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.