Small Banks Could be Erased from Mortgage Market Thanks to Choice Act

By Ari Karen

The proposed Financial Choice Act recently passed by the House contains many positive reforms that are likely to help community banks and non-depository mortgage lenders. Yet one specific provision poses a major risk to small lenders. Ironically, legislation that supporters say is meant to hold Wall Street accountable could ultimately lead to a market in which smaller lenders cannot compete.

In Title V, the bill contains a provision entitled: “Safe Harbor for Certain Loans Held on Portfolio.” This particular section would essentially eliminate the regulatory requirement that lenders evaluate and document borrowers’ “ability to repay” in cases where a bank holds the loan on its books. At first blush, this makes complete sense. If a bank is continuing to hold the loan, then it is assuming all the risk — and the lender would only do that if it was confident in the borrower’s ability to repay the loan. Yet a deeper understanding of the markets and the rules suggests this proposal could threaten the viability of a highly competitive banking system that has an ample number of both community and large banking institutions.

Read the full article on American Banker here.