Why federal CRA requirement on IMBs is not necessary

IMBs are already serving their communities

Federal Reserve Chairman Jerome Powell recently announced his support to extend the Community Reinvestment Act (CRA) to nonbanks. 

The Community Home Lenders Association can’t speak for other nonbank sectors — but applying CRA to independent mortgage bankers seems like a solution in search of a problem. The Urban Institute regularly cites statistics showing IMBs do a better job than banks of serving underserved borrowers, as measured by metrics such as FICO scores and debt to income ratios. A November 2020 Greenlighting Institute Report concluded that in California “Non-bank lenders make twice as many home purchase loans to low-income borrowers as mainstream banks.”

Since the 2008 housing crisis, banks have increasingly resorted to mortgage credit overlays, in order to focus on higher income borrowers so that they can cross sell other bank products. People also generally understand that the big bank push to replace the QM DTI standard with an APOR metric is NOT based on a desire to do more mortgage lending to lower income families — but instead to well-heeled borrowers with a high DTI and a lower LTV.

Therefore, the mortgage questions federal policymakers should be asking are: 1) Why do IMBs have a much better mortgage access to credit record than banks? (2) In light of this, why do banks have less stringent consumer protections, such as an exemption for 99% of banks from CFPB enforcement (while not even the smallest IMB is exempt) or exempting all bank mortgage loan originators from the SAFE Act test and continuing education requirements?

Instead, we see calls to apply CRA to IMBs. IMBs are already subject to Fair Housing requirements and supervision by every state they do business in. A federal CRA requirement on IMBs would merely impose unnecessary regulatory compliance costs and burdens on the strongest source of mortgage loans to minorities and underserved borrowers that we have today.    

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This makes no sense for many reasons. CRA is designed to prevent banks from diverting funds OUT of a community where they take deposits in order to lend in other communities. IMBs do the opposite. IMBs access capital markets (like Ginnie Mae and GSE MBS) to flow credit INTO local communities, including many communities with a limited bank presence.

Second, banks are subject to CRA because they have access to cheap federal funds. However, unlike banks, IMBs don’t have access to taxpayer-backed FDIC-insured deposits. Unlike banks, IMBs don’t have access to the Federal Reserve discount window. Unlike banks, IMBs don’t have access to Federal Home Loan Bank advances that help banks fund mortgage loans.

Third, the term “Community Reinvestment Act” underscores the premise that banks must reinvest in communities where their branches take in deposits. However, without deposits coming from specific locations, it is unclear what the local community is that an IMB would have to “reinvest” in. 

An IMB typically establishes offices in certain locations, so it is reasonable that they should serve borrowers in that community. But does that mean they have to spend resources to market to borrowers near to that community (and if so, how far away)? Or to all borrowers in the state(s) they operate in? 

Fourth, it is important for Washington policy makers to understand the core business model of IMBs. IMBs — particularly smaller ones — don’t make portfolio loans. Instead, they must follow underwriting standards of federal agency loans (FHA, RHS, VA, Fannie Mae, Freddie Mac) and state bond programs — both of which focus more on underserved borrowers. 

A good example of why CRA for IMBs is problematic is the January PSPA restrictions adopted by FHFA and Treasury on so-called “higher risk” GSE loans to borrowers with higher DTIs and higher LTVs. If IMBs were subject to CRA, would individual lenders be found in CRA non-compliance because they reduced lending to minorities and underserved borrowers in their community in response to the strict GSE volume cap now imposed on such loans? 

Finally, how would IMB compliance be enforced? IMBs have no federal financial regulator comparable to the Fed or OCC, nor is there any federal merger approval authority, which is the most significant CRA enforcement tool.

The small and mid-sized IMBs that CHLA represent welcome a vigorous debate about who is doing the best job of providing mortgage access to credit to minorities and underserved and low-income borrowers, about who is best serving their local communities, and about who is providing the most personalized service. 

But applying a bank-based regulatory scheme on IMBs that don’t have either access to federal funds or a community-based deposit base will just impose an unnecessary new regulatory cost burden on IMBs — while doing nothing to improve consumer access to mortgage credit.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Scott Olson at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]

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