WASHINGTON, June 28 U.S. lenders and community
bankers sounded the alarm to lawmakers on Tuesday over proposed
federal rules aimed at reducing risk-taking on mortgage
lending, saying the guidelines could hurt small banks and
impair credit markets.
The rules -- mandated by the passage of the Dodd-Frank Wall
Street overhaul bill -- are under consideration by regulators
to establish guidelines for originators of securitized loans,
the types of instruments that are blamed for fueling the
2007-2009 financial crisis.
Regulators intend to reduce risk-taking by forcing lenders
to hold a 5 percent stake in any debt instrument pooled in the
"Should this proposal be adopted, it will surely drive many
banks from mortgage lending and shut many borrowers out of the
credit market entirely," Christopher Dunn, chief operating
officer of South Shore Savings Bank in South Weymouth,
Massachusetts, told a Senate Banking Committee hearing on
behalf of the American Bankers Association.
The current guidelines "fly in the face of workable and
clear standards," he said. This type of "regulatory burden is
significant" to smaller institutions, and will impair access to
credit for consumers.
The law created an exemption for mortgages deemed to be safe
enough and gave regulators the task to define such suitable
loans. Regulators proposed an exemption for the so-called
qualified residential mortgages when borrowers make 20 percent
down payments. A comment period on the proposed rule expires on
"We have to come up with an appropriate balance," said
Senator Jack Reed, a Rhode Island Democrat, during the hearing.
"If you don't have any of these rules of the road, you get
exactly what we had -- which was gaming and no money down."
REFORMING FANNIE AND FREDDIE
The panel representing smaller lenders also expressed unease
about proposals to wind down Fannie Mae FNMA.OB and Freddie
The government-sponsored enterprises are critical to the
housing market because they provide financing to banks and
lenders by purchasing mortgages and either keeping them on
their books or packaging them for sale to investors.
"I have concerns about going from a GSE market into a
private market. You have to put a system in place," said Jack
Hartings on behalf of the Independent Community Bankers of
"The GSEs must not be turned over to the Wall Street firms
that fueled the financial crisis with sloppy underwriting,
abusive loan terms, and an endless stream of complex
securitization products," he said.
Senate lawmakers have not produced a legislative approach
to overhaul the housing finance system. The Republican-led U.S.
House of Representatives, however, has introduced a variety of
bills which aim to dampen the government's role in the mortgage
system, including legislation that would create private
entities to replace Fannie and Freddie altogether.
Many small institutions worry that if Fannie and Freddie
were eliminated, large banks would have an advantage over
Hartings told the committee community banks and smaller
institutions represent about 20 percent of the mortgage market
and provide access to loans for borrowers underserved by larger
Lawmakers agreed small banks should not be harmed by new
"We just have to make sure that we do not create regulatory
barriers that place small banks at an unfair competitive
disadvantage," said Senator Richard Shelby of Alabama, the
panel's top Republican.
(Reporting by Margaret Chadbourn; Editing by Andrea Ricci)