A recent article in American Banker and National Mortgage News estimated that 20-25% of independent nonbank mortgage lenders "could change hands or simply shut down in the next 12 to 18 months." This should worry consumers wondering how they will obtain the credit to buy a home.
Nonbank community lenders have led the charge in recent years to expand access to mortgage credit while the nation's megabanks have been more focused on designing their credit products so that better-heeled customers can get loans. Community-based lenders are also important because they service the loans they originate, providing continued localized service to borrowers rather than from a large megaservicer located halfway across the country.
The article explained that independent mortgage lenders are bracing for a wave of consolidation "prompted by heavy compliance costs and a tepid housing recovery."
Unlike other product categories for which the rules are different for banks versus nonbanks, all mortgage lenders have to comply with the regulations arising from the Dodd-Frank Act. Those include the new integrated disclosure requirements known as TRID — that combine the disclosure regimes of the Truth in Lending Act and Real Estate Settlement Procedures Act — as well as the compensation requirements for loan originators and the "qualified mortgage" underwriting rules.
Just like community banks struggle with the compliance burden, so too do community-based nonbanks. They lack the scale enjoyed by the very large banks, which can make up for their fixed compliance costs with significant loan volume. Megabanks can also more readily afford compliance teams, attorneys and lobbyists, spreading them out over a larger revenue stream. But the time and cost of compliance takes a proportionately larger toll on smaller lenders — whether a nonbank or a community bank mortgage lender.
Yet there are specific steps lawmakers can take to hold back the forces of consolidation.
Dodd-Frank did include some sensible exemptions for smaller companies. For example, the law authorized targeted exemptions from some Regulation Z and Regulation X servicing requirements for lenders that service fewer than 5,000 loans. But this threshold is too low to have much of an impact. Last year the House Financial Services Committee reported out a bill that would raise the exemption threshold to 20,000 loans. Lawmakers should revive the effort to pass this bill, and the legislation should be amended to include loans backed by the Federal Housing Administration and the government-sponsored enterprises.
Meanwhile, Congress should also equal the regulatory playing field by providing small nonbank mortgage lenders with an exemption from Consumer Financial Protection Bureau exams, similar to the exemption provided to banks under $10 billion in assets.
Both smaller banks and nonbank lenders are subject to supervision from a wide range of state and federal regulators, including the FHA and the Federal Housing Finance Agency. When Congress created the CFPB, it exempted 99% of banks from supervision by the bureau. But no exemption was provided for even the smallest nonbank lenders. Congress should correct this imbalance by creating a targeted exemption for responsible nonbank mortgage lenders that either have a net worth of $25 million or less or that originated fewer than 25,000 loans in the prior year.
The CFPB can also help with the burden of compliance. The recent rollout of TRID left many smaller lenders struggling to understand how to handle the minute details of individual disclosure situations in the context of complicated new rules. Large lenders can address these details with their compliance economies of scale.
Small lenders' compliance worries are not limited to TRID. All independent mortgage lenders want is clear guidance from the CFPB on how to comply with rules and the confidence that good-faith compliance with the bureau's directives will not result in enforcement actions and financial penalties. It is these types of concerns that are driving many owners to decide it is not worth the risk, or the stress, to stay in the mortgage business — hence the headlines about industry consolidation.
We understand that the issue of regulatory fairness may sound parochial. But the consequences are very real for a consumer that calls his or her local community mortgage lender only to have the call transferred to a larger, less personalized firm across the country.
It is time to preserve the community aspect of mortgage lending.
Scott Olson is executive director of the Community Home Lenders Association.