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There are some things that are difficult, or impossible, to put back into the bottle. Genies, toothpaste, technology, and government agencies come to mind. We can probably add the Community Reinvestment Act (CRA) to the list. In the last few years there has been a heavy focus on CRA for both depository banks and credit unions, but also now for independent mortgage banks (IMBs), and STRATMOR believes that it is important to look past the tag line and really dig into what products are best for your borrower versus what claim to do the most.
First, let’s gain some perspective with a quick history lesson. The Community Reinvestment Act was enacted in 1977 and requires the Federal Reserve and other federal banking regulators to encourage financial institutions to help meet the credit needs of the communities in which they do business, including low- and moderate-income (LMI) neighborhoods. Three federal banking agencies, or regulators, are responsible for the CRA. Each regulator has a dedicated CRA site that provides information about the banks they oversee and those banks’ CRA ratings and Performance Evaluations: Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), and the Office of the Comptroller of the Currency (OCC). Major changes in the nature and provision of financial services, however, have spurred some to call for more fundamental CRA modernization efforts.
As illustration, the FDIC regularly issues its list of state nonmember banks recently evaluated for compliance with the Community Reinvestment Act (CRA). The list covers evaluation ratings that the FDIC assigned to institutions in any given month. Additionally, Congress and regulators periodically update the Act. For example, as part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Congress mandated the public disclosure of an evaluation and rating for each bank or thrift that undergoes a CRA examination on or after July 1, 1990. Anyone may obtain a consolidated list of all state nonmember banks whose evaluations have been made publicly available since July 1, 1990, including the rating for each bank.
In early September the FDIC announced that it is launching a new Banker Engagement Site (BES) this month through FDICconnect to serve as the primary tool for exchanging examination planning and other information for consumer compliance and Community Reinvestment Act (CRA) activities. (The FDIC examines state-chartered banks that are not members of the Federal Reserve System.)
But how does any of this impact non-depository lenders? Unfortunately, among the options being considered by Congress and state legislatures is an expansion of CRA requirements to IMBs. The MBA and others believe that this would be a major policy mistake, “one that overlooks the data on IMB performance in serving low- to moderate-income (LMI) communities and rests on a misunderstanding of the IMB business model as well as the purposes of the CRA.”
Lenders know that independent mortgage banks do not have deposits to reinvest, do not have access to direct government support, already engage in sustainable lending in low- to moderate-income communities, and are subject to robust oversight and supervision.
IMBs do not accept deposits from their customers as a source of funds to lend or invest, and therefore are not recipients of FDIC deposit insurance. The IMB business model is designed to import funds from global capital markets and lend those funds in local communities to support homeownership. IMBs do not take in deposits or other resources from these local communities, and therefore the concept of reinvesting does not apply. Rather, IMBs channel capital from outside the local community into productive uses within that community. At its core, this is an entirely different model of originating mortgages than the model used by banks, and it is not compatible with the requirements of the CRA.
The Mortgage Bankers Association points out that, “One of the main objectives of the CRA is to ensure reliable, sustainable lending to LMI (low to moderate income) borrowers and communities throughout the country… IMBs already engage in substantial lending in LMI communities and compare very favorably to other types of financial institutions in this regard.
“Based on Home Mortgage Disclosure Act (HMDA) data and the CRA files from the Federal Financial Institutions Examination Council (FFIEC), the Urban Institute found that IMBs have a higher LMI borrower share and LMI area share than banks, whether viewed by loan count or dollar volume. Similarly, IMBs are the dominant originators in the government housing finance programs operated by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Rural Housing Service (RHS).”
The impact of the CRA regulations don’t end in the primary market, aka, origination side, of lending. CRA activities also carry through into the capital markets, including “specified pools” or “spec pools” that are made up of loans that have certain attributes, like low credit score borrowers, or properties in a certain area. For decades banks who have a wholesale or correspondent origination arm will pay higher prices for loans that can be classified as a “CRA loan.” These higher prices tend to move even higher toward the end of the year for some, depending on how the year’s originations look, and it is not uncommon for Citi, US Bank, or Chase correspondent divisions to actively ratchet up their bids.
Banks can receive “investment test” credit for buying bonds filled with CRA loans but can receive “lending test” credit from buying loans, so more CRA trades are in whole loan form. Nonregulated buyers, namely non-bank correspondent investors, entered the CRA market as a way of buying relatively inexpensive convexity pools, during the refi wave of 2020-2021, because pools traded at lower prices compared to other “spec pools,” usually comprised of low balance, or defined geography loans, for example. Given all of that, CRA spec pools trade .5 to 2 points higher than generic pools, depending on coupon and what collateral in which they are competing.
IMBs do not accept deposits, nor are they the beneficiaries of direct taxpayer backstops for their ongoing operations. They have a proven track record of strong and reliable lending to LMI borrowers and communities and are subject to the same consumer-facing regulations as depository institutions, which ensure sound underwriting and high-quality lending. At this point it is advisable that independent mortgage banks and brokers become active in their local, state, and national organizations to attempt to limit non-depository lenders from being fully impacted by CRA regulations. In addition, following any CRA-related news that comes from regulatory bodies, as well as state and Federal government sources, is important. But, like a carpenter with a hammer who only sees nails, governments and regulatory bodies may only see things that need more regulation.
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