Wells Fargo & Co. has joined large regional lender Bank of the West in ignoring components of a federal lending rule that goes into effect Friday.
San Francisco-based Wells Fargo has assigned nearly 400 underwriters to originate mortgages for the bank to carry on its books, with 25 to 40 percent of the lender's nonconforming loans -- those that can't be sold to Fannie Mae or Freddie Mac -- likely to fall outside the qualified mortgage guidelines that have been advanced by the Consumer Financial Protection Bureau, Bloomberg reported. Those mortgages make up about 5 percent of all Wells Fargo mortgages.
The group will review loans, including those with terms that prevent them from qualifying for protections provided by the Consumer Financial Protection Bureau under new rules, said Brad Blackwell, head of portfolio lending for Wells Fargo. Banks that follow the qualified mortgages have provided a "safe harbor" from lawsuits filed by borrowers, according to rules adopted by the consumer's bureau.
Wells Fargo, responsible for about one in five U.S. mortgages last year, is pushing the initiative to compete for wealthier clients seeking nonconventional loans such as those with interest-only payments. In an interest-only loan, the borrower's payments may only be the interest on the loan until a balloon payment is due, for example.
Earlier this week, Bank of the West, a San Francisco-based regional lender with offices in Greater Des Moines, said it would continue to offer interest-only mortgages to borrowers even though such loans are excluded from the qualified mortgage rule, American Banker reported. Bank of the West will hold those loans on its books.
"A well-underwritten, interest-only mortgage can be a good choice for our customers and they are safe for us to hold on our balance sheet," Paul Wible, senior executive vice president and head of Bank of the West's national finance group, said in a press release.
In Iowa, the new rules, which require lenders to make certain that borrowers have the financial ability to repay a home loan, could force some community banks to get out of the mortgage business, said Robert Hartwig, legal counsel at the Iowa Bankers Association.
He pointed out that the rules place the federal government in the position of regulating how banks make money. For example, fees charged on mortgages cannot exceed 3 percent of the loan. Borrowers also are expected to have a debt ratio of 43 percent.
One Iowa bank that will stay in the mortgage business, and may offer home loans that fall outside the federal guidelines, is Lincoln Savings Bank, the Reinbeck-based financial institution that entered the Greater Des Moines market as a mortgage originator and has transitioned or is converting those operations into full-service banks.
"We're not going to stop lending," said Mike Schick, who leads the Greater Des Moines operation for Lincoln Savings Bank. "We're a responsible lender. More important to us is that we are a community-based lender."
Note: Second paragraph updated to clarify the number of Wells Fargo mortgages that could fall outside of federal guidelines.