Mortgage bankers and Freddie Mac were quick to condemn an Office of Thrift Supervision proposal that would pull mortgage bankers and other nonbank lenders under the purview of the Community Reinvestment Act- type mandates and would give regulatory responsibilities to Freddie and Fannie Mae in overseeing lenders that sell mortgages to them.
Acting OTS Director Jonathan L. Fiechter outlined his proposal during a speech before the Michigan League of Savings Institutions July 19.
Fiechters plan, which uses the Federal Home Finance Boards Community Support Program as a model, would call for Fannie and Freddie to establish uniform guidelines on community lending performance for originators that each purchases loans from and would also require lenders doing business with GSEs to conduct biennial self-assessments of their performance.
The GSEs would then be required to evaluate the self assessments and halt the purchase of loans from lenders that dont comply with the guidelines, Fiechter said, until they take affirmative action to comply. They only affect institutions that sold their loans to Fannie and Freddie.
Fiechter said the proposal, which would only apply to institutions that chose to sell mortgages to either Fannie or Freddie, was not endorsed by the Clinton administration, but his views are similar to those recently offered by others within the administration, including Treasury Undersecretary Frank Newman.
In 1977, when CRA was enacted, thrift institutions originated 59% of all residential mortgages and banks originated 23%, Fiechter said. Today, by contrast, thrifts have only 22% of the market, while banks share is 26%. Over half of the residential mortgages are now originated by lenders not subject to CRA. While some mortgage companies may be owned by banks and thriftsand thus indirectly subject to their parent institutions CRA obligation, most are not.
The Mortgage Bankers Associations Executive vice president, Warren Lasko, in a tersely written statement, criticized Fiechters proposal as being deeply flawed and based on a set of faulty beliefs and misperceptions that do not reflect the way mortgage banks operate and the way that ... Fannie Mae and Freddie Mac function in the mortgage lending process.
Freddie was quick to agree. Were pleased the OTS recognizes our contribution to the mortgage finance system, said Marcia Davies, a spokeswoman for Freddie Mac. But were not in the business to serve as a regulatorits not an appropriate role for Freddie Mac.
Fannie Mae has not had an opportunity to view OTS proposal, said David Jeffers, a spokesman for Fannie.
The OTS ill-conceived proposals will impede, rather than further, efforts to extend mortgage credit to revitalize and develop low- and moderate-income communities, Lasko said. Mortgage bankers do not take funds from depositors located in a primary community, and are inherently unable to meet CRA-type criteria.
Since mortgage bankers do not have a built-in customer base of depositors, Lasko said, they do not have defined primary market areas in which their low-mod lending performance could be readily measured.
Lasko also said Fiechters proposed use of the FHLB system as a model reflects a deep misunderstanding of the fundamental differences between mortgage banks and depository institutions. FHLB members may draw on their deposits, sell their own stock or sell their mortgages into the secondary market to replenish their funds, he said. They are not dependent on the FHLB as the exclusive source of their capital. Mortgage bankers ... can only sell their loans into the secondary market.
Fiechters proposal comes as banking regulators wrestle with revisions for CRA regulationssomething Fiechter said regulators were unsure of when they would be complete, or what they would call for.
RELATED ARTICLE: Fannie, Freddie Are Regulators Under OTS Plan
Acting Office of Thrift Supervision Director Jonathan L. Fiechter offered an instantly maligned proposal July 20 that would bring mortgage bankers, credit unions and other financial institutions under Community Reinvestment Act-type regulations, as well as give Fannie Mae and Freddie Mac regulatory authority of those institutions.
Fiechter said the proposal had not been endorsed by the Clinton administration and gave no indication about when his rough outline would be completed and open for comment. The rough proposal, as released by the OTS, would provide for:
Fannie and Freddie would establish uniform guidelines regarding community lending performance. All sellers not now subject to the CRA would be required to meet these guidelines if they wish to continue selling their loans to the government-sponsored enterprises. At a minimum, the guidelines would require them to:
*Identify the primary communities served by each seller;
*Explain the specific lending programs and outreach efforts designed to benefit these communities, with an emphasis on low-mod-income neighborhoods within these communities; and
*Offer a geographic analysis of lending patterns, with explanations for any disparities.
Sellers not now subject to CRA would also have to show they have engaged the public in developing their community investment program. This program would require management to identify the local communities served by their businesses, ascertain the credit needs of those communities and develop responsive products.
Entities wishing to do business with the GSEs would be required to conduct self-assessments of their performance under these guidelines on a biennial basis and submit them to the GSEs.
Evaluations of self-assessments would be conducted by the GSEs to determine if guidelines have been met. As with the Federal Home Finance Board programwhich was the model for this proposalthe public would have an opportunity to comment on these self-assessments. If a lender does not meet the guidelines, it would not be permitted to sell loans to the GSEs until it has taken demonstrable, affirmative steps to fulfill its community investment obligation.
While the oversight efforts would be administered by the GSEs, HUD and the Office of Federal Housing Enterprise Oversight could oversee the process and ensure the GSEs effective-ly implement the program.