College Game Plan: Banking bill clears Senate, could make mortgages easier to get at local banks

Qualifying for a mortgage could require fewer hoops at banks with $10 billion or less in assets. To sidestep strict federal guidelines for so‑called "qualified mortgages," those institutions would be required to keep the loan on their books instead of selling it, among other conditions. The Senate passed S. 2155 with some bipartisan support; it rolls back various banking regulations put in place by the Dodd‑Frank Act of 2010. The bill now heads to the House, where it may face different support — last year the House passed a much broader rewrite of Dodd‑Frank — and the two chambers must agree on a final version before it can be sent to the President to be signed into law. One provision would allow smaller institutions (up to $10 billion in assets) to offer mortgages that are exempt from some of the strictest federal underwriting requirements, provided they meet certain other conditions. Where it likely will make a bigger difference is in rural areas, where big lenders don't necessarily operate, said Richard Andreano, a partner with law firm Ballard Spahr in Washington and head of its mortgage banking group. It can be harder to get a mortgage in those places.

When Congress enacted Dodd-Frank, the idea was to better protect consumers from risky mortgages, among other things. Loans that were little understood or that ended up being unaffordable contributed to millions of homeowners losing their homes to foreclosure. One of the things implemented by Dodd-Frank was the creation of a "qualified mortgage." If lenders meet a variety of strict guidelines — such as ensuring a borrower's loan is no more than 43 percent of their income — they get legal protection if a consumer later claims they were sold an inappropriate mortgage. The Senate bill would let smaller banks and credit unions still qualify for those legal protections without meeting all of the requirements that typically go with underwriting qualified mortgages. However, the bill would still require them to assess the borrower's financial resources and debt as part of the underwriting process. The loan also could not be interest-only or one whose balance could grow over time (so-called negative amortization). Those types of loans proliferated leading up to the mortgage crisis and contributed to homeowners' inability to keep up with their payments. The lender would also be required to keep the mortgage in its own portfolio instead of selling it to investors, which would mean the risk remains with the bank. Nevertheless, consumer advocates worry that reduced regulation could allow lenders to put borrowers in inappropriate mortgages while protecting the lender from legal recourse. "This opens up a window for the return of some of the reckless financial practices that caused the crisis," said Yana Miles, senior legislative counsel for the Center for Responsible Lending. Part of the problem with the mortgage crisis, however, was that some lenders sold mortgages with little or no effort to ensure the borrower could actually afford the loan. Once that loan was resold on the secondary market to investors, the originator no longer retained the risk. To banking industry insiders, the bill's requirement for the bank to hold onto the loan will help prevent the type of abuse that consumer advocates fear. "If they hold on to the credit risk, they probably underwrote the loan very carefully," said Joe Pigg, senior vice president of mortgage finance at the American Bankers Association. "The bank will have done its due diligence." "They are the ones holding the loan and it will directly impact their bottom line," said Joe Pigg, senior vice president of mortgage finance for the American Bankers Association. "If they hold on to the credit risk, they probably underwrote the loan very carefully."