The Financial CHOICE Act (FCA) that recently passed the House Financial Services Committee provides regulatory relief for independent mortgage bankers (IMBs).
IMBs are nonbank mortgage lenders – the very lenders that stepped up to expand mortgage access to credit for consumers since the 2008 housing crisis, at the same time that many banks exited the mortgage lending business or imposed credit overlays to limit loans to high FICO borrowers.
The FCA curtails the Consumer Financial Protection Bureau’s authority in certain areas that affect IMBs – eliminating CFPB exam authority, ending CFPB authority to audit third party vendors, and eliminating CFPB actions based on unclear standards inherent in UDAAP. But one additional provision is needed to ensure that small IMBs are treated the same as banks are under the bill.
IMBs are supervised and regulated by every state in which they do business. But despite the fact that IMBs did not cause the housing crisis, federal laws have significantly expanded their regulatory compliance burden in the wake of that crisis. The 2008 SAFE Act requires that every loan originator that works at a nonbank mortgage lender is required to pass the SAFE Act qualifications test, an independent background check, and pre-licensing and continuing education courses (requirements that all banks are exempt from).
And, with passage of Dodd-Frank, even the smallest IMB is subject to the dual consumer regulatory jurisdiction of both the CFPB and the states - along with new Dodd-Frank mortgage rules. Yet, this dual regulatory process for IMBs currently does not apply to the 99% of banks that have been exempt from CFPB exams and enforcement since the passage of Dodd-Frank.
This exemption for smaller banks was created in recognition of the burden of dual regulatory costs, as well as the fact that small entities pose less of a risk to consumers simply by virtue of their more limited size and consumer impact. The FCA expands these exemptions to the nation’s largest banks. The question is why even the smallest IMB should not enjoy the same treatment.
Some might argue that we need the CFPB to police the smaller IMBs, to make sure they follow the rules. But that view overlooks the fact that IMBs already have a host of regulators. IMB compliance with federal (and state) consumer laws is supervised and enforced by every state in which an IMB does business. IMBs are also subject to scrutiny by FHA, GNMA, Fannie Mae, and Freddie Mac when they originate or securitize loans guaranteed by those entities. And IMBs also have outside auditors and scrutiny by warehouse lenders.
A small lender exemption is also rooted in a difference in the relative compliance burden. CFPB compliance costs are not a big financial burden for the large banks or even the large non-bank mortgage lenders, which can spread those costs over a large number of loans. But for smaller firms, they are significant.
CHLA has done analyses of CFPB compliance costs. We found that the same level of CFPB compliance costs that might add only $5 or $10 per loan for a large bank or non-bank lender could add $100, $500, or even thousands of dollars per loan for the smallest IMBs. This can make small IMBs non-competitive – a barrier to entry or an incentive to sell an otherwise profitable firm to a hedge fund or mega-firm. This reduces competition, which is bad for consumers.
Therefore, we would encourage the FCA to be amended to provide for a CFPB exemption for smaller IMBs that is identical to the one given to all banks under the bill. A model for this approach is H.R. 1964, legislation recently introduced by Rep. Roger Williams (R-TX). That bill exempts small, community-based IMBs from CFPB enforcement actions – providing targeted relief to IMBs that have a net worth of less than $50 million and that originate fewer than 25,000 loans a year.
Community non-bank mortgage loan originators are leading the way in providing access to mortgage credit for consumers. A streamlined regulatory process will help them continue that role.