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By Gretchen Wegrich Updated on 1/11/2013

By Gretchen Wegrich

2013 may finally be the year when homeowners find the appeal of community banks and credit unions to be greater than that of large, established financial institutions.

New mortgage rules released by the government on Jan. 10 included the much-hyped definition of a “qualified mortgage,” which stated that mortgage loan applicants with debts greater than 43 percent of their income would not meet basic loan requirements. However, the qualified mortgage rule contained an exception proposed by the Consumer Financial Protection Bureau that was designed to aid small creditors who lend to low-to-moderate income families.

In a Baltimore press conference, the Consumer Financial Protection Bureau was emphatic about the benefits of qualified mortgages for borrowers. Although borrowers will be subject to more rigorous qualification standards, qualified mortgages will contain fewer fees, lower mortgage rates, and built in legal protections for banks.

Outcry from consumer advocates focused on the possibility that the new regulations could bar first time home buyers and low income borrowers from qualifying for mortgage loans. However, the proposed exception which specifically applies to small banks with less than $2 billion in assets may open up the big-bank dominated mortgage market to credit unions and other small lenders.  

“The traditional model of relationship lending practiced by community banks and credit unions has been beneficial for many people in rural areas and small towns across the country,” said Richard Cordray, director of the Consumer Financial Protection Bureau. He added, “These small lenders did not cause the financial crisis.”

To qualify for the exemption, small banks [defined as banks with less than $2 billion in assets] would be required to keep their loans “on the books,” instead of selling the loans to global investors. The standard practice of “packaging” and trading mortgage loans on financial markets is a major factor in big banks' high-profit margins over the past decade.

Currently, most community banks do not trade their mortgages.

“This rule [may] shift a particular type of borrower toward community banks and away from big national banks because of increased flexibility in local banks,” predicted Camden Fine, president and chief executive of the Independent Community Bankers of America.

Although Independent Community Bankers of America lobbied for the exemption to apply to banks with less than $10 billion in assets, the $2 billion asset exemption was nonetheless considered a victory by the industry trade group that promoted the addition.

Already, smaller lenders and community banks are beginning to steal more of the market share from big banks. Large financial institutions such as Bank of America, JPMorgan Chase and Wells Fargo sit on almost half of the mortgage market. Between 2011 and 2012, credit unions increased the amount of their credit loans by $34.6 billion, reaching $88.5 billion in September 2012, reported the National Association of Federal Credit Unions.

A second exemption grants small lenders increased flexibility with balloon-payment mortgage loans, a loan type which allows borrowers to pay very little at the beginning of the loan and pay considerably more towards the end of the loan period. Balloon-payment mortgage loans enjoy popularity in small towns and rural areas. Under the new standards, balloon-payment mortgages are not limited by the 43 percent requirement but still fall under the qualified mortgage label.

Balloon-payment mortgages feature strict regulations. Lenders must make a minimum of half of their mortgages in underserved or rural areas. Lender density in these areas is restricted to a maximum of two major lenders.

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About The Author:
Gretchen Wegrich
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.

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