Give Small Banks a Break on CFPB Mortgage Rules

As many Americans look for a break from our nation's roiling fiscal and economic uncertainty, community bankers are seeking relief from another source of anxiety. The bevy of new mortgage rules released by the Consumer Financial Protection Bureau earlier this year collectively take effect on Jan. 10, 2014. The CFPB has acknowledged that community banks were not responsible for the mortgage crisis that led to the new regulations. Nevertheless, these institutions are now required to ensure their mortgage businesses, which took years to build, comply with the myriad new rules in only a few months.

This single time frame for lenders large and small has presented significant challenges. To avoid limiting access to credit for millions of Americans, the CFPB should extend the mandatory compliance deadline to allow additional transition time for implementation.

Regulators should understand the impact of the new mortgage rules on community banks and others in the mortgage industry. With new rules on customers' ability-to-pay, appraisal and escrow requirements for higher-priced mortgage loans, high-cost mortgages, mortgage originator compensation and qualification standards and mortgage-servicing requirements, there's no shortage of new regulations. In fact, the change to the industry is unprecedented.

Community banks tailor their businesses to fit the ideals, values and needs of their individual communities. Because of this business model, their mortgage loan volume is smaller than that of larger, nationwide banks. Complying with many rules in a short amount of time can be particularly daunting for community banks with fewer staff, legal and compliance resources.

While regulators included some welcomed accommodations for community-based financial institutions in the final rules, the regulations will nevertheless mean dramatic changes to our mortgage business.

In recent feedback, Independent Community Bankers of America members said they will not be able to comply with all of the new mortgage rules by January. Reasons include not having enough time to change procedures or train staff as well as unprepared vendors and suppliers. Given this feedback, we are concerned community banks not ready by the deadline will suspend their mortgage-lending business until they are able to fully comply with the new rules and their subsequent amendments. Under the best-case scenario, they will significantly tighten their underwriting criteria to limit their risk and liability.

Either way, the result will be limited access to credit for consumers, which is bad news for communities across the nation. Not only do community banks account for up to 20% of the market, they also provide a disproportionately large number of loans to low- and moderate-income borrowers and strengthen the housing markets with their conservative underwriting practices. Cutting off this source of credit will mean dire consequences for borrowers, particularly in rural and underserved communities whose only access to credit is their local community bank. We don't believe this was the intention of the CFPB, whose mission is to protect consumers in every community. 

Due to the broad and far-reaching impact of the new mortgage rules taking effect in a matter of months, the CFPB should extend its mandatory compliance deadline. Allowing a further transition period of nine to 12 months would better ensure community banks' complete compliance with all the requirements. Meanwhile, community banks will be able to continue providing the safe and solid mortgage loans they are known for — ensuring uninterrupted access to mortgage services for their customers.

The CFPB's new mortgage regulations are designed to ward off the kinds of unscrupulous mortgage-lending practices that drove the housing and financial crises from which we are still emerging. Driving away the responsible lenders that the CFPB itself has acknowledged were stalwarts of sound mortgage lending will only harm the mission of protecting consumers.

Instead, giving relationship-based lenders more time to comply will ensure this critical source of mortgage credit can continue to support our housing recovery as the new regulations are implemented. This will ensure important relief in the months ahead for community banks and the customers they serve. For consumers across America, the rewards of such an extension will be exponentially higher than any costs.

Karen Thomas is senior executive vice president of government relations and public policy for the Independent Community Bankers of America.