Regulatory playing field for banks, nonbanks is anything but level

Policymakers in Washington often have the objective to level the regulatory playing field. But federal oversight of mortgage bankers has been anything but equitable.

The Consumer Financial Protection Bureau was given authority to examine both bank and nonbank mortgage lenders, the idea being that nonbanks should not escape federal supervision because they were not FDIC-insured. But the fact is that 99% of banks (those with assets of less than $10 billion) are exempt from CFPB supervision. The same cannot be said about small, independently operated nonbanks.

It is time for officials to pursue policies that truly make the playing field level so that all mortgage providers — nonbanks and banks — can continue to drive the housing recovery.

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That is the central conclusion of a report the Community Home Lenders Association released last month on “independent mortgage bankers” (also known as IMBs).

First, it is important to understand the definition of “independent mortgage bankers.” Paradoxically, they are not banks at all, in the sense we normally think of banks, since IMBs are not FDIC-insured depository institutions. Instead, IMBs are nonbanks that typically fund their operations through a combination of warehouse loans and putting their own personal capital at risk.

IMBs are generally small businesses, with mortgage lending and servicing being their sole or primary business. But they are referred to as “mortgage bankers” because, unlike mortgage brokers, they fund their own mortgage loan originations — and then typically they sell off their loans into the secondary market.

Why are IMBs important? The CHLA report chronicles the fact that after the 2008 housing crisis hit, many banks exited the mortgage business or imposed credit overlays, limiting mortgage loans to only the highest FICO or credit-quality borrowers. At the same time, IMB mortgage lending significantly increased, filling the vacuum left by banks’ retreat.

In 2016, IMBs originated 85% of Federal Housing Administration mortgages, up from 50% in 2010. The CHLA report also includes data showing that the share of Ginnie Mae loans originated by IMBs exploded from 12% in 2010 to 73% last year. These statistics are reinforced by a recent Urban Institute report that highlights the “growing importance of nonbanks in the Mortgage Market” and states that “they have also played an important role in easing access to mortgage credit.”

A top priority of the Trump administration has been to streamline regulation of key financial services providers to help strengthen the economy. The June Treasury Department report on “core principles” for reforming the regulatory structure points the way to much-needed change by citing the dual regulation of nonbanks by both states and the CFPB. The report recommends that “supervision of nonbanks should be returned to state regulators, who have proven experience in this field and an existing process for interstate regulatory cooperation.”

Unlike banks, which enjoy an exemption from CFPB supervision if they have less than $10 billion in assets, even the tiniest nonbank IMB is subject to CFPB exams, fines and enforcement actions. We don’t have a one-size-fits-all approach to CFPB regulation of banks, and we shouldn’t have one for nonbanks. Smaller IMBs don’t have the economies of scale that large banks (or large IMBs) have to absorb the costs of dual regulation by both their primary regulator and the CFPB.

Therefore, the CHLA continues to advocate for targeted relief from CFPB scrutiny for smaller IMBs. This can be done legislatively, such as through the bill sponsored by Rep. Roger Williams, R-Texas, or through CFPB action pursuant to a statutory requirement to tier its regulation based on a firm’s size and consumer impact. IMBs are committed to consumer protection and full compliance with consumer mortgage rules. An exemption for small IMBs, like the exemption for small banks, would still leave their primary regulator to enforce consumer protection rules. And, under Williams’ bill, the CFPB could still step in to take an enforcement action if it receives a referral from an IMB’s state regulator.

Another area where more equitable treatment between banks and IMBs is appropriate is the huge disparity in qualification requirements for mortgage loan originators.

Mortgage originators at nonbanks must pass a test under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), an independent background check, and prelicensing and continuing education requirements, while loan originators at banks face much less rigorous registration requirements under the law. Surely, the recent consumer scandals hitting Wells Fargo — including allegations of fees tied to mortgage rate locks — raise questions about this loophole, which make it possible for mortgage originators who have failed the SAFE Act test to still originate mortgage loans at a bank.

Congress is considering changes to address the consequences of this patchwork of regulatory scrutiny. But CHLA believes a more straightforward reform is available: The CFPB should simply require every mortgage loan originator to pass the SAFE Act test and an independent background check.

The importance of IMBs to the mortgage and housing markets cannot be denied. CHLA urges policymakers to focus on this important force in facilitating affordable homeownership.