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Senate Banking Chair, Richard Shelby, introduced regulatory relief legislation known as the “Financial Regulatory Improvement Act of 2015”.
Among other things, this Act calls for a safe harbor protection from a consumer Ability To Repay (ATR) claim for any loans held in portfolio by a bank, with a few restrictions. Some key provisions of the bill may be found here, as provided by the Mortgage Bankers Association (MBA) (The Bill).
The MBA supports the provision for the portfolio loan safe harbor as do most, if not all, banks. Passage would mean that any conforming loan deliverable to Fannie or Freddie, any government insured loan and any bank portfolio loan would all have the safe harbor.
However, this protection is scheduled to expire in 2021 for the Agency and government insured loans. Is this is in the best interest of the consumer? Does the fact that a bank decides to hold a loan in portfolio make a difference in the consumer’s ability to repay? Is it safe to go back into the water?
Wells Fargo says that they should get the safe harbor (Safe Lending) because of their special breed of underwriters and the process for the review and approval of portfolio loans. They say that these are “high-quality mortgages”.
Does that suggest that the loans not held in portfolio are of lesser quality? Are the riskier loans sold off into securities? Wells says their motivation, and one big reason why they should get the safe harbor, is that these loans are held as investments for the long haul.
The loan only has the safe harbor protection for as long as it held in portfolio. Since they have this “skin in the game” they ensure the borrower has the ability to repay. Accordingly, they believe they should automatically get the safe harbor.
Others say that regardless of the circumstance, the consumer should be protected and have the option of a claim against the bank in the event of a default. It might be evidenced that the bank was remiss in some way in determining their ability to repay.
Further, if these loans are so safe, and Wells, or any other bank, is so careful in their underwriting , then why the need for the safe harbor? Could banks take advantage of the safe harbor and originate loans which may prove to be risky for them and the consumers? Before you say no, think of the past and the problems caused by marginal bank lending programs. Think of the Savings & Loan fiasco.
Odds are, when done properly, portfolio lending should be quality products offered to qualified borrowers. These loans should perform as expected when underwritten to standards geared toward the ability of the particular borrower obtaining the loan.
If that is so, do the banks need the safe harbor? Maybe, under the current law, since the ability to repay standards are based on TILA’s Appendix Q, which is basically the FHA underwriting guidelines. It would stand to reason that a Bank’s portfolio product would not be underwritten using FHA guidelines. So, maybe they should get the safe harbor.
Oh what a tangled web we weave. It is not so simple to outline clear and specific underwriting guidelines to cover all consumer mortgage lending into a law. When trying to do so; the result will be that some consumers get left out.
Will the bank’s safe harbor exception help or hurt? Will some bank’s abuse the privilege or maybe just make bad lending decisions. If so, how will this affect the consumers, the bank’s and the industry?
Maybe somebody should have looked into this mortgage lending thing a little more deeply before passing all these laws meant to protect the consumer. Now that they are in place, I hope we’ll be more careful when considering any modifications.
Are bank portfolio loans too safe to fail?
