Financial Institutions and Banking

FAQs About Selling Mortgages on the Secondary Market

In an increasingly volatile marketplace, community banks need to be resourceful to take advantage of strategies that can help them maintain profitability and stability over time. Selling mortgage loans that your bank originated to secondary market investors can create a much-needed influx of cash, but it’s important to understand and mitigate the risks.

How did we get here?

Traditionally, community banks that participated in the secondary market were brokers, originating mortgages closed on behalf of larger financial institutions. In 2013, the Consumer Financial Protection Bureau (CFPB) finalized new loan originator compensation rules, which substantially limited the fees a broker could earn.

Since then, many community banks, in an effort to enhance noninterest income, have begun originating mortgages on their own behalf and then selling them to secondary market investors.

What are the risks?

Community banks that move away from the broker role and originate their own loans increase their risk exposure. For one thing, they become subject to CFPB rules, including the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules, which were revised in April 2021 with a mandatory compliance date of October 1, 2022. Even after selling a loan to the secondary market, a bank remains liable under these rules. A bank might even be required to buy back the loan years later if it’s determined that it failed to properly evaluate the borrower’s ability to repay or to meet qualified mortgage standards.

To mitigate these risks, it’s important for banks to develop or update underwriting policies, procedures and internal controls to ensure compliance with the revised ATR and QM rules. It’s also critical for banks to have loan officers and other personnel in place with the skill and training necessary to implement the rules.

Moreover, there’s a risk that contracts to sell mortgages to the secondary market will have a negative effect on a bank’s regulatory capital. Often, these contracts contain credit-enhancing representations and warranties, under which the seller assumes some of the risk of default or nonperformance. Generally, these exposures must be reported and risk-weighted (using one of several approaches) on a bank’s call reports. In turn, this can increase the amount of capital or reserves the bank is required to maintain.

Will updated Basel III rules add risk?

In addition, the Basel III capital rules are currently being updated to reduce operational risk in banks. The update was made in response, in part, to several 2023 regional bank failures largely caused by inadequate levels of capital. Known as the Basel III endgame, the update is somewhat controversial because some see its requirements as excessively stringent. Currently, the Basel III endgame is scheduled to take effect July 1, 2025, and will phase in the capital ratio impact over three years.

Among other things, the updated rules would reduce banks’ ability to use their own models for calculating capital requirements for loans. Banks would instead be required to use standardized measures and models to evaluate loan risks.

Stay vigilant.

Community banks have much to gain by selling their mortgage loans to the secondary market, but only if they fully understand and take steps to mitigate the potential problems. Staying on top of the latest regulatory updates and developing proper procedures and internal controls will help ensure the rewards outweighs the risks.

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Financial Institutions and Banking

Get Ready for General Qualified Mortgage Final Rule

In April 2021, the Consumer Financial Protection Bureau (CFPB) delayed the deadline for compliance with its revised general qualified mortgage (QM) rule to October 1, 2022. But it’s a good idea for banks to start reviewing the requirements now and determine how they’ll need to update their procedures to incorporate the new rule. QMs — which avoid certain risky features and meet other requirements designed to make them safer and easier for borrowers to understand — are presumed to comply with ability-to-repay rules.

Currently, for a loan to be a QM, the borrower must have a total monthly debt-to-income ratio (including mortgage payments) of 43% or less. The revised rule greatly simplifies the definition of a QM by discarding the debt-to-income limit in favor of a price-based model. For loan applications received on or after March 1, 2021, but before October 1, 2022, lenders have the option of complying with either the current or the revised general QM loan definition. (Note: Separate rules apply to “seasoned” QMs.)

New lease accounting rules back on banks’ radar

After several delays — including a one-year postponement due to COVID-19 — the new lease accounting standard is scheduled to take effect for private companies for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. If your compliance efforts have been on hold, it’s time to ramp them up again. The upcoming transition to the new rules may influence current negotiations between banks and their loan customers, and banks that lease their facilities, equipment or other fixed assets should prepare for the rules’ potential impact on their balance sheets and regulatory capital. Plus, the standard’s transition approach may require banks to implement certain changes before the rules take effect.

Guide to conducting due diligence on FinTech companies

Community banks are under increasing pressure to provide their customers with digital products and services, and many banks are partnering with financial technology (FinTech) companies as a strategy for developing innovative, customized, cost-effective solutions. These partnerships can be complex ventures that involve a variety of risks, so thorough due diligence is critical. To assist banks with these efforts, federal banking agencies have published “Conducting Due Diligence on Financial Technology Companies: A Guide for Community Banks.”

The due diligence practices described in the guide are voluntary and don’t establish any new risk-management requirements. But they provide valuable guidance on what community banks should be looking for when they evaluate potential FinTech providers in six areas: 1) business experience and qualifications, 2) financial condition, 3) legal and regulatory compliance, 4) risk management and controls, 5) information security, and 6) operational resilience.

For more guidance regarding your bank’s compliance, contact Jack Matthis at

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