Voices

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.

National Mortgage News - - Contents - By Michael Jones & Sam Lam­par­ello Michael Jones is the CFO of Ge­orge­town Mort­gage in Ge­orge­town, Texas, and Sam Lam­par­ello is CEO of MLB Res­i­den­tial Mort­gage in Spring­field, N. J.

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.

Michael Jones

Sam Lam­par­ello

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