Federal Reserve Governor Elizabeth Duke said during a Community Bankers Symposium last week that addressing the regulatory burden surrounding mortgages and community banks “will require more than a tweak here or an exemption there.”
Community bank lending accounted for approximately one-fifth of closed-end, first-lien mortgages as of June. Duke said that mortgage lending “appears to be just as important to community banks as it is to larger banks, as both tend to devote about one-quarter of their on-balance-sheet loan portfolios to home loans.”
Community banks have maintained that they did not engage in the risky lending practices that fueled the recent financial crisis and, therefore, they should not be subject to the same regulations as larger institutions.
“I think the data I have presented here support the first claim that their lending didn’t cause the problem,” Duke said. “But crafting regulations to address the real problems that occurred in subprime lending without creating punitive burdens on community banks may prove to be quite difficult…I do believe that the contribution of community banks to mortgage lending abuses was proportionately small and that problematic practices in smaller banks can be addressed through on-site supervision. And I also believe that many community banks simply do not have the resources to appropriately comply with all of the pending regulatory changes pertaining to mortgage lending. Thus, the cost of solving the problem falls disproportionately on them.”
Duke said that, having confirmed the importance of community banks to the mortgage lending market, “the best course for policymakers would be to abandon efforts for a one-size-fits-all approach to mortgage lending,” adding that “an argument can be made that it is appropriate to establish a separate, simpler regulatory structure.”
“The regulators cannot, on their own, craft a new approach to regulating mortgage lending by community banks,” Duke said. “However, I hope that this data will be useful to bankers and policymaker as they discuss more broadly the establishment of a regulatory regime that preserves the important role of community banks in mortgage lending.”