2019 Journal of Community Bank Case Studies

Eastern Kentucky University

SECOND PLACE:

simultaneous loans; monthly payments for mortgage-related obligations; current debt, alimony, and child support; and monthly debt-to-income ratio or residual income (Shatz 2). Also, the sources of financial information lenders receive must be verifiable using copies of tax returns, W-2 or other qualified financial document. Regulators did provide some relief from the Ability-to-Repay rule using the “qualified mortgage”. The CFPB describes a Qualified Mortgage as a loan that possesses certain features that aid a borrower in repaying his or her loan (What is a Qualified Mortgage). Some prohibited loan features include “interest only” periods, negative amortization loans, mortgage terms over thirty years, and excessive upfront points and fees. Qualified mortgages are presumed to meet Ability-to-Repay requirements easing the regulatory burden of banks that originate these loans. With the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act, Congress redefined Qualified Mortgage status for loans held by small banks. According to Congressional Research Service, “Section 101 [of EGRRCPA] creates a new qualified mortgage compliance option for mortgages that depositories with less than $10 billion in assets originate and hold in their portfolio” (Perkins, et al. 5). This rule change brings a new category of qualified mortgage known as a “Small Creditor Portfolio QM” which provides the same presumption of compliance with the Ability- to-Repay rule as a standard qualified mortgage would.

For Kentucky Bank, redefining the Qualified Mortgage criteria to allow portfolio loans proved helpful in avoiding increased expenses that would ultimately be passed on to the customer. Every mortgage loan Kentucky Bank currently holds is considered a qualified mortgage. These qualified mortgages are exempt from strenuous Ability-to-Repay requirements. Specifically, exemption of the bright line test regarding the debt-to-income ratio helps Kentucky Bank offer non-traditional borrowers such as self-employed borrowers (i.e. contractors with rental houses) and individuals with uneven income sources (i.e. farmers) mortgages without increasing their compliance risk and expense. Changes to QM allow Kentucky Bank to better serve customers, but it was not the only provisional change to benefit the bank. Prior to the passage of EGRRCPA, banks were required to undergo a standard examination every twelve months. However, banks with less than $1 billion in total consolidated assets were

Every mortgage loan Kentucky Bank currently holds is considered a qualified mortgage.

37