Community bank members of the Federal Reserve’s Community Depository Institutions Advisory Council told the Fed community banks will wait to implement the Consumer Financial Protection Bureau’s mortgage framework until the law has been tested in court, according to Brian Johnson, CEO of Choice Financial Group, Grand Forks, N.D. Johnson was one of 12 financial industry representatives to attend the Board of Governors of the Federal Reserve’s Community Depository Institution Advisory Council at the end of 2013.
Johnson is chairman of the Community Depository Institution Advisory Council of the Federal Reserve Bank of Minneapolis. He and the chairmen of the 11 other Federal Reserve banks’ Community Depository Institution Advisory Councils are the 12 members of the Board of Governor’s council. The group meets in Washington D.C., twice each year.
In the meeting with the Fed governors at the end of 2013, the board asked the council members what changes they had seen in the mortgage market since the beginning of 2013. The board also asked if community banks were going to increase, decrease, or cease home mortgage originations. “Some banks said they would wait to see how litigation [arising from the CFPB’s mortgage rules] plays out before they increase their mortgage activity,” Johnson said, noting that neither Ben Bernanke nor Janet Yellen was present at the meeting.
“The majority of the [council] noted that they planned to remain within the Qualified Mortgage definition for almost all of their loans,” the Fed said in its meeting minutes. “Despite this, some noted there would be community institutions – particularly in rural areas – that would need to make non-QM loans due to their customer base and long-term customer relationships. For urban community institutions, the choice to stay within the QM box was stronger. Several council members noted that a few community institutions they know of have already stopped mortgage lending altogether.”
The governors were interested in the QM implementation and its effects on community banks and the possibility that the QM rule will restrict credit in rural areas, Johnson said.
Community bankers also gave the Fed suggestions to improve the payments system. The Council advised that the Federal Reserve or the CFPB should take a more active oversight role for nonbank payment companies. Here community bankers urged the Fed to action. The Fed is studying PayPal and other similar companies. “We told the board that if they wait to act until they complete a study, it will be too late,” Johnson said.
The council noted to the board that nonbank companies are not subject to as many regulations and are much less risk-averse than community institutions because the negative fallout associated with failure is so low, Johnson said. This problem is magnified because consumers expect bank-like regulatory standards while these nonbank companies are not held to the same high standard. Bank products such as deposit accounts are the reason companies like PayPal can do business. These companies have taken advantage of the framework built by banks, Johnson said.
The Fed has a thin line to walk when it comes to regulating technology companies in the financial services industry. It has a financial relationship with banks and cannot appear to favor them. However, the CFPB does not have that financial relationship. In payments, as in mortgages, the bureau should protect consumer payments across bank and nonbank companies as it does with mortgages, payday loans and remittances.