Mortgage Rules Weigh on Minds (and Wallets) of Community Bankers

NEW ORLEANS — Mortgage rules are a growing source of frustration for community bankers.

The changes to mortgage-disclosure requirements that took effect in October are stretching out closing times and forcing small banks to centralize loan processes and spend more on training, executives said at the Independent Community Bankers of America conference being held here this week.

Those changes represent another example of increased regulatory burden that has been pressuring smaller banks to get bigger or sell themselves.

"There's so much regulation that doesn't seem to benefit anyone," said Lloyd Murphy, the president and general counsel at Tuscola National Bank in Tuscola, Ill. "All of these changes just confuse people more than anything so that borrowers no longer understand the transaction."

While some changes — including an initial mandate that banks clearly list a loan's annual percentage rate — were beneficial, Murphy said, continuous changes and added requirements have undermined that benefit by making the overall application process too burdensome for borrowers.

Lenders at the $78 million-asset bank could spend "an hour explaining the forms for a single-family home," Murphy said.

The latest instance of excessive regulation, in the minds of bankers, is the Consumer Financial Protection Bureau's disclosure rules, known as "Know Before You Owe," or the Truth-in-Lending Act and Real Estate Settlement Procedures Act integrated disclosures.

"TRID has been a big hassle," said Matt Ricker, president and chief executive of the $530 million-asset Volunteer State Bank in Portland, Tenn. "It's changed the timing of the closing of our loans and training for employees. We've had to centralize the processing."

Kirk Pittman, president and CEO of Seiling State Bank in Seiling, Okla., had been optimistic about community banking, but post-crisis reforms have made it difficult for small institutions to originate mortgages, so much so that he has heard of other bankers exiting the business.

Existing-home sales plunged in November from a month earlier, and some industry observers said TRID was a contributing factor.

"A lot of banks don't want to offer mortgages because of the rules," Pittman said.

Community bankers are not the alone in this discussion.

Robert Wilmers, the chairman and CEO of M&T Bank in Buffalo, N.Y., wrote in his annual letter to shareholders that the expense of complying with myriad new regulations is straining the budgets of small and midsize banks.

Drawing from his own experience with mortgage lending, Wilmers noted that three agencies analyzed the $122.8 billion-asset M&T's mortgage portfolio last year, and each required it to submit a unique sample of mortgages. M&T underwent 36 different inspections across 10 different agencies, with each review bringing up to 15 examiners to the bank.

Ongoing consolidation has been a frequent topic of discussion during this year's conference. Acquisitions slowed earlier this year after a decline in bank stocks, and many community bank executives pledged they would fight to stay independent.

"We have no intention of being acquired," Tuscola National's Murphy said. "We've actually kept our eyes open to acquire something."

Still, banks are facing a variety of pressures to sell, ranging from increasing regulatory requirements and technology costs to margin pressure and succession issues.

United Community Bank of North Dakota in Leeds agreed to sell itself last April to the $1.6 billion-asset American Bancor after realizing that there was no one to take over for its elderly owners, said Bob Larson, market president for American Bank Center.

The added scale has helped the $322 million-asset United do more than it could have accomplished on its own, Larson said.

"Being bigger has allowed us to do things we couldn't do before," Larson said. "It comes to a point that you can't afford things like the technology. You can outsource some of it, but it's not just regulatory reasons for banks selling."

Competition is also prompting more banks to consider selling, bankers said. For example, nearly 60 banks are based in Montana, which has just 1 million people, or less than half the number of cows in the state, said Larry Dreyer, chairman of Opportunity Bank of Montana in Helena. This competition as well as management and ownership-succession problems are leading some to sell. Opportunity, a $625 million-asset unit of Eagle Bancorp Montana, bought the Montana operations of Sterling Financial in Spokane, Wash., in 2012.

"Montana is overbanked, as most places are," Dreyer said. "You can't swing a dead cat in some of these towns without hitting a bank."