Lawmakers sided with community banks on Tuesday in expressing concern that a pending risk retention rule and other new regulations will soon drive small institutions from the mortgage business.
At a Senate Banking Committee hearing, lawmakers were sympathetic to banker arguments that they will be unable to compete with the largest banks because of the sheer number of regulatory requirements.
"You have a small bank out there with a limited ability to respond to the requirements of Dodd-Frank," said Sen.
Mike Johanns, R-Neb. "They are getting to the point [that] they're saying, 'Why are we doing this? It doesn't make sense for us to be in the mortgage business.'"
Bankers are largely focused on a risk retention rule that would require lenders to retain at least 5% of the credit risk of loans they sell into the secondary market unless they met certain narrow criteria designating the loan a "qualified residential mortgage."
During the hearing, bankers said the QRM, which would require borrowers to put down at least a 20% downpayment and meet other requirements, was too restrictive. If it isn't broadened, they argued, community banks will not be able to compete in the mortgage market.
"Right now, in terms of determining whether or not we are going to be in the mortgage business or not is this whole discussion circulating around a 'qualified residential mortgage,'" said Christopher Dunn, executive vice president of South Shore Saving Bank, who testified of behalf of the American Bankers Association. "If that stays as currently proposed … a lot of the loans that otherwise are being made today to qualified borrowers will not be made in the future."
The 5% risk retention and the QRM label were intended in Dodd-Frank to ensure better underwriting for loans sold to the secondary market. In the March proposal, regulators said that to meet QRM criteria, a borrower not only has to make the high down payment, but also has to comply with debt-to-income restrictions and retain strong credit histories.
Supporters of the narrow exemption say that the rules should keep risk retention as the norm, and that broadening the QRM category could overheat the mortgage market, as rampant lending did before the crisis.
But there appeared to be no supporters for the proposed rule at Thursday's hearing.
Jack Hartings, president and CEO of the Peoples Bank Company, speaking for the Independent Community Bankers of America, echoed Dunn's remarks, saying he's received several emails from local community banks about their concerns over regulatory overload.
"A lot of the smaller institutions are… leaving the market just simply because it's too cumbersome," said Hartings. "It seems sad to me. That's really the heart of our business as community lenders to take care of our communities."
Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, stressed a housing policy should be based on a sound underwriting, sound economics and protecting the taxpayer, but not at the exclusion of prohibiting access to credit to low and moderate-income borrowers.
"There are a lot of good borrowers out there who don't necessarily have 10% or 20% down and when you look at who's in that category it's often low- to moderate- income households," said Skillern. "We're opposed to QRM because it draws that band around what's prime much too narrow, and it's not good for the housing market as a whole or for local communities."
Sen. Kay Hagan, D-N.C., agreed, saying in her state people would have to save for more than 15 years to place a 20% down payment to buy an average-priced home.
"I think that's definitely pricing people out of markets, and unreasonable," said Hagan.
The concerns on risk retention were part of a broader point from bankers, who said their primary worry is regulatory overkill.
"We look at regulation as a 'pile on,' said Hartings. "Sometimes we're asked, 'What regulation would you like to see eliminated?' It's not one regulation, it's every regulation, and it continues to pile on, and that's really the difficulty that we have."