The U.S. Government Accountability Office released a report in July examining the impact of the Consumer Financial Protection Bureau’s new mortgage servicing and lending rules on community lenders. The GAO wanted to determine to what degree, if any, the rules are affecting mortgage activity by community banks and credit unions.
“There was some concern that community lenders would be affected by changes in mortgage-related requirements that resulted in increased costs — for example, to add more staff, update systems and hire vendors,” said Matthew Scire, director, financial markets and community investment for the GAO. “However, this study indicates that we’re not really seeing this right now.
“For the most part, community lenders really want to keep the mortgage origination part of their business because it helps them develop relationships with customers and is part of their array of financial products,” he added. In addition, the GAO report found community banks share of the mortgage servicing market has grown over the past several years.
Financial crisis
Soon after the financial crisis erupted in 2008-2009, regulators enacted new rules related to mortgage servicing and regulatory capital. Small banks and credit unions that service fewer than 5,000 mortgages are exempted from parts of the rules. However, despite the findings of the GAO report, some community banks complain they have experienced increased costs as a result of these rules.
“While the CFPB provided some exemptions and carve outs for small lenders and servicers, those entities still have to be able to comply with all the rules in some fashion,” said Ron Haynie, senior vice president of mortgage finance policy for the Independent Community Bankers of America. “Community banks in general have struggled with complying with over 5,000 pages of new regulations since 2010.”
However, the GAO report determined these increased costs have not driven community lenders out of the mortgage lending and servicing business. “Although new regulations related to mortgage lending and servicing may increase compliance costs for community banks, our analysis suggests that these lenders generally appear to be participating in residential mortgage lending much as they have in the past,” the report stated. To review the full report, click here.
In fact, the share of mortgages serviced by community lenders doubled between 2008 and 2015 to approximately 13% of the total mortgage service market, according to the report. Also, median residential mortgages as a percentage of assets generally have increased in the past couple of years for community banks of all sizes. “Thus, community banks generally do not appear to be shifting their portfolios away from mortgage lending,” the GAO report stated.
“It appears that community lenders really want to hold onto the mortgage origination and servicing part of their business,” Scire said.
Industry perspective
Trade associations representing community banks and credit unions paint a less rosy picture than the GAO report of the impact of the servicing rules.
“The GAO report confirms our concerns that CFPB’s mortgage servicing rules are impacting credit unions,” National Association of Federal Credit Union’s General Counsel Carrie Hunt said in a statement.
Hunt said in the statement that many lenders interviewed by the GAO for the report said the CFPB’s mortgage-related requirements have resulted in increased costs for their institutions, such as the need to hire new staff and update systems.
Meanwhile, Jared Ihrig, chief compliance officer for the Credit Union National Association, said many aspects of the CFPB rules have been burdensome on credit unions. “The requirements contained in the CFPB’s mortgage servicing rules will continue to force credit unions to outsource the servicing function to mortgage subservicers,” he said.
“It’s likely credit unions will adjust to these new rules the same way they have adjusted to many of the other countless regulations since Dodd-Frank; namely, by shifting resources away from serving their members directly and into increased compliance monitoring,” Ihrig said. “On the whole, the new rules have been a compliance burden that’s led to increased costs due to limited resources and not enough staff.”
Haynie said the ICBA has seen a number of smaller community banks exit the mortgage business — especially those with small volumes of residential mortgages. “Fortunately there have only been a small number of impacted institutions so far,” he said. “But the rules make it more challenging for banks that are approaching the 10% Basel III capital requirements for holding MSAs (mortgage servicing assets).”
Ongoing impact
Ihrig believes that the ongoing impact of these new rules will increase the regulatory burden that credit unions already face. “Many credit unions will likely stop offering certain products and services such as home equity lines of credit and bridge loans because the cost of compliance will exceed any revenue generated,” he said.
Haynie concurs, adding that community lenders that stay in the mortgage business will need to generate higher levels of activity to support the higher cost structure driven by the compliance burden.
“What was once a business whose costs were rolled into the overall profit and loss statement of the bank has become a business that must be constantly reevaluated on a standalone basis,” he said. “And it will be dropped if the returns can’t support the cost and compliance structure.”
However, despite these concerns, Scire said community banks and credit unions remain active in servicing mortgage loans. “These remain important to them for the revenue they can generate and their customer-focused business model,” he said.
Freelance writer Don Sadler contributed to the writing and research of this article.
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