Striving for Business as Usual

“We used to have regulations A through Z, and now we are getting deep into double letters.” —Diane McElwee, Bally Savings Bank
“We used to have regulations A through Z, and now we are getting deep into double letters.”
—Diane McElwee, Bally Savings Bank

Three small community banks manage new mortgage lending regulatory storm

By Mary Thorson

By now, community banks are nearly a year beyond last January’s compliance deadline for the sweeping mortgage compliance regulations issued by the Consumer Financial Protection Bureau. With the construction noise of compliance preparations fading, anecdotal banter about how many community banks will continue to offer mortgage products and what kinds has continued. Beneath the din and chatter, a sizable number of smaller community banks looked the new rules in the eye, quietly adjusted their mortgage operations to the new rules, and moved forward in their “business as usual” fashion.

What insights can community banks gain from these resilient community banks about compliance management?

ICBA Independent Banker contacted three community banks whose total assets are each less than $50 million and whose residential mortgage portfolios comprise more than half of their total loans. These community banks offer traditional home purchase, home refinance and home equity loans that are all held in their loan portfolios. And they all handled the new mortgage rules well, but not without a lot of focus and hard work.

Challenges for community banks

These three community banks feel the pressure from increasing compliance requirements and limited internal resources. David Hale, president of Tucumcari Federal Savings and Loan Association in Tucumcari, N.M., says, “Overall, the regulatory approach is much more demanding than it was several years ago. We’re currently subject to lower loan demand and have had to add staff to handle additional regulatory burden.”

Hale finds the ability-to-repay mortgage rules require much more detailed underwriting documentation than before. He says the rules have imposed a new learning curve, not just for Tucumcari Federal Savings’ staff but for its mortgage borrowers as well.

Diane McElwee, executive vice president of Bally Savings Bank in Bally, Pa., points to the growing regulatory complexity in mortgage lending that the bank has managed. “Community banks are held to nearly the same standards and broad array of rules as bigger banks, and you can’t possibly keep it all in your head anymore,” she says.

For McElwee, the greatest burden created by the recent mortgage rules for Bally Savings Bank has been keeping up with a greater volume of complex, rapid-fire changes. She says much more time is spent on determining whether every detail of the bank’s mortgages comply absolutely with the new rules. “We’ve become more cautious,” she says. “We used to have regulations A through Z, and now we are getting deep into double letters.”

Although Bally Savings Bank has always felt challenged by the variety and number of residential mortgage compliance requirements, McElwee says, “the new rules have tightened certain requirements, making certain things almost ‘over compliant,’ guiding every move and removing flexibility for creditors to meet the needs of customers.”

“Overall, the regulatory approach is much more demanding than it was several years ago. We’re currently subject to lower loan demand and have had to add staff to handle additional regulatory burden.”
—David Hale, Tucumcari Federal Savings and Loan Association

Lori Porter, vice president of lending for Our Community Bank in Spencer, Ind., agrees that the changes stemming from the ability-to-repay mortgage rules have been a strain on the bank’s mortgage lending operations this past year. “You can tell by the size of the files,” she says. “They are nearly three times the size that they were several years ago.”

Porter is concerned that the new ability-to-repay rules, even with the small creditor exemptions, may cause difficulties for some of the bank’s longtime customers. For instance, she cites self-employed farmers who have been the bank’s customers for years who may, at some time, exceed the 43 percent debt-to-income ratio for qualified mortgages. For that reason, under some circumstances, the bank may now need to provide additional justification for those loans.

Compliance as usual

These three community banks have traditionally relied on a variety of means to supplement their internal compliance resources. Long before the CFPB released its mortgage rules changes, these community banks were employing good compliance management discipline commensurate with their strengths, risk tolerances and customer needs.

Hale says knowledge sharing among staff is one of Tucumcari Federal Savings’ best mortgage lending coping mechanisms and competitive advantages. “We routinely discuss new or changed requirements among our staff members,” he points out.

To meet the additional challenges brought by the new mortgage rules, however, Tucumcari Federal Savings has hired additional staff. “We haven’t used outside compliance vendors, except our loan documentation software provider,” he says. “We were doing fine handling compliance before, and we are doing fine now, but at a much greater cost. The additional mortgage rules increased workload and threatened to limit our effectiveness to be compliant.”

“You can tell by the size of the files. They are nearly three times the size that they were several years ago.”
—Lori Porter,
Our Community Bank

Compliance specialists play the key role in each community bank’s compliance management program. Porter is not a full-time compliance officer, but she is a member of Our Community Bank’s compliance team of five staff members. The team reviews changes, like the new mortgage rules, and determines what the bank will need to do to address each requirement.

Porter says Our Community Bank has also used a third-party compliance company for a time, and the monthly meetings with the consultant help bank staff keep up with changes and provide insight on how to do their jobs to be compliant. “Day to day, we are glad we have an outside source to supplement our internal team,” she says.

Tucumcari Federal Savings employs a compliance officer who received ICBA Certified Compliance Officer training. She dedicates about 60 to 70 percent of her time to compliance. Her responsibilities include monitoring regulatory changes, coordinating with other staff members to implement requirements, and reporting to the bank’s board of directors.

For McElwee, compliance duties are part of the numerous responsibilities she carries out for Bally Savings Bank. She says she spends considerable time sorting out information and confirming what the bank needs. “We use a loan documentation system to help ensure our disclosures are up-to-date, but we are ultimately responsible to know what is changed and that these updates meet the requirements of the law.”

Small Creditor Mortgage Lending Exemptions

Ability-to-repay exemption—Relieves community banks with less than $2 billion in assets and each year make 500 or fewer first-lien mortgages in three ways:

  • Extends qualified mortgage status to certain loans held in portfolio, even if the consumers’ debt-to-income ratio exceeds 43 percent.
  • Provides a temporary two-year transition period to make balloon loans to have those loans meet the definition of qualified mortgage. (Effective Jan. 10, 2016, only small creditors that operate in predominantly rural or underserved areas—designated by the Consumer Financial Protection Bureau—will be able to make balloon qualified mortgages.)
  • Allows small creditors to charge a higher annual percentage rate for certain first-lien qualified mortgages while maintaining a safe harbor for the ability-to-repay requirements.

Escrow Rule exemptions—Exempts higher-priced mortgage loans made by small creditors that operate in rural or underserved counties from the minimum five-year escrow account requirement.

Ongoing staff training

Staff training has been critical for these three community banks to stay abreast of compliance requirements, and they have embraced various forms of training for flexibility and coverage. “We spend considerably more time on training than a few years ago,” Hale points out.

When possible, Tucumcari Federal Savings sends a staff member to presentations, including ICBA compliance seminars. The bank is using Web-based training more, Hale says. “The Web-based training is very flexible for our smaller staff, and people can pull up a training program when it is convenient.”

“With limited staff, it’s difficult to leave the bank for off-site training,” adds McElwee, whose bank employs just four people. “We rely heavily on Web-based training, especially the ICBA training, to get the courses we need.”

Bally Savings Bank also takes advantage of training opportunities by the Pennsylvania Association of Community Bankers, and watches for FDIC Financial Institution Letters to keep up with new guidance.

Hale says Tucumcari Federal Savings staff, which uses education and training resources from ICBA and the Independent Community Bankers Association of New Mexico, also doesn’t hesitate to call the regulators for guidance on certain questions or regulatory issuances. Porter also says staff training at Our Community Bank has always been a key to maintaining compliance, and it has been even more so with the ability-to-repay rules.


Mary Thorson, a former Federal Reserve managing examiner and compliance consultant, is a financial writer in Virginia.