Community bankers who refused to give up on mortgage lending are becoming increasingly hopeful that volumes will rise in the next three years.

A survey released Thursday by mortgage software provider Ellie Mae (ELLI) found that bankers remain concerned about regulation and compliance costs, but many believe they can benefit from reduced competition and other lenders are forced out of the mortgage business. Ellie Mae surveyed 34 community banks.

"We've seen a surge in our pipeline and have expanded offerings similar to other community banks," one unnamed banker said in the survey. "Several of my peers are exploring the correspondent market for those banks not choosing to take part."

About of the respondents said that larger banks are their primary competitor, 38% pointed to other community banks and 15% said they felt pressure from credit unions.

"A lot of smaller community banks are seeing more volume," Jonathan Corr, Ellie Mae's chief operating officer, said in an interview. "They're benefiting as folks really tend to have trust with community banks but banks are also challenged by greater volume."

More than 80% of the survey participants said that compliance and regulation were the biggest challenges. The survey found that 28% of respondents felt challenged by the Dodd-Frank Act, another 28% were concerned about the Consumer Financial Protection Bureau, and a fifth were mindful of the Truth in Lending Act. Basel III, the Federal Housing Authority, and license requirements for loan officers were each cited by just 4% of participants.

More than 40% of the respondents said that impending regulation would increase expenses; 21% said regulations would make it harder to originate mortgages.

"I believe that if the community banks do not grow their mortgage divisions, then the cost of compliance will lead to unprofitability," an unnamed community banker said in the survey. "The ones that are doing $300 to $400 million per year will remain viable."

Smaller banks, defined as those with less than $500 million in assets, complained about inadequate staffing to meet compliance standards. Banks with more than $500 million in assets expressed greater concerns over service, particularly in dealing with borrower approvals. That disparity surprised Ellie Mae.

"We went into it thinking community banks are going to have one voice and they did to an extent," Terry Aloise, a managing director at research firm T. Aloise & Co. who conducted the survey, said in an interview. "We really saw breaks in larger community banks versus smaller ones."

Aloise said respondents from the smaller banks discussed exiting the mortgage business, while the bigger community banks "felt they had the volumes to support the people they had."

Technology was viewed as the third-biggest challenge; two-thirds of participants said their mortgage platforms do not interact with core banking systems. "We don't even bother tying it to our core banking platform because it takes more time to do that than actually make the entries," an unnamed banker said. "It would be lovely if we could upload everything."

Ellie Mae had no historical data because this was its first survey. Corr said his company would conduct similar surveys in the future. "We wanted to do some research that helped give us further insight into the priorities and challenges" for bankers, he said. "Lenders could really see what peers were thinking about and that they weren't in this game alone."

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