New Mortgage Rules May Encourage More Lending Among Small Banks

The federal government established a new mortgage rule this week governing how much debt borrowers can have. While critics fear that this may close doors to many first-time home buyers and low-income borrowers, others say the rule’s exceptions would just send those consumers to community banks and credit unions.

The new rule, one of many released Thursday, forbids lenders from making mortgages to borrowers with debts greater than 43 percent of their income. The hope is that only those who can really afford a mortgage will be given that responsibility, but it certainly could postpone the dream of homeownership for many Americans.

But the Consumer Financial Protection Bureau, the mortgage market’s regulator, has outlined an exception that would allow banks with less than $2 billion in assets to still make loans to those with large debt loads. The result would likely be that community banks and credit unions would see an increase in their market share of mortgages. Right now the nation’s largest banks make about half of all home loans.

“Community banks and credit unions did not cause the financial crisis,” Richard Cordray, the director of the consumer bureau, said Thursday during a speech in Baltimore as quoted in a Washington Post article. “Their traditional model of relationship lending has been beneficial for many people in rural areas and small towns across this country.”

Part of the exemption though would be that the small banks have to keep the loans on their own books instead of selling them off to investors. This is to encourage lenders to still make sensible loans in which they have full confidence.

So is turning more borrowers towards local lenders a good thing? It doesn’t seem like it could hurt. It might make it easier for those with worse credit and lower income to obtain and maintain a mortgage when they personally know the bankers who collect their monthly payments. Yet, it might decrease competition among the lower-income borrowers if they are limited to only their own local banks. Let’s hope the end product will at least be a safer mortgage market.

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