More than half of community bankers view increasing regulations and the attached uncertainty as the greatest immediate challenge to their mortgage businesses, according to a new study commissioned by Ellie Mae (ELLI).
Citing new regulations born from the Dodd-Frank Act and the Consumer Financial Protection Bureau, 51% of community bank executives surveyed said dealing with changing compliance standards is their most significant challenge.
“Regulation is becoming a big issue and you’ll see people exiting smaller community banks,” said a banker who participated in the study and is concerned that community banks will lose customers to larger banks.
“It has become overwhelming for smaller players that were only able to do a handful of deals a month. Business might flow to larger-size banks. As people get used to the regulations, they might re-enter the business or they might not,” the banker said.
In June, a Texas community bank and two nonprofits filed suit against the CFPB, claiming the bureau's structure and the president's means for appointing Richard Cordray CFPB director violated provisions of the U.S. Constitution.
Consumer protection groups and mortgage industry representatives disagree over a CFPB proposal that would allow consumers to sue banks for qualified mortgage lending violations.
While the Dodd-Frank Act caps possible damages awarded under QM violations to roughly three years of payments, mortgage bankers believe the damage to smaller banks in particular could be severe.
"If you look at the size of the penalties, one infraction can be ruinous to a community bank," said Debra Still, chairman-elect of the Mortgage Bankers Association, said. She added that including court and litigation costs, one loss in trial could cost as much as $200,000.
"If you liken that to the repercussions of a repurchase, those are the same extraordinary numbers that would cause small community lenders not to lend," Still said.
Others say litigation risk is still extremely low partly because it is rare for borrowers in foreclosure to retain an attorney. A Brennan Center for Justice report shows more than 80% of borrowers in foreclosure went without legal representation.
The study from Ellie Mae also found that smaller community banks, or those below $500 million in assets, are more likely to view compliance as a staffing issue as they need to attract and retain the appropriate professionals to ensure compliance. However, mid-size and large community banks surveyed tended to view the impact of compliance as a service issue and expect new regulations to cause a slowdown in approval processes for customers.
“I believe that if the community banks do not grow their mortgage divisions, then the cost of compliance will lead to unprofitability," another banker said. "The ones that are doing $300 million to $400 million per year will remain viable.”
Community banks must also contend with proposals to implement Basel III capital standards, which they say would impose excessive burdens on them.
“Community banks are common sense institutions that maintain the highest capital levels in the banking industry — they should not be subject to the same complex standards required of larger and riskier financial firms,” said Bill Loving, chairman-elect of the Independent Community Bankers of America.