CSBS Issue Briefings - August 2020

The community bank business model relies on social capital, or relationship lending. Because community banks are often located in rural communities and have a smaller customer base, expanded qualitative data is taken into consideration throughout the lending process. It can be a challenge for small community banks to originate mortgage loans that fit inside the QM standard, often because the markets in which they do business require more flexible underwriting. Community banks are also more likely to hold originated loans in portfolio, compared to their larger counterparts that typically focus on standardized mortgage products and routinely sell their mortgage loans on the secondary market. When mortgage loans are held in portfolio, the interests of the borrower and lender are aligned because the lender is fully incentivized to ensure the borrower can meet the monthly obligations of the mortgage. Providing QM status to all mortgage loans held in community banks portfolios would encourage more mortgage lending by community banks. Access to affordable and flexible mortgage credit is not simply about advancing homeownership, but also small business growth. Small business owners often rely on home equity as a significant credit source, and the overly rigid ATR standard can inhibit community banks from extending this type of credit to worthy borrowers. In the year’s following the crisis many state regulators have observed that the two -billion-dollar threshold to be eligible for small creditor status under Regulation Z does not capture all community banks that engage in portfolio lending. Because the community bank business model is distinct and not necessarily linked to asset size, state regulators recommend that the CFPB utilize a definition that is primarily activities-based. The FDIC community bank research definition, introduced in 2012, defines community banks by an indexed asset threshold and certain activities. The Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) fixed this disconnect with a new QM category. Mortgage originations made by federally insured banks and credit unions under $10 billion dollars in assets are now considered QM if they are held in portfolio.

Talking Points

• Community banks rely on relationship lending and need to be flexible on their loan products • Many community banks have not been able to take advantage of the existing small creditor QM due to having assets above $2 billion. • To mitigate this issue, S.2155 added a new QM category that makes originations from insured banks and credit unions under $10 billion dollars in assets QM if held in portfolio.

SME Contact: Joey Samowitz, Policy & Supervision Analyst: (202) 559-1978 or jsamowitz@csbs.org

Date Updated: 8/27/2020

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