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Community Banks Will Benefit from HR 2226

Author: Barry D. Johnson

Community banks stand to benefit if HR 2226 continues to progress toward passage. This bill – the Portfolio Lending and Mortgage Access Act – amends the federal Truth in Lending Act by creating a special type of “qualified mortgage” for lenders who hold loans in their portfolio.

First the basics: After the mortgage meltdown of 2008 Congress passed the Dodd Frank Act. Dodd Frank required that residential mortgages be underwritten with regard to the consumer’s ability to repay the loan. Unfortunately, saying that a consumer should have the ability to repay is a lot easier than defining how to judge the ability to repay a loan. The devil in the details was left to the CFPB.

The CFPB ultimately created a regulation (now part of Regulation Z, Truth in Lending) known as the Ability to Repay (ATR) regulation. This regulation created a class of loan known as a Qualified Mortgage (QM) which by definition meets the ATR standard. Lenders are not obligated to originate QMs but they get a legal benefit it they do – they have a “safe harbor” against borrower litigation. Borrower cannot sue lenders for failure to meet TILA’s ability to repay standard if the loan is a QM. Non-QM loans are not illegal, but do not get this litigation shield.

As a result of the substantial litigation benefit (protection from borrower suits) QMs have become the standard loan product. Regulators and other examiners have criticized non-QM lending and accordingly most lenders now only originate QMs.

The prevalence of QM loans has had a substantial effect on community banks, because QMs carry with them significant restrictions such as limitations on balloon payments, specific underwriting ratios and restrictive income calculations. Many community banks, prior to the ATR rule, approached mortgage underwriting with a much more flexible attitude than allowed under the QM standard. The effect – especially for private banker whose customers often have unconventional income streams – has been significant: limitations on products that can be offered, increased underwriting standards, and significant compliance costs.

Now HR 2226 aims at partially solving that problem. HR 2226 answers many of the complaints community bankers have had with the ATR rule. Community bankers have long argued that their loans have lower than average default ratios, and while underwritten with some flexibility outperform the market in general.

Here’s what HR 2226 does: If a depository institution originates a residential mortgage loan and holds that loan in the institution’s portfolio, then that loan will now not have to comply with the ATR rule. The assumption – which is true – is that an institution lending its own money (not selling the loan in the secondary market) by definition is interested in, and will verify to the best of its ability, the customer’s ability to repay. Accordingly, such loans should be exempt from the ATR rule and related sections of TILA (including restrictions on certain loan terms). These loans have some restrictions associated with them, namely that prepayment penalties are limited. Never the less, congress – in a bold stroke of common sense – is writing into law what the industry has known for years: community bankers have, without the complicated ATR rule, always underwritten mortgage based upon the consumer’s ability to repay.

HR 2226 was introduced in April of 2017, and on January 19, 2018 was unanimously voted out of the House Financial Services Committee. The vote was 55-0, supported by members from both parties. While this particular bill may not pass, the concept of this bill is also included in several other pending bills in the House, including the Choice Act – the comprehensive Dodd-Frank/CFPB reform bill.

If you would like further information regarding this bill or the ATR rule in general, please feel free to contact Barry D. Johnson at