Community Bankers Urge Simplicity in Secondary Market Reform

With Congress pondering (among other things) how best to reform the nation's housing finance system, ""Independent Community Bankers of America"":http://icba.org/ (ICBA) urges lawmakers not to count smaller banks out when drafting new policies.

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In a ""white paper"":http://www.icba.org/files/ICBASites/PDFs/HousingFinanceReformWhitePaper2013.pdf released Monday, ICBA warns policymakers to ""be careful not to create a new [secondary market] system that destroys liquidity for all but the few largest players, limits access to the market or narrows options for smaller lenders, and imposes requirements that make it too costly for smaller lenders to operate""--a common thread among the major proposals presented so far, the group says.

""My community bank depends on easy access to the secondary market that doesn't require me to sell loans to a competitor,"" said Jack Hopkins, chairman of ICBA's Housing Policy Task Force and president and CEO of Sioux Fall's CorTrust Bank. ""Consumers are better served by a diverse, competitive market with thousands of active mortgage lenders, including community banks, which specialize in personalized and customized lending that megabanks are structurally incapable of providing.""

In addition to preserving the relative simplicity of the current loan selling process and avoiding industry consolidation, ICBA says lawmakers must make sure that any secondary mortgage market reform ensures ""robust oversight by a strong and competent regulator"" and maintains ""an explicit government guarantee against catastrophic loss.""

Going forward, it will also be crucial to protect originators' rights to retain servicing after selling a loan, the group says.

""In today's market, the large aggregators insist that lenders release servicing rights along with their loans. ... While servicing is a low-margin business, it is a crucial aspect of the relationship-lending business model, giving community banks the opportunity to meet the additional banking needs of their customers,"" the white paper reads.

With these concerns addressed, community banks are prepared to ""adapt and thrive"" in the private-market environment Congress is trying to restore, ICBA says.