Small lenders are complaining about the new qualified mortgage (QM) rules that took effect last week, saying they put an undue burden on them and limit their ability to offer certain types of mortgages their customers demand.

They say that the rules, which are intended to prevent the type of irresponsible lending that led to the housing bubble and subsequent crash, are out of touch with the nature of small-institution lending and the customers they serve.

No more 40-year loans?

Of particular concern is their ability to offer loans that are often popular with low-to-moderate income and rural borrowers, such as 40-year mortgages and low-balance loans with certain fixed fees.

"Credit unions didn't cause the financial crisis and shouldn't be caught in the crosshairs of regulations aimed at those entities that did," said Daniel Weickenand CEO, of Orion Federal Credit Union, testifying on Tuesday before he House Financial Services Committee. "We are concerned that this rule will potentially reduce access to credit and hamper the ability of credit unions to continue to meet their member's needs."

Weickenand was appearing on behalf of the National Association of Credit Unions. He cited several requirements of the new QM standard as being problematic from their standpoint: excluding negative amortization, interest-only loans and balloon payments; a limit to loan terms or 30 years or less; a general cap of 3% on fees and points; and a 43% cap on a borrower's debt-to-income ratio.

9-10 percent rates?

It should be note that the new QM rule does not ban loans with such features, but provides certain legal protections to lenders who make rules that conform to the standard. As a result, loans that do not meet the standard will be inherently riskier for lenders to make, and thereby more costly. Another executive testifying Tuesday said borrowers could end up paying rates as high as 9-10 percent on mortgages that do not meet the standard.

Weickenand cited as an example 40-year mortgages, which he said are often sought by borrowers in high-cost areas, but which exceed the QM maximum. He also noted that limiting points and fees to 3% can be problematic for credit unions because they often use their relationships with affiliates to get the best deals for borrowers, although the way those are structured may result in fees exceeding 3%.

He proposed that the rule be modified so that any mortgage that a lender keeps on its own books rather than selling to investors be classified as a QM. One of the reasons for the rule was that lenders who made risky loans during the bubble years were able to avoid that risk by selling those loans to investors and making their profits off the origination itself.

A closer look at all mortgages

The QM rule also has a larger effect on small lenders' business, by forcing them to carefully examine every loan made to ensure they meet the guidelines, Jack Hartings, President and CEO of The Peoples Bank Company and Vice Chair of the Independent Community Bankers of America told the committee. He said that was a burden that could degrade the finances of small lenders.

Hartings said the rule also was a burden on the growth of small lenders such as himself. The QM rule exempts proprietary loans (those kept on the books) of small lenders with less than $2 billion in assets and which originate fewer than 500 mortgages a year. But Harding noted his bank came close to that limit last year, originating 493 mortgages, and would have to trend carefully before crossing that limit.

He noted that small community banks make up 20 percent of the U.S. mortgage market and represent an outsized share of loans to low-and-moderate income borrowers.

Will low-balance mortgages be squeezed?

Large lenders also expect to be affected. Bill Emerson, CEO of Quicken Loans and Vice Chair of the Mortgage Bankers Association, told the committee the rule could put a crimp in home purchase mortgages in the $100,000-$150,000 range for his company. Because many of the fees charged on those loans are fixed, including certain charges from Fannie Mae and Freddie Mac, the fees inevitably will add up to more than 3 percent of the loan amount and lenders will avoid those loans.

The executives are asking Congress to modify the rule or have the Consumer Financial Protection Agency, which wrote it, to change the guidelines to make it more flexible.

Mortgages that meet the new QM rule protect the lender from being sued in the event of foreclosure, on grounds that the lender should have known the borrower would not be able to repay it.

Published on January 15, 2014