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State Regulator Testifies on the Perils of One-Size-Fits-All Supervision


June 20 - Charles A. Vice, commissioner of the Kentucky Department of Financial Institutions and chairman of Conference of State Bank Supervisors, has testified before the Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee. In his testimony, Vice detailed concerns of state bank regulators regarding the CFPB’s final Ability-to-Repay and Qualified Mortgage rule, emphasizing the regulatory and supervisory importance of portfolio lending for the community banking business model.

“Lenders that retain the full risk of a borrower’s default – like community banks that retain mortgages in their portfolio – should be presumed to have determined a borrower’s ability to repay,” Vice testified.

Buttressing this position, Vice noted the importance of the CFPB’s Small Creditor QM, which recognizes the portfolio-lending business model. The Small Creditor QM creates a framework that supports retention of mortgages in portfolio by community banks. “This right-sizing of regulations appropriately accounts for differences in the community bank business model,” Vice said. “Congress and federal regulators should use the Small Creditor QM as an example for developing laws and regulations.”

Because portfolio lending of balloon loans was not accounted for in the QM rule, Vice expressed CSBS’s concern with the pending treatment of balloon loans.  Under the law, balloon loans held in portfolio would only qualify for QM status if they are originated in a “rural” or “underserved” area. However, when used responsibly, balloon loans can be a useful source of mortgage credit for borrowers in all areas.

“This provision effectively limits a bank’s flexibility to tailor products to the credit needs of the community,” Vice said. “As a regulator, the banks under my purview and the consumers they serve benefit from having more products at their disposal.”

Speaking for the state regulators, Vice also identified flaws in the regulation defining “rural” for the purposes of the balloon QM rule. As a more immediate solution and absent a legislative change in this area, state regulators recommend a petition process to address inconsistencies for “rural” designations. “The CFPB has the challenging task of providing an appropriate definition of ‘rural,’” Vice acknowledged.  “Unfortunately, the CFPB’s approach has some illogical results. This is inevitable when local communities are defined by a formula developed in Washington, D.C.”

Vice’s testimony can be viewed here.