RESPA vs mortgage preapprovals - unintended consequences

Respa Rule Has Lenders Balking on Preapproval

The new mortgage disclosure rule is upending the first step in the process of lending to homebuyers. Before shopping for a property, a prospective buyer typically gets a preapproval letter from a lender indicating how big a loan the person qualifies for. Real estate agents often ask for these letters so they can make sure the customer can afford the property before showing it.

Before writing the letters, lenders like to see proof of income, such as a pay stub or tax return. But under the Real Estate Settlement Procedures Act rule that took effect Jan. 1, lenders may not require such documents before giving the borrower a good-faith estimate of closing costs.
Since lenders are now being held to those estimates, they want to hold off on issuing them as long as possible. So some lenders are reconsidering or backing away from preapprovals. Without them lenders could end up wasting time on loan applications that fall out.

"If you don't have preapproval letters, then Realtors are going to have to show people houses whether they can afford them or not," said David Dickinson, president of Bankers Compliance Consulting Inc. in Central City, Neb.

Vicki Bott, the deputy assistant secretary for single family housing at the Department of Housing and Urban Development, said in an interview Tuesday that lenders are not barred from accepting documents, only from requiring them prior to issuing a GFE. "If a consumer wants to receive a preapproval they can choose to have their information verified," she said, and HUD will clarify this in future updates to its "frequently asked questions" about the Respa rule. (How inconvenient is that?)

Credit unions can take advice from Cisco Gen Y bank study

Banks can expect to achieve revenue gains of up to 10 percent over the long term by catering to the online and social media tastes of Generation Y, according to a survey report released today by Cisco's Internet Business Solutions Group.

These younger consumers, over half of whom have Webcams and log on to YouTube five times a day, say they are eager to use banks' online tools for budgeting and savings. Though not yet high earners, Gen Y'ers are professing high levels of trust in financial institutions that deliver professional advice in areas like debt reduction and long-term savings, and do so through interactive or social media.

"They are interested in and are coordinating quite frequently with friends, family, and peers using different types of social media," said Jorgen Ericsson, global lead for Cisco IBSG's financial services practice that provides technology consulting to executives of global Fortune 500 companies.

"For the specific question — how do I shape my financial future — they really want to get professional advice" through social media. But other than pilot projects in online personal financial management, most banks are still not adequately speaking to Gen Y'ers through the channels they use. More than 33 percent of younger consumers, for example, would be willing to have a "completely" virtual relationship with their bank by interacting with advisors through online video, according to the Cisco survey, which polled 1,055 consumers across all age groups in the fall. That trend is at odds with "the general perception of many established bankers who believe that video is unappealing to customers and not mature technology," said Philip Farah, the director of the financial services practice at Cisco IBSG. Prior to the survey, Cisco IBSG officials were skeptical that banks, particularly large national institutions, would score well with younger consumers.

"We assumed they would be very distrustful of banks," for two reasons, Farah said: banks are not well connected with Gen Y's communication outlets, "and because of everything that has happened with banks in the role of the current economic crisis." But instead, 85 percent of consumers under 30 gave large financial institutions high marks as trustworthy outlets for offering financial advice, guidance and planning tools to manage debt and build savings. Cisco IBSG found that more than one-third of Gen Y'ers polled last fall feels a greater need for financial advice, compared to less than one-fifth of boomers and seniors. Farah noted that brand recognition played a strong role in favorable views. While young consumers want more financial guidance in a relationship, they aren't likely to wait around for a slow-moving bank to provide it. Twenty-six percent of Gen Y'ers said they'd be willing to switch banks to get these tools.

The survey also found that: 40 percent of younger consumers use personal financial management tools, ones primarily offered by their banks, to manage expenses, reduce debt and maximize savings; and Gen Y consumers are four times more likely than boomers to post a question about financial matters to a blog or online forum.

US Banker February, 2010

Bankers worry about change in credit union business lending cap

Credit unions are feeling hopeful about finally persuading Congress to let them make more loans to small businesses. These days the rhetoric on Capitol Hill is all about creating jobs and getting the economy going again. By arguing that they can help, credit unions are gaining support in what has been a decade-long quest to expand their business lending.

Just before Christmas, Sen. Mark Udall, D-Colo., introduced a bill to increase the member business-lending cap to 25 percent of a credit union's total assets, from the current 12.25 percent. Perhaps even more significantly, the bill also would exempt loans under $250,000 from counting toward the cap; only loans under $50,000 are exempt now. The bipartisan co-sponsors include Sen. Charles Schumer, D-N.Y., a powerful new ally for the credit union effort.

Though the banking industry has fought off similar bills before, this one is a notable advance for credit unions because it is supported by so many small-business groups and think tanks that previously opted to avoid the issue. At least 17 of them endorsed the bill, including the National Association of Realtors, the National Small Business Association and the National Association of Manufacturers.

"In the past it was very difficult to get some of these associations to enter the fray because they just didn't want to bother with it," says John Magill, senior vice president of legislative affairs for the Credit Union National Association, an industry trade group. But if they preferred not to take sides before in what they considered to be a turf war between banks and credit unions, now the potential benefit of easing the credit crunch has won them over, Magill says. "All of these associations feel credit should be flowing more freely to small businesses." He says some banking industry lobbyists and other Washington insiders seemed "fairly stunned" by the list of organizations backing the bill, with the National Association of Realtors being viewed as a particular coup, since it commands formidable grassroots support. "I think that really raised eyebrows on Capitol Hill."

Still, the banking industry is doing what it can to slow the momentum. The Senate bill largely mirrors one in the House from Rep. Paul Kanjorski, D-Pa., that also has bipartisan support, and in early December, the American Bankers Association sent a letter to House Speaker Nancy Pelosi, D-Calif., and chairman of House Committee on Education and Labor, George Miller, D-Calif., urging them to oppose Kanjorski's bill. The letter, which was co-signed by banking trade groups in every state, argued that credit unions lack expertise in business lending and that an economic crisis is no time to give them more lending authority. It also reiterated the banking industry's contention that credit unions should give up their tax exemption if they stray from lending to consumers of modest means.Keith Leggett, the ABA's chief economist, says recent congressional testimony from the credit union industry's own regulator should give members of Congress pause about creating more competition.

In testifying before a Senate committee in October, Deborah Matz, chairman of the National Credit Union Administration, said a review of 71 troubled credit unions found that 62 of them had member business loans, with 12 of them having gotten into the sector since 2005. These credit unions, which average $1.1 billion of assets, had a higher concentration of member business loans than the overall industry, and delinquencies on those loans were at 8.34 percent as of June.

But the political focus is on jobs, and that's what credit unions are promising. With a higher cap, the credit union industry says it expects to extend an additional $10 billion of loans to small businesses in the first year, creating an estimated 108,000 jobs at zero cost to taxpayers.
"Why in the world stop credit unions from trying to help?" asks Magill. He doubts the banking industry will get far with its arguments to derail the credit union bill. "Given their own history of late, and their inability to lend, it's going to be very difficult for them to say, on the safety- and-soundness argument, we shouldn't be allowed to enter this arena and help the American economy."

In the past credit unions struggled to get attention in the Senate, but had more success in the House, with Kanjorski repeatedly introducing a version of his current bill over the years. Then Schumer announced in the spring that he would take up their cause. "With so many large banks in bad shape," credit unions need to be able to offer more small-business loans, Schumer said in a press release at the time.

"The situation facing these businesses right now is much worse than a matter of them simply being denied new loans. They are being strangled by having existing lines of credit pulled. A threat like this to small businesses could upend the livelihood of millions of workers and be catastrophic for the larger economy."

President Obama himself has stressed the need for more small-business lending in two separate meetings with bankers in December. He grabbed headlines by hauling a dozen chief executives of large financial firms to the White House and urging them to take a second look at any applications for business loans that they had previously denied. The following week, he welcomed 11 community bankers and one credit union executive to a more cordial meeting, where he encouraged them to do more for small businesses. But several attendees say the president never brought up the issue of the credit union cap. Magill concedes that other pressing issues have consumed banking committee members in both the House and the Senate over the past year, but he interprets the newly introduced Senate bill as a significant step forward.
"This got put on the back burner, and now we are confident it's on the front burner," he says. "I think this will give incentive to the House to focus, once it sees a strong lineup on the Senate side."

Magill says Schumer - whom he describes as a master tactician - is helping shepherd the bill. "With small-business lending almost, if not completely, at a halt these days, I think he felt the time was right." Magill wants to get the language about credit union business lending added to the jobs bill to be considered in the Senate early this year. But Leggett says expanding business lending for credit unions is "still very controversial" politically. Legislators declined to attach the proposed higher lending cap to a jobs bill this fall because "they didn't want to have something associated with that bill that would detract from the votes." Leggett also suggests the projected $10 billion increase in lending so often touted by credit unions is misleading.

The estimate is from CUNA economists, based on interest from credit unions close to the cap, as well as those that were scared away from getting into the loan segment because of it.
"The question is: does this really represent a net increase in business lending or does it represent $10 billion of business lending that goes from for-profit banks to not-for-profit credit unions?" Leggett asks. Leggett points out that only business loans a credit union makes to its members and keeps in its portfolio count toward the current cap. Any business loans that a credit union buys, whether whole ones or participations, are excluded, as are any portion of its own member business loans that it opts to sell.

So a significant amount of business lending by credit unions - about 19 percent, based on September data - is already exempt. (The industry reported roughly $27 billion of member business loans, and $6.65 billion of nonmember business loans. Nearly 700 of the 8,000 credit unions nationwide hold nonmember business loans.)

Even more, Alan Theriault, the president of CU Financial Services, a Portland, Maine, consulting firm that advises credit unions on entering new business lines and switching charters, says excluding any loans up to $250,000 from counting as member business lending would render the cap virtually meaningless. He considers such expansion of credit union business lending ill-advised.

"It allows credit unions to have a very large portfolio of commercial loans, much more than 25 percent," Theriault says. "It really gives credit unions the opportunity to convert from being a consumer lender to being almost a pure commercial lender." He thinks this ultimately could undermine support for the legislation, as it could be interpreted as going too far. Still, both Leggett and Theriault concede that the credit unions could benefit from the zeitgeist.
"I do think the climate is very politically charged and this could gain momentum," Leggett says.