Community banks need access to secondary mortgage market: AEI report
Lawmakers should get rid of Dodd-Frank rules that discriminate against community banks and find a way for smaller banks to gain traction in the secondary mortgage market, said Edward Pinto, a resident fellow at the American Enterprise Institute for Public Policy Research in a report to the U.S. Senate Banking Committee. In his prepared testimony, Pinto told lawmakers the government-sponsored enterprises chased community banks out of the secondary mortgage market by offering better guarantees to lending institutions that delivered higher volumes. Adding insult to injury, Pinto claims community banks were subjected to higher fees even though those institutions had a history of issuing higher quality loans when compared to the industry's larger banks. "This denied community financial institutions fair and equal access to the secondary market, disadvantaged them economically, and in many cases resulted in their handing over their best customers to their large bank competitors," Pinto wrote. Instead of subjecting community banks to Dodd-Frank's qualified residential mortgage and qualified mortgage statutory provisions, Pinto believes it would be best to create a standard definition of what constitutes a prime loan. Any securitized loan not meeting this standard would be considered nonprime. Pinto believes Dodd-Frank's current construction turns the big banks into the new GSEs since they are among the few institutions that will be able to afford the influx of new rules and regulations, thereby increasing their play in the secondary mortgage markets. To ensure community banks have a role in the secondary market, Pinto argues for a joint structure that could be created by the Independent Community Bankers of America or its membership to aggregate the mortgages originated at the smaller banks. This bank service entity would then prepare the mortgage-backed securities for sale through underwriters or institutional buyers, Pinto said. Write to: Kerri Panchuk.