Small, community-based, nondepository mortgage lenders are struggling to stay afloat after being bombarded with a wave of federal lending legislation and regulation in the past few years, a group of lending industry leaders told members of Congress yesterday.
The House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit conducted a hearing to provide an overview of the current regulatory climate and how it affects the ability of community financial institutions to provide financial services or products to consumers.
Randy Neugebauer
“While we often talk about regulatory burdens in compliance terms, burdensome, duplicative and unnecessary supervision and examination can also burden community-based lenders,” said Rep. Randy Neugebauer, R-Texas, chairman of the committee. “It is important for this committee to examine the regulatory structure of these products, and understand how a federal regulation impacts credit access and product choice for consumers,” Neugebauer said.
Although the goal of the Dodd-Frank Act and its creation of the Consumer Financial Protection Bureau (CFPB) was to make lending safe for consumers by more closely regulating large lenders and the bad actors responsible for the financial crisis and housing market collapse of 2008, the law has unfairly levied a regulatory burden on lenders of all sizes, including small lenders that are now struggling under the expense and operational challenges posed by complying with new rules, said Paulina Sepulveda McGrath, president of Republic State Mortgage Co. in Houston.
Testifying in her capacity as chair of the Community Mortgage Lenders of America (CMLA), a trade group representing both small mortgage bankers and community banks with mortgage lending expertise, McGrath told the committee that although CMLA is pleased that Congress is moving forward with regulatory streamlining for community banks, lawmakers should also consider the needs of smaller, nondepository mortgage lenders that originate about 40 percent of all conventional loans and roughly 50 percent of all loans insured by the Federal Housing Administration and Department of Veterans Affairs in 2014.
“We are a key piece of the mortgage market, especially for consumers looking to get on the first rung of the economic ladder and for those borrowers looking for, or needing, more personalized service,” McGrath said. “Unfortunately, the current regulatory burden is driving consolidation among small mortgage lenders. If this consolidation continues, the reduced competition will lead to even higher costs, and consumers will have fewer choices. As a country, we need to find a way to serve — with careful and safe underwriting — more families in their homeownership needs, particularly first-time homebuyers. If we cannot, these families will continue to pay ever-increasing rents that are outstripping income gains.”
Justin G. Friedman, director of federal government affairs for the American Financial Services Association, a consumer credit organization, noted in his testimony that the creation of the CFPB “imposes new, often duplicative, federal regulatory burdens on … state-regulated entities.”
“State regulators have a familiarity with local and regional circumstances and issues faced by lenders,” Friedman testified. “This knowledge, along with their geographic proximity to a given lender and the markets in which it operates, means that a state regulator is often the first to identify emerging issues, practices or products that may need further investigation or may pose additional risk to the financial industry and its customers.”
Friedman said currently, the CFPB may promulgate regulations impacting state-licensed companies without finding that existing state law or regulation is inadequate; determining that an estimate of the number of state-licensed or supervised entities to which the regulation will apply; describing the projected reporting, record-keeping and other compliance requirements; or identifying the relevant state statutes, regulations and enforcement proceedings with which the new federal regulation may duplicate, overlap or conflict.
“No one size fits all,” Friedman said. “Credit needs, average income and demographics vary from state to state. A given state legislature may choose to allow a product or tolerate a pricing regime of which another state does not approve. Where it comes to state-licensed consumer finance companies, we believe that decision is best left to each state capital to decide what is beneficial to their constituents.”
Diane Evans, president of the American Land Title Association (ALTA), testified that increased federal regulation has strained some related sectors of the mortgage industry like the title insurance industry, which is regulated at the state level but also falls under the oversight of federal regulators in terms of the settlement side of its business.
“This creates a complex compliance environment and increased costs for our members’ businesses, additional liability for our mortgage lender clients and confusion and frustration at the closing table for homebuyers,” Evans testified.
Evans provided the example of Nancy McNealy, an ALTA member and settlement agent from Beltsville, Maryland, who feels that “it is costing a small fortune for most title companies to retool to meet the new August requirements” of the CFPB’s TILA-RESPA Integrated Disclosures rule, or TRID.
“Nancy needed to switch software providers in order to properly support the TILA/RESPA changes,” Evans said. “With her new provider, the cost to retrieve old files and continue to access her old database is costing nearly $3,000. The cost of the new software and its installation on new computers is about an additional $5,000. For Nancy, that $8,000 in expense for her roughly $156,000 in gross revenue represents a 5 percent increase in [her] cost of doing business for one regulation in 2015 alone.”
But not all who testified agreed that Congress should give these lending institutions a break. Mitria Wilson, vice president of government affairs and senior counsel at the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization dedicated to eliminating abusive financial practices, said that in considering regulatory relief for community-based, financial institutions, “we must ensure that the institutions we provide that relief to are legitimately community-based. There is little evidence that nondepository mortgage lenders satisfy that requirement,” she argued.
“Nondepository mortgage lenders are rarely community-based,” Wilson said. “Rather than using a lending model that depends on a long-standing business relationship with a consumer and actual ties to the community that they live in, nondepository mortgage lenders often engage in a single interaction with a consumer that lives in a community where the nondepository lender has no brick-and-mortar presence.
While community bank staff averages range from 40 to 54 employees, the Community Mortgage Lenders of America notes that the average independent mortgage banker can have staff up to 250 employees, Wilson testified.
“Those numbers suggest that the compliance burden is less for nondepository lenders,” Wilson said.
