The high cost of preparing for both CFPB and state exams has a disproportionate impact on small independent mortgage banks that don’t have the compliance economies of scale of larger lenders.
Our firms recently joined up with 50 other independent mortgage bankers in a comment letter to the Consumer Financial Protection Bureau asking for regulatory streamlining for smaller IMBs. Our letter asked that Section 1024(b)(b) of the Dodd- Frank
Act — which requires tiered regulation of nonbanks based on size, volume, product risk, and extent of state supervision — be fully implemented with respect to these types of community- based mortgage lenders.
IMBs are supervised by every state in which they do business, as well as by the sponsors of mortgage programs they originate under, including Fannie Mae and Freddie Mac and government agencies like the Federal Housing Administration and Department of Veterans Affairs. IMBs are also redundantly regulated by the CFPB with respect to federal consumer mortgage laws.
Why is this a concern? Because the additional costs of preparing for CFPB exams (on top of state exams) and of divining CFPB rules interpretations that may differ from state regulators has a disproportionate impact on smaller IMBs. Smaller lenders don’t have the compliance economies of scale that larger lenders do. The costs of redundant CFPB regulation contribute to IMB consolidation, which is bad for competition and bad for consumers.
The CFPB has supervisory authority over banks, thrifts, and credit unions with assets over $ 10 billion, a threshold that exempts roughly 98% of the nation’s 5,600 depository institutions. Our letter asks for similar treatment for nonbank IMBs — calling on the CFPB to adopt a formal policy or rule that exempts smaller IMBs from CFPB exams or audits, as well as makes it clear that the CFPB will not take enforcement action against smaller IMBs unless one of their state regulators or a different federal regulator provides a referral for it to act.
In the summer of 2017, the Treasury Department released a detailed report on regulatory issues, which highlighted unnecessary regulatory burdens, with recommendations to address them. A major conclusion of that report was that “The CFPB’s supervisory authority is duplicative and unnecessary.” Treasury’s report noted that CFPB supervisory authority extends to state-licensed nonbanks that neither enjoy special status under federal law, “nor is regulation needed to address moral hazard created by deposit insurance.” The report further underscores the effectiveness of state supervision, noting that state supervisors “were often leaders in identifying consumer protection problems during the financial crisis and have a unique perspective into the financial services available and needs in their communities.”
The report concluded by calling on Congress to repeal the CFPB’s duplicative supervisory authority, recommending that “Supervision of nonbanks should be returned to state regulators, who have proven experience in this field and an existing process for interstate regulatory cooperation.”
There is legislation that provides a model for how to do this: H. R. 1964, the “Community Mortgage Lender Regulatory Act of 2017.” The bill, introduced by Rep. Roger Williams, R-Texas, provides for streamlined, risk- based CFPB regulation of smaller through the type of approach we advocate.
The recent regulatory relief bill, S. 2155, approved by Congress and signed into law by President Trump, provides substantive regulatory reform for community and regional banks, and for many other areas, such as manufactured housing and the securities industry. While that bill included a useful Transitional Licensing provision, there was really no substantive regulatory relief in S. 2155 for smaller community-based IMBs.
This is where the Dodd- Frank provision on tiered regulation comes in. We don’t need Congress to act; we just need the CFPB to fully follow the statutory requirements of Section 1024(b)(2) of Dodd- Frank. The provision says CFPB supervision of nonbanks should be tiered based on size, volume, product risk, and extent of state supervision. Smaller IMBs meet all of these categories — probably more so than any other types of nonbank financial firms or financial activities.
Community-based IMBs are small businesses that originate and service mortgages and are major job creators. IMBs are active in their local communities and have historically done a better job than the large banks in serving low- and moderate-income and underserved borrowers. Consumers benefit both from the personalized service of community IMBs and their commitment to mortgage loan origination through both good economic times and bad.