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7 problems NAFCU, CUNA and ICBA have with Johnson-Crapo

Trade coalition says GSE reform favors big lenders

Three financial trade associations have issued a joint letter protesting the direction in housing finance reform as biased in favor of large lenders, and they list seven specific concerns they have about Johnson-Crapo.

The Credit Union National Association, Independent Community Bankers of America and the National Association of Federal Credit Unions issued the letter ahead of the Johnson-Crapo markup coming April 29. 

“The creation of the coalition enables CUNA, along with the National Association of Federal Credit Unions and the Independent Community Bankers of America, to present a united front on key changes needed in proposed housing finance reform legislation,” the letter reads. "We understand some of the specific details of the proposal are still to be established and we hope those changes will satisfy our ongoing concerns and address the uncertainty faced by our member institutions.” 

The letter was signed by CUNA President/CEO Bill Cheney, ICBA President/CEO Camden Fine and NAFCU President/CEO B. Dan Berger.

The three associations want to ensure any housing reform proposal protects equal and competitive access for community banks and credit unions, while avoiding further concentration of the primary and secondary mortgage markets to the largest of lenders and Wall Street firms.

"We look forward to providing ongoing input on the concerns raised by community banks and credit unions as we continue to review and digest the evolving measures," the coalition letter reads. 

The seven primary areas of concern with Johnson-Crapo and the coalition’s recommendation or position are:

1) Vertical Integration

Approved guarantors can be affiliated with approved aggregators and can also be an approved private market holder of credit risk. A large depository with all of the above capabilities could dominate the market through pricing, by opportunistically leveraging either its guarantor status, balance sheet, or other types of capital market transactions, depending on market conditions. This could lead to the small lender mutual becoming uncompetitive, resulting in additional concentration of the mortgage business to the largest financial institutions and Wall Street firms.


No entity should be permitted to be a guarantor if they are an aggregator or an originator.

2) Capital Requirements

FMIC would require credit support of 10% for each pool of loans securitized and receiving the FMIC wrap. Standard credit enhancement structures would be approved by the FMIC, along with the guarantors and private market holders of credit risk that would provide them. The group is concerned specific requirements could be interpreted to be excessive when compared to the real risk to the taxpayer. The use of opaque securities based orncapital markets transactions could give the illusion of strong first-loss protection at the 10% level. More transparency and flexibility could both protect the taxpayer and maintain an affordable housing market. Upfront use of capital markets transactions would prevent the growth of multiple guarantors, and would not support the development of the TBA market for FMIC securities, both key goals in this reform.


FMIC should require a fully adequate level of capital to stand behind any of the approved credit enhancement structures. This capital should be exhausted before any FMIC guarantee is accessed. Models and historical data should be used to determine taxpayer risk, and the corresponding private capital commitment. As such, we recommend only approved guarantors may provide the required credit support in front of the FMIC guaranty. Upfront capital markets transactions or upfront securities-based transactions would be prohibited. Approved guarantors would be able to engage in capital markets transactions or other types of reinsurance transactions to manage credit risk as needed and as approved by the FMIC.

3) Additional Regulatory Authority

Under the discussion draft, FMIC becomes another regulator that could add cost and regulatory burden. FMIC would have authority to conduct safety and soundness examinations of small lenders who are approved aggregators to the Common Securitization Platform. Under the current system, GSEs only review compliance with GSE policies and procedures and generally do not perform on-site audits of most small financial institutions.


FMIC should have safety and soundness examination authority for: a) approved guarantors, b) approved mortgage insurance companies, and c) approved aggregators, originators and servicers that are non-depositories or are a subsidiary of an insured depository with more than $500 billion (indexed over time) in assets. FMIC would rely primarily on the prudential banking regulators for safety and soundness examinations and reviews of approved aggregators, originators, and servicers that are insured depository institutions with assets of $500 billion or less (indexed over time).

4) Governance of the Mutual and the Common Securitization Platform (CSP)

The Mutual would be governed by a 14-member board elected by the membership. However, the draft does not specify nor require the board to have representatives from all types of institutions who are members of the Mutual.

Under the draft legislation, the CSP would have a nine-member board of directors elected from the approved members. There is no specific representation for a small lender on the Mutual.


The 14-member board of the mutual should be structured as follows:

  • Two community banks
  • Two credit unions
  • Two non-depositories
  • One large financial institution (over $50 billion in assets)
  • Two Federal Home Loan Banks
  • One housing finance agency
  • One outside independent director
  • Three at-large members

The nine-member board of the CSP should be structured as follows:

  • CEO of Mutual
  • One community bank
  • One credit union
  • One outside independent director
  • Five at-large members

5) The Application of the QM Standard

Under the terms of the discussion draft, the existing QM definition is implied as a standard. Community banks and credit unions urge the Committee to provide more flexibility to community lenders who understand the differing needs of their borrowers. Allowing the Mutual to focus more on meeting the Ability-to-Repay factors instead of the QM standards will enable small lenders to extend additional mortgage credit to the communities they serve. Further, under the proposed language, it is questionable whether smaller institutions could qualify for an exemption, as they can now under CFPB rules.


A revised amendment would change the definition to address those concerns. The new language is consistent with the CFPB’s Ability-to-Repay rule, under which a covered loan is generally in compliance with the rule if it is a QM or meets the ATR’s factors for prudent mortgage loan originations.

6) Multiple Lender Issues

Section 335 of the discussion draft, entitled “Multiple Lender Issues,” would require any lender placing a junior lien on a property secured by a covered loan to notify the current servicer of that covered loan of the pending transaction prior to the loan consummation when the combined loan- to-value would exceed 80%. We are concerned this would cause the senior lienholder to solicit the borrower for the same credit transaction.


Lenders should be required to notify senior lienholders of any covered loan upon consummation of any junior lien where the combined loan to value exceeds 80%.

7) Streamlining Process for Fannie/Freddie Approved Lenders to Join Mutual

The procedure to become an approved lender for Fannie Mae and Freddie Mac is time-consuming for smaller financial institutions. Further, institutions already approved to participate in the current system, and in good standing, may decide a new approval process for joining the Mutual is costly.


Institutions under $500 billion in assets approved to sell loans to Fannie Mae and Freddie Mac at the time of transition should be afforded a streamlined process to become a member of Mutual.

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