Lenders in the North Bay said they are watching closely as federal regulators make tweaks to a new set of mortgage rules that will go into effect in January of next year, considering what impact those rules may have on their operations amid others connected to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Known as the "Qualified Mortgage Rule," the regulations are among the most recent to come out of the Consumer Financial Protection Bureau and are among the latest rules affecting mortgage lenders in California and the U.S.

The proposed rules require that creditors make a "reasonable, good-faith determination" of a borrower's ability to repay a mortgage, focusing on eight criteria. The rule generally requires a calculation based on the highest amount that a borrower might pay, and aims to suppress the kind of default-prone, high-priced loans often cited as helping to fuel the recent financial crisis.

Yet with the most recent of four distinct revisions issued on Sept. 13, the rule could well be the subject of further iterations before its planned implementation in January. And trade groups are already calling for more adjustments, citing instances where the rules diminish flexibility for community lenders that often rely on long-term relationships as much as on-paper credit worthiness.

[caption id="attachment_35953" align="alignleft" width="176"] Rachel Dollar[/caption]

"It really prohibits lenders from making certain kinds of loans: If they make a certain loan under certain parameters, they're good," said Rachel Dollar, co-founder of the law firm Smith Dollar, PC, and an expert in mortgage law. "There will be fewer types of products for borrowers, without a doubt."

Groups such as the American Bankers Association have lauded some elements of the rules, particularly where mortgages are generally considered "qualified" if held on the lender's own books. The provision allows smaller lenders to remain flexible in their loan structure, while continuing to lean on close customer relationships for what the association called a "more accurate assessment of consumers' ability to repay." Taking on that loan risk creates an even greater incentive for prudent practices, according to a public letter the trade group sent regulators on Feb. 25.

Lenders at Santa Rosa-based Exchange Bank have been watching that provision closely, after recently seeing greater demand for larger "jumbo" mortgages beyond the purchase limit for Fannie Mae and Freddie Mac. The bank keeps those loans in its portfolio, accounting for between 35 percent and 40 percent of current mortgage loans. Those loans often have greater complexity because of elements like on-site vineyards, and sometimes demand specialized terms.

[caption id="attachment_80111" align="alignleft" width="200"] Howard Daulton[/caption]

"We tend to know our borrowers," said Howard Daulton, senior vice president of business development. "We're willing to do the work."

Yet it is in the finer details of the rule where questions have continued. The Independent Community Bankers Association contends the rule should not exclude some balloon-payment mortgages from compliance if held on a lender's books. Even if those loans are allowed, the higher reporting requirements likely would result in higher costs for lenders and end up suppressing the availability of those sorts of products, according to Ms. Dollar.

Banks are not the only subjects of the new rules. All mortgage lenders, including credit unions and non-depository mortgage companies, are required to comply.

[caption id="attachment_80112" align="alignleft" width="200"] Dennis Harter[/caption]

"A small, independent mortgage lender like us has to comply with the same requirements as Wells Fargo," said Dennis Harter, president of Sequoia Pacific Mortgage Company in Santa Rosa.

While the full impact of the rules remains to be seen, one component limits fees to 3 percent of overall loan size and could shrink profit and incentive for funding smaller loans for some lenders, according to Mr. Harter.

Some have speculated that could tighten availability of credit for first-time homebuyers, he noted.

[caption id="attachment_80113" align="alignright" width="200"] Cynthia Negri[/caption]

"These things may be done in the proper spirit to protect the consumer. It's kind of a double-edged sword," said Cynthia Negri, chief lending officer at Redwood Credit Union, of the broader efforts under the Consumer Financial Protection Bureau.

While not expecting the new rules to have a significant impact on the institution's operations, Ms. Negri acknowledged that regulations have had a growing importance for mortgage lending in recent years -- even for those with highly prudent practices.

In a state-level example of reforms, California's recently adopted "Homeowner Bill of Rights" prohibited certain aggressive foreclosure practices and expanded provisions intended to protect homeowners facing default. The duo of bills increased the notice required from lenders, while also requiring a single point of contact for foreclosure and refinance matters.

The laws also gave borrowers a greater power to sue for improper proceedings. The Qualified Mortgage Rule is expected to include provisions that give banks enhanced legal protection if foreclosing on a qualifying mortgage -- as long as that loan is properly classified.

Other legal questions loom on the horizon. The U.S. Supreme Court currently is scheduled to hear the case Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. in December, a case that could decide if financial institutions are liable for instances that a loan or practice has even an unintended discriminatory effect for a minority group.

Yet lenders said that the economic trends effecting prospective and current homeowners is likely to play an even stronger role than the shifting regulatory landscape in the coming years. While interest rates are beginning to tick upward, a parallel rise in home prices has also put more equity in the hands of current homeowners and made it easier for them to refinance at what are still historically low rates.

"There were a lot of folks who couldn't refinance. But now we're getting the second wave of people who now have some more value in their homes," Ms. Negri said. "There's a lot more optimism."