CFPB/HMDA/Reg. Z Changes Big Bank and Lender Credit Underwriting Changes

By rchrisman@robchrisman.com

I changed my iPod name to Titanic. It's syncing now.
I tried to catch some Fog. I mist.
When chemists die, they barium.
Jokes about German sausage are the wurst.
A soldier who survived mustard gas and pepper spray is now a seasoned veteran.
I know a guy who's addicted to brake fluid. He says he can stop any time.
How does Moses make his tea? Hebrews it.
I stayed up all night to see where the sun went. Than it dawned on me.
This girl said she recognized me from the vegetarian club, but I'd never met herbivore.
I'm reading a book about anti-gravity. I can't put it down.
I did a theatrical performance about puns. It was a play on words.

IT staffs around the country are now focused on HMDA, and the changes to be implemented in terms of an increased data file size - better make sure a) all those fields are correct, and b) they don't show discriminatory lending practices! Last week the CFPB announced annual adjustments to two asset-size exemption thresholds. First, the CFPB has made no change to the asset-size exemption threshold under HMDA/Regulation C which is currently set at $44 million. What does that mean? Banks, savings associations, and credit unions with assets at or below $44 million as of December 31, 2016, will continue to be exempt from collecting HMDA data in 2017.

 Second, the CFPB has increased the asset-size threshold under TILA/Regulation Z for certain small creditors operating primarily in rural or underserved areas to qualify for an exemption to the requirement to establish an escrow account for higher-priced mortgage loans (HPML). The threshold is currently set at $2.052 billion. Loans made by creditors operating primarily in rural or underserved areas with assets of less than $2.069 billion as of December 31 (including assets of certain affiliates) that meet the other Reg. Z exemption requirements will be exempt in 2017 from the escrow account requirement for HPMLs. (Ballard Spahr reports that the adjustment will also increase the asset threshold for small creditor portfolio and balloon-payment qualified mortgages which references the HPML escrow account asset-size threshold.)

 My cat Myrtle reminded me that the CFPB "only" has direct jurisdiction over banks with more than $10 billion in assets. What happens when a bank crosses over that asset level? All kinds of things. In terms of lending standards and credit risk, large U.S. banks raised their own risks by pushing down lending standards for a fourth consecutive year in 2016, per the OCC. The banks loosened underwriting standards mostly in direct consumer loans, conventional home equity, commercial real estate loans, and residential mortgages.

 "If such trends continue, increasing credit risk could accelerate," the report warned. Just wait until banks are scrambling for market share even more than they are now. "Looking at 90 percent of the debt in the federal banking system, equal to $5.2 trillion, the OCC found that banks are easing standards because of competition from other banks and nonfinancial firms, their appetite for risk is expanding, and they are seeking to make more loans."

The "OCC added that banks are relying less on derivatives and loan sales to manage credit risks. The regulator said its biggest worries are aggressive growth in lending, concentration, deterioration in energy-related portfolios, and further underwriting loosening. During times of economic expansion, banks generally ease lending standards, the OCC said. Since 2012, there has been abundant liquidity in the market, making more dollars available to lend and pushing banks to hunt down more borrowers, it added. For commercial loans, the OCC found looser standards in pricing, guarantor requirements, and loan covenants. In retail, easing was mostly in collateral, loan size, and debt-to-income requirements. Approximately 24 percent of banks introduced new loan products this year, and another 23 percent plan on offering new ones next year, the survey found."

 What about residential lenders and credit underwriting? There is a trend to add more and different information to the underwriting process. I have heard plenty of LOs say, "I don't care what their credit score is, I'd make a loan to that person!" There are other indicators of credit risk beyond FICO such as VantageScore which uses an algorithm to provide lenders additional information. Others, like SoFi, are trying to use online behavior to deduce credit risk. The theory being that socially connected folks with access to networks, geography and education may be a better risk than FICO currently states. 

 There was lots of noise around the Digital Mortgage Conference about technologies that improve the borrower experience, but what about technology that help mortgage companies process and underwrite loans faster with fewer people?  FinLocker, which automates many processor and underwriter functions, was introduced last week at the conference.  FinLocker accesses consumer financial data electronically and applies configurable business rules and algorithms to analyze employment, income, assets, credit, taxes and other information to validate guideline issues and highlight conditions that require processor/underwriter attention.  FinLocker is managed by a veteran team of technology and mortgage leaders, including Bryan Garcia, former CTO of Equifax and Tim Stern and Barry Sandweiss, co-founders of Lenders One Mortgage Cooperative.

  Does anyone care what rates are doing this week? Sure they do. LOs aren't letting those precious pre-election rate locks expire when 30-year rates are .5% higher than in October. But on Friday we had an early close, and the markets were closed yesterday for the Christmas holiday. One thing to note: Friday's slight advance helped the 10-yr note secure its first weekly gain in seven weeks, pressuring its yield to 2.54% from last Friday's 2.60%. We did have New Home Sales and the University of Michigan Consumer Sentiment Index, the key takeaway from the revision is that the post-election surge in consumer confidence had tapered off by mid-December.

 For exciting, titillating news this week we have, if you care about housing values before Halloween, the October Case-Shiller 20-city Index at 6AM PT today, along with December Consumer Confidence and a $26 billion, 2-yr auction. Wednesday we'll see the MBA Mortgage Index for last week, Pending Home Sales, and a $34 billion 5-yr auction. Thursday brings the usual weekly Initial Jobless Claims, along with International Trade in Goods and a $28 billion 7-yr auction. Friday is the December Chicago PMI.

 For anyone wondering where rates are this morning compared to Friday, we closed the 10-year at 2.54%; this morning, on no substantive news, it is yielding 2.55% and current coupon agency MBS prices are worse .125 versus late last week.