Last edited 1:26 p.m., April 8, 2014While Jan. 10 marked the official day the Dodd-Frank Wall Street Reform and Consumer Protection Act took full effect in the banking industry, the law has been making changes to the mortgage market since coming to fruition in July 2010.
In its simplest terms, the Consumer Financial Protection Bureau defines the law’s 849 pages in new reforms as a tool to ensure borrowers are able to pay back the money they borrow to buy a house – a side effect of the loose mortgage practices that led to a burst in the housing bubble and resulted in millions of foreclosures across America.
The Missouri Association of Mortgage Professionals reports to avoid another housing burst and to protect consumers, lenders are now required to determine a reasonable ability to repay, considering factors such as the consumer’s income or assets and employment status against loan payments, ongoing expenses related to the mortgage, such as property taxes and insurance, payments on simultaneous loans such as a car loan or school loans, and other debt obligations, such as alimony and child-support payments.
Although feared to dramatically and negatively hit banks hard, CU Community Credit Union and Guaranty Bank officials say the reform wasn’t much of a hit, but rather just a change.
More paperworkWith nearly 10 locations, Springfield-based Guaranty Bank underwent changes to its mortgage process out of necessity almost three years ago. At the time, secondary markets such as Fannie Mae, Freddie Mac, the Federal Housing Administration, Veterans Administration and the U.S. Department of Agriculture Rural Development began compliance with the new regulations. Guaranty followed suit.
“Basically, as a bank, most of the loans that we process we sell in the secondary market. The bulk of our loan portfolios are not kept in house,” said Carlye Wannenmacher, vice president and director of marketing.
Michael Frerking, senior vice president and residential lending manager at Guaranty Bank, said it was the beginning of 2011 when the final Dodd-Frank rule went into effect for Guaranty regarding qualifying for home loans, but at the same time the market changed in a big way. With a decreasing interest rate, the bulk of Guaranty’s mortgage department, specifically 75 to 80 percent of the volume, was refinancing.
Since interest rates rapidly increased by a whole percent in the fourth quarter of 2013 – to a steady 4.5 percent from 3.5 percent – as a result of the federal government relaxing its quantitative easing, the refinancing business came to an abrupt halt.
“It was almost as if someone turned the spigot off. The refinancing business literally just stopped,” Frerking said.
Frerking declined to disclose specific numbers on any increases or decreases in revenue for the mortgage department, saying the numbers would only reflect a change in interest rates, not any changes in the regulatory environment.
However, the change in the forefront of loan officer’s minds at Guaranty Bank as a result of Dodd-Frank is the documentation required of borrowers, resulting in more work for lenders and borrowers alike.
“It’s basically more documentation. Yes, I’m sure we are doing fewer loans than we could do three or four years ago, but for the most part it is not a substantial number. It is more of a process now, it is more documentation, showing proof that people can repay the loans,” Frerking said.
As a result of reform, mortgage departments have stricter rules on debt-to-income ratios of potential borrowers. Casey Cooper, a mortgage loan officer at CU Community Credit Union, said before the reforms went into effect, he could work with someone who had a 44 percent debt-to-income ratio, but now the line is firm at 43 percent.
“There is not a leeway anymore,” he said.
Cooper said on top of protecting consumers, compliance with the Dodd-Frank Act also protects lenders.
“The borrower could come back to us and sue us if they couldn’t repay their loan back. They say it’s our fault. So, that is where the Dodd-Frank reform has changed in the mortgage industry,” he said, noting as long as credit unions and banks remain compliant with the regulations, lenders are protected from such litigation.
While Cooper is confident people will always buy homes, he has concerns about first-time homebuyers straight out of college.
“I now have to count all that student debt against a borrower,” he said. “This is going to keep a lot of first time home buyers from buying houses, and I see that affecting people in the future for sure.”
A new loan environmentIn addition to a W-2 or payroll statements, the bank utilizes income-using tax returns, bank statements, receipts from check-cashing or funds-transfer services, benefits program documentation or records from an employer to determine a consumer’s reasonable ability to repay a loan.
With these requirements for more documentation in place, Frerking said the Guaranty team adjusted itself accordingly.
“It was an adjustment, and we had to work on efficiency, but once you learn how things are, you get efficient at doing it that way,” said Frerking.
Purchase loans can close in three weeks or less, and, while it requires more documentation, the timeline for getting a loan has not increased.
“In terms of staffing the mortgage department, we are really processing home loans in a more traditional way like we did 15 to 20 years ago,” said Frerking. “Residential loan officers are working to educate clients on what is needed so they can get all of the required information when the loan is originated.
“This expedites the loan progression for the loan processors and underwriters so we can close the loan more quickly and efficiently.”
Frerking said Dodd-Frank has not necessarily changed the number of staff required to process mortgages. It’s more about fine-tuning the information gathering process on the front end to ensure all of the necessary documentation is in place.
Cooper said Dodd-Frank reforms were just reinforcements of what the credit union had been doing for years.
“I haven’t seen that big of an effect on our mortgage department. As a credit union, we were more cautious anyway, so when the new regulations came out, really our processes and things didn’t change at all,” Cooper said.
Cooper said comparing first quarter 2014 to first quarter 2013, the credit union saw a loss of $70,000, about the cost of a single small home.
While Cooper said the results of these reforms are minimal, the credit union makes every effort to keep rates and costs low for its members.
“We have cut costs in certain areas, like looking for difference servicers. We get our credit reports cheaper now. We no longer use FedEx or UPS, we go through USPS because it is cheaper,” he said.
While commercial lending could be an alternative option to keep mortgage revenue up, Cooper said the credit union’s current department is maxed out.
“We cannot take on another commercial loan until one is paid off,” Cooper said. “Our consumer lending is getting ready to change and our card servicing is getting ready to change as well. We learned to shop different servicers to find ways to cut costs, but so far we have not passed a single fee or anything onto any members.”
Cooper foresees a possible loss of income for the credit union in the servicing of its loans, which entails the collecting of escrows, paying taxes and insurance and sending out statements.
“We no longer service the loans. We sold them out. That affects the credit union, not the consumer,” Cooper said, noting year-to-year servicing revenue increased by a minimal two percent.
