect their ability to dispense loans.

The demand for mortgage, too, has been falling probably because the interest rates are going upward. Some credit unions may also stop making loans in 2014. For a small lending institution the burden of complying with the rules simply isn't easy.

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