Vote Notes: H.R.3971, The Community Institution Mortgage Relief Act of 2017

The so-called Dodd-Frank legislation of 2010 I would argue was one of the most reactive pieces of legislation Washington has seen in a long time. That’s the good news. The bad news is that its remedy was based on government rather than markets being the solution to the financial meltdown that came in 2008 and 2009.

As is too often the case with major pieces of legislation from Washington, it was one-size-fits-all. Big money center banks that had taken extreme measures of risk were lumped in the same as a local community bank where lenders knew their customers and had personal relationships with them. In so doing, it heavily penalized small local banks that had been the lifeblood of credit in many communities across our country.

As a result of this legislation, the money center banks’ influence and grasp over our financial system grew rather than diminished. This is really bad news for all of us who care about systemic risk in our financial system. Furthermore, the bill attempted to impose government regulation instead of a risk-reward system. One of the reasons that the big banks would take the risks that they did was because they were playing with somebody else’s money.

Rather than simply raising reserve requirements so that those financial institutions had more skin in the deal in risks that they took, it instead looked to regulations to try and impose the same. I believe that this was the fatal flaw of Dodd-Frank and with it came a whole host of negative repercussions in enabling finance and credit in our economy. There is no better buffer to excessive risk than someone knowing they will lose their job and all the money that they placed at risk.

In attempting to little by little dismantle the architecture of the Dodd-Frank bill, we took another positive step with the Community Institution Mortgage Relief Act, which I voted for and the House passed on December 12th, 294 to 129. 

The bill exempts small, community banks and credit unions from burdensome regulations and requirements related to mortgage lending. I voted in favor of the bill because small, community banks don’t pose the kind of risk to the financial system that these regulations are meant to prevent and therefore shouldn’t have to struggle with the costs and complexity of complying with them.

Think about that for a moment. Giant banks have enough money to have large compliance departments that handle the thousand and one details and requirements that go with the regulatory overlay that comes in the wake of a bill like Dodd-Frank. A community bank or credit union doesn’t have that, and in that regard, this bill made absolute sense.

The Dodd-Frank Financial Reform Act generally requires mortgage lenders to provide escrow services to their customers, allowing them to make one lump-sum payment each month covering their mortgage, property taxes, and homeowners insurance premiums. However, not all customers want escrow services, and offering them costs mortgage lenders time and money. For large banks and credit unions that handle tens-of-thousands of mortgages, the cost-per-loan of offering escrow services is low. Smaller financial institutions, however, must pass that cost on to their customers in the form of higher rates and fees...or else risk losing profitability.

Mortgage lenders are exempt from the escrow requirement if they issue less than 500 new mortgages per year, if their total asset size is less than $2 billion, or if they make more than half of their mortgage loans to rural customers. This bill expands that exemption to include lenders with total assets of less than $10 billion, so long as they hold mortgages on their portfolio for more than three years.

This again makes sense because there is no greater “regulation” than risking your own money. Banks that keep mortgages on their books have more skin in the game than banks that routinely resell mortgages onto the secondary market and therefore have a strong incentive to behave cautiously and in effect regulate themselves.

Ultimately, this bill was about tailoring regulations so that they properly reflect the very real differences between large, multinational banks and small, community banks. It was the big, Wall Street banks that needed bailing out in the financial crisis, not the small ones. We shouldn’t expect those small, community banks to have to struggle under the weight of regulations meant to keep big banks from causing another financial crisis. This bill provides regulatory relief for those struggling small banks.