Federal regulations now dictate virtually every step in the mortgage lending process — even for the hometown community banks that work one-on-one with borrowers. These changes have made the mortgage business increasingly cumbersome and cost-prohibitive for smaller financial institutions.
Community banks are particularly concerned about the Consumer Financial Protection Bureau's proposal to expand the amount of borrower and loan data banks are required to report under the Home Mortgage Disclosure Act. Congress added to the already detailed HMDA data collection requirements by compelling regulators to collect additional borrower data. But the CFPB's proposed rulemaking goes above and beyond what lawmakers requested.
The CFPB's proposal would require financial institutions to report 37 new data fields for each borrower — more than double the statutory requirement laid out by Congress. Furthermore, the bureau has said it views the implementation of the Dodd-Frank changes to HMDA as an opportunity to improve upon the data-collection process. But there must be a way to reap the benefits of additional reporting without imposing even greater costs on financial institutions — especially local community banks, which bear a disproportionate burden of any regulation because of their smaller size. To help maintain the balance of private cost and public benefit, regulators should stick to the 17 new data fields laid out by lawmakers.
The CFPB must understand that the collective impact of its new mortgage regulations — including six major final rules issued in January 2013 and new mortgage-disclosure requirements that take effect in August — pose a tangible threat to the local communities that depend on mortgage credit from small banks. In the Independent Community Bankers of America's 2014 survey of more than 500 community bankers, roughly three-quarters said that new government regulations are keeping them from making more residential mortgage loans, even though they have the desire and capacity to lend more.
Moreover, revamping virtually all mortgage regulatory requirements within such a small window of time could drive many smaller lenders completely out of the market. Many community banks are already either inactive in the residential mortgage market or considering an exit from this business line. Further community bank pullouts could have a devastating impact on the housing market just as it has begun to recover.
To better protect borrowers and secure our housing and financial markets, policymakers should work to promote a more decentralized mortgage lending industry — not push it further into the hands of the largest and riskiest financial institutions.
Fortunately, the CFPB still has options. The bureau can start by ensuring that its reporting requirements encompass only essential mortgage lending information or the data points expressly required by Congress. Excessively costly, complex and irrelevant data should be left out.
In addition, the CFPB should exempt lower-volume lenders from the reporting rules to avoid imposing unnecessary regulatory burdens on the smallest community financial institutions. The bureau's rule would exempt institutions that make less than 25 covered loans per year. Raising the threshold to a more meaningful number of covered loans would provide the smallest financial institutions with regulatory relief while staying true to the purpose and intent of HMDA.
Finally, the CFPB should listen closely to the input of community banks through its Small Business Review Panel for the HMDA rulemaking. Despite the comments CFPB received from small banks as part of the review, it made few adjustments to its proposed rule, which suggests these institutions' comments were given little weight. Rather than checking an administrative box, the CFPB should carefully consider the input of the people who understand firsthand the impact of government regulation on local communities.
While the CFPB is making progress in rolling back the negative impact of mortgage regulations on community banks with its recently proposed qualified mortgage reforms, its proposed HMDA reporting requirements pose an additional set of threats to local economies. Instead of forcing through additional regulatory requirements, the bureau should build on its recent reforms to help right-size its slate of new mortgage regulations for the smallest and least-risky lenders.
Jack Hartings is chairman of the Independent Community Bankers of America and president and chief executive of the Peoples Bank Co. of Coldwater, Ohio.