State Regulators Urge More Carve-Outs for Small Banks

WASHINGTON — State regulators are pushing for broader exemptions for community banks under new mortgage rules due to take effect next month.

In a white paper issued by the Conference of State Bank Supervisors on Monday, the regulatory group said they "vigorously" oppose the federal supervisory model of applying the same rules to all types of banks.

They urged federal policymakers to tailor a number of significant rules, including the Consumer Financial Protection Bureau's "Qualified Mortgage" regulation, to broaden exemptions to nearly all community institutions.

They argued that small banks will be afraid to make loans that do not meet the Qualified Mortgage rule, which outlines underwriting criteria lenders must meet to win additional protection from lawsuits.

"Our issue right now truly is that the banks are just not sure of taking on what they see as additional risk in an environment where they're already feeling a huge burden," said Shane Deal, deputy commissioner of financial institutions for the Minnesota Department of Commerce. "I don't think anybody is arguing that there needs to be a look at and verification of an ability-to-repay. But… from our perspective we think all community banks, if they portfolio a loan, should meet the QM standards."

Though the final Qualified Mortgage rule is unlikely to be changed much before it goes into effect Jan. 10, the CFPB did amend the rule earlier this year to temporarily extend QM status to certain small banks that make balloon loans for two years. And banks with less than $2 billion in assets and make fewer than 500 mortgages a year already automatically qualify for QM status. While the CSBS paper supported those changes, it said nearly all community banks should be exempt from sweeping rules like QM.

"There's not just a learning curve for bankers, there's a learning curve for regulators here as well. This was a change in the way mortgage loans are being originated so we have to figure out how that is," Deal said, adding they are working with federal regulators to ease banks into the rule come January. "We'll never perform a 'gotcha' examination. And it will be more of, to be honest with you, probably the first couple of examinations we have under this regimen will be training-type sessions."

Overall, the white paper urges policymakers to tailor regulations based on a bank's risk profile, size and business model.

"Consolidation will occur and we're all going to have to deal with that. However, we must get this regulation piece right and it must be the right size for the institutions involved," said Charles Vice, Kentucky's banking commissioner and chairman of the CSBS. "It will have a significant impact on small businesses, access to credit for every American, market stability and growth in small towns."

Specific suggestions included removing barriers for small bank holding companies to raise private capital and for regulators to take a clearer stance on fair lending issues, particularly their controversial use of disparate impact when a lender is seen as unintentionally mistreating a protected class. While the white paper largely sought regulatory relief for community banks, state regulators indicated on the call that further regulation needed to be directed toward virtual currency and online payday lenders.

"In a state level, we have a unique perspective of being — unlike any federal prudential regulator — having supervisory authority on all financial intermediaries in the payment system including banks, credit unions and money transmitters," said David Cotney, the Massachusetts banking commissioner. "So we are actively engaged in looking at payment issues and evolving payment trends."

Cotney said during the call that CSBS is forming a new task force to be announced later this week that will look at evolving payment trends and systems such as Bitcoin. Though the virtual currency has raised significant political and regulatory concerns, state regulators cautioned they were not trying to eliminate it. They were only seeking ways to regulate what they view as another form of monetary transmission.

State regulators are "engaging industry to determine what is the right level of regulation; to determine that consumers are protected; to ensure that money gets from point A to point B, that there's someone standing behind who they say they are," said Cotney, who added his state has only received one Bitcoin licensing application. "This is a means of sending money, albeit it has the promise of being faster or a cheaper means, but it's still a means of sending money.... So we want to make sure that people get their money when they send it and we've taken action against companies when they don't send money."