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Following bankers' positive reaction to the bureau's QM regulation, industry observers are optimistic about the prospects for added flexibility in the QRM rules that will follow.
January 23
WASHINGTON — Community bankers should continue to bolster lending despite challenges created by compliance with a host of new Dodd-Frank regulations, Federal Reserve Gov. Elizabeth Duke said Tuesday.
Bankers have argued that the slate of rules is too burdensome, and may force them to pull out of certain markets. This is particularly true for residential mortgages, where banks face several new regulations.
But Duke said community banks must find a balance in complying with a new set of requirements while not abandoning the product.
"I think it is unfortunate when I hear some bankers say that they will stop offering mortgages if they can't make them the same way that they always have," said Duke, in prepared remarks before the Southeastern Bank Management and Directors Conference at the University of George in Duluth. "While I certainly understand their frustration, I still believe that community bankers can respond within the new environment by creating products that are profitable and meet the needs of their customers, while still managing their interest rate and funding risks."
The Consumer Financial Protection Bureau released a rule last month that said all lenders must ensure borrowers have the ability to repay their loans, including creating standards for a set of extra-safe loans known as "qualified mortgages." The QM rule granted banks a legal safe harbor for prime loans, but mandated specific loan terms and pricing criteria.
It also included exceptions for community banks, including allowing loans with balloon payments, which are generally not approved under QM, for small institutions in rural and underserved areas.
Separately, the CFPB also excluded many small banks from the provisions of new servicing requirements.
Duke, a former community banker, said such exceptions are "especially important" given that small banks are important lenders in the mortgage market. It also represents a significant portion of lending by community banks and such institutions are "quite responsible" in their practices, she said.
While community banks didn't necessarily engage in some of the more risky residential mortgage lending practices that spurred the financial crisis and tend to have lower delinquencies on loans made to prime borrowers, some of those loans shared similar qualities as other troubled loans.
"Residential mortgage loans made by community banks do frequently share some characteristics, such as higher rates and balloon payments, with the subprime lending that proved to be so disastrous," said Duke.
Perhaps even more pressing for community banks were their lending practices for construction and land development — a significant source of problems during the crisis.
Regulators issued guidance in 2006 on the risks from different types of commercial real estate concentrations and rapid growth of such portfolios. While the guidelines set a threshold for the ratios of construction and total CRE lending to a bank's capital, it wasn't mean to result in a "hard cap," said Duke. Rather, it was intended to "trigger a conversation" with the bank's supervisor about the firm's ability to manage risk rising from such concentrations.
Duke asked bankers for feedback on how useful the guidance has proved to be as regulators continue to examine the issue.
Separately, she addressed the importance of small business lending to community banks versus their larger counterparts.
"I think it's critically important for bank boards of directors to insist on appropriate risk management that retains the flexibility to use the bankers' knowledge of their customers' business to their best advantage," said Duke. "And it is equally critical that supervisors develop tools to measure the overall effectiveness of risk management in small business lending without being overly prescriptive."
Duke said regulators would continue to pursue research to determine the impact of rules on community banks, but urged bankers to continue to "communicate about the challenges that regulations pose" on them.
"Yes, the regulatory environment is challenging and the economy remains weak in many areas," said Duke. "But all our research shows that with creative, engaged bankers and strong risk-management processes, community banks can continue to not only survive but to thrive."
