CRA compliance gets pricey as mortgage market tightens
Affordable housing shortages and declining loan volumes are making it difficult for banks to originate enough mortgages to meet their Community Reinvestment Act obligations, which could make filling shortfalls with loans from nonbanks more expensive.
It's a recurring challenge in the industry that resurfaced late last year and may even continue into 2018.
"I think you've got a lot of banks that are having more trouble meeting the CRA goals," said Jeff Bode, chief executive officer at nonbank Mid America Mortgage in Addison, Texas. "We've seen investors stepping up already in the CRA space."
CRA loan purchases have been scarcer since 2016 ended, but that's probably due to "seasonality," said John Hedlund, chief operating officer and managing director of correspondent lending at AmeriHome Mortgage Co., during a recent conference panel on loan trades.
Sellers are still expecting buying to pick up "closer to the end of the year," said Greg Tsang, co-head of Wells Fargo Securities' residential loan trading business, during the panel, which took place at a Mortgage Bankers Association conference.
If banks can't originate enough loans to meet CRA requirements, they may buy some. Whole loans that haven't incurred the fees involved in going through the secondary market might be the most cost-effective option, even if they have to pay a premium to compete with other buyers.
Buying earlier in the year may mean a better price, but it might not be necessary if an institution can originate enough of its own CRA loans.
However, affordable housing shortages and slower originations have been increasing the challenge involved in banks' efforts to both originate and buy low-to-moderate income loans in their footprints.
"It's hard for [lower income] borrowers to qualify," said Francesca Sedini, senior vice president, CRA programs and project manager, at Iberiabank in Sarasota, Fla. "This year is going to be tough."
Her institution is already looking into various third-party resources to acquire the loans it needs, but has faced challenges finding ones that match its specifications.
Larger banks in particular may be concerned about CRA. Most of the limited merger and acquisition activity involves larger institutions that tend to draw more regulatory scrutiny.
Regulators that enforce CRA carefully look at whether banks support sufficient lending to low-to-moderate income individuals or in Census Bureau tracts where they take deposits. There's not an exact number to hit, but regulators generally want to see that banks are supporting community development and low-to-moderate income lending in line with the size of the deposits they are taking in their footprint. Officials weigh this heavily as they decide whether to approve M&A activity or growth.
"The impact of a low CRA rating could really affect a bank's ability to grow or even install an ATM," said Barbara Boccia, a senior director at Wolters Kluwer.
Of the 249 bank M&A deals done last year, 218 involved banks with over $10 billion in assets, according to a Deloitte report. Regulators generally pay more attention to larger players because they have more systemic importance.
The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. gave 20 institutions "needs to improve" or "substantial noncompliance" ratings in 2016 and announced seven more this year through May. With more than 1,000 CRA exams conducted between the two agencies each year, most institutions pass muster with regulators. But the industry is paying more attention to CRA issues after a number of high-profile banks, including Wells Fargo and Santander Bank, recently received negative ratings. Home loans are not the only form of community development counted for CRA purposes and not all cited weak low-mod home lending in particular, but some did.
"The focus seemed to be greater last year than in previous years," said Tom Millon, president, CEO and chairman of the Capital Markets Cooperative, a subsidiary of Computershare that helps supply CRA loans to its bank members. "Definitely, the pressure is still on."
New requirements for Home Mortgage Disclosure Act reporting that take effect next year could make it even tougher to fulfill CRA lending requirements in 2018.
HMDA, a statute instituted to guard against discriminatory lending, involves annual data collection that bank regulators can use in their qualitative CRA examinations. "There is no magic number" of loan originations and purchases for CRA exams, which rest on examiners' judgment, said Boccia. But regulators do tend to examine HMDA numbers in order to get a sense of how well banks support low-mod lending in their deposit base, she added.
One of the new HMDA reporting requirements is a Universal Loan Identifier that will make it easier for examiners to see how frequently the same low-mod loan has been bought and sold. When loans are repeatedly bought and sold, they're often counted multiple times for CRA purposes.
"The number is unique to the loan and is never used by any other loan," said Leonard Ryan, president of QuestSoft, a provider of automated compliance review technology in Laguna Hills, Calif.
While it's not clear whether examiners will be concerned about this, lenders are wary of it, he added.
Automation could make acquiring CRA-qualifying loans easier, but it's not a panacea. Currently, institutions often pay third parties to find loans they can acquire to help fill CRA gaps, as well as seek out lenders in specific geographic markets, loan aggregators and cooperative groups that can help them.
A cost-effective online trading platform with the right filters could make that process easier. But so far, building a critical mass of trusted loan sellers to meet demand has been a challenge.
With loans in short supply right now, it could take some time to develop. But there are signs that it will, said John Ardy, CEO at online platform Resitrader in Calabasas, Calif. For example, Promontory ResiMarkets provides online loan trading.
"The overall trend is that there is a movement toward an electronic exchange," Ardy said.