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27–428 PDF 2017

S. HRG. 115–109 

HOUSING FINANCE REFORM—MAINTAINING 

ACCESS FOR SMALL LENDERS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE ROLES THAT SMALL LENDERS PLAY IN THE 

MORTGAGE MARKET 

JULY 20, 2017 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

TRAVIS HILL, Senior Counsel 

GRAHAM STEELE, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

ERIN BARRY, Democratic Professional Staff Member 

MEGAN CHENEY, Democratic Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, JULY 20, 2017 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

Brenda Hughes, Senior Vice President and Director of Mortgage and Retail 

Lending, First Federal Savings Bank of Twin Falls, Idaho, on behalf of 

the American Bankers Association ..................................................................... 4 

Prepared statement .......................................................................................... 30 

Responses to written questions of: 

Senator Cotton ........................................................................................... 77 

Tim Mislansky, Senior Vice President and Chief Lending Officer, Wright– 

Patt Credit Union, and President, myCUmortgage, LLC, on behalf of the 

Credit Union National Association ..................................................................... 5 

Prepared statement .......................................................................................... 34 

Jack E. Hopkins, President and Chief Executive Officer, CorTrust Bank, 

N.A., Mitchell, South Dakota, on behalf of the Independent Community 

Bankers of America .............................................................................................. 7 

Prepared statement .......................................................................................... 44 

Responses to written questions of: 

Senator Cotton ........................................................................................... 77 

Chuck Purvis, President and Chief Executive Officer, Coastal Federal Credit 

Union, Raleigh, North Carolina, on behalf of the National Association of 

Federally Insured Credit Unions ........................................................................ 9 

Prepared statement .......................................................................................... 47 

Responses to written questions of: 

Senator Cotton ........................................................................................... 78 

Wes Hunt, President and Chief Executive Officer, Homestar Financial Corporation, Gainesville, Georgia, on behalf of the Community Mortgage Lenders of America ....................................................................................................... 10 

Prepared statement .......................................................................................... 58 

William Giambrone, President and Chief Executive Officer, Platinum Home 

Mortgage, Rolling Meadows, Illinois, and President, Community Home 

Lenders Association ............................................................................................. 12 

Prepared statement .......................................................................................... 66 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by Capital Markets Cooperative ............................................... 80 

Letter submitted by The Mortgage Collaborative ................................................. 83 

Statement submitted by the Mortgage Bankers Association ............................... 85 

Joint letter submitted by consumer and housing industry groups ...................... 93 

Letter submitted by the Mortgage Bankers Association ...................................... 95 

Joint letter submitted by Senator Scott ................................................................. 97 

Joint letter submitted by small and mid-sized trade associations ...................... 98 

(III)

(1) 

HOUSING FINANCE REFORM—MAINTAINING 

ACCESS FOR SMALL LENDERS 

THURSDAY, JULY 20, 2017 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:04 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. This hearing will come to order. 

Today the Committee will continue its series of hearings on housing finance reform. In May, Treasury Secretary Mnuchin and 

FHFA Director Watt both appeared before the Committee and gave 

their perspectives on the state of housing finance and the housing 

finance reform prospects. 

In June, we held a hearing on the principles of housing finance 

systems featuring three witnesses, each with a deep background in 

housing finance. Today we will hear from a range of small lenders, 

representing community banks, credit unions, and non-depositories. 

Small lenders play a critical role in the mortgage market. This 

is especially true in rural States like Idaho, as well as other communities across the country. Small lenders are often fixtures in 

their communities who extend credit based on local knowledge and 

expertise. 

As we contemplate how to reform the housing system, we must 

understand how small lenders access the secondary market and ensure that such access is preserved in the new system. 

Today small lenders often sell mortgage loans to Fannie Mae and 

Freddie Mac through the cash window at each enterprise, which allows lenders to exchange individual loans for cash. Among the benefits of the cash window is that it allows small lenders to access 

the secondary market without selling loans to competitors. 

I look forward to hearing from our witnesses today regarding 

what a reformed system must include to ensure small lenders can 

access the secondary market. 

In past hearings on housing, I have discussed housing finance reform principles that I believe share bipartisan support. We need to 

preserve the to-be-announced market and an affordable, accessible 

30-year fixed-rate mortgage. 

We must have multiple levels of taxpayer protection standing in 

front of any Government guarantee, including downpayments, loanVerDate Nov 24 2008 09:14 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\07-20 ZDISTILL\72017.TXT JASON
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level insurance, and, very importantly, substantial, robust, loss-absorbing private capital. 

The transition to a new system must be orderly and deliberate, 

and it should utilize existing market infrastructure where possible. 

These are foundational principles that are consistent with many of 

the reform plans that have been proposed in recent years. 

Fannie Mae and Freddie Mac have been in conservatorship for 

close to 9 years. While some have grown accustomed to the current 

system, the status quo is not sustainable. A mortgage market dominated by two huge Government-sponsored companies in conservatorship is not a long-term solution and is not in the best interest of consumers, taxpayers, lenders, investors, or the broader economy. 

The GSEs are currently earning profits, but taxpayers could 

again be on the hook for billions of dollars when the housing market experiences its next downturn. Reform is urgently needed. 

I look forward to working with other Members of this Committee 

and the witnesses today, as well as the groups they represent, as 

we develop a long-term solution for our housing finance system. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Chairman Crapo. Thank you for 

holding this hearing. I would like to first welcome all of our witnesses, including a lender from Ohio. 

Tim Mislansky is the senior vice president/chief lending officer at 

Wright–Patt Credit Union. He lives in West Chester, Ohio. The 

credit union is located outside of Dayton in Beavercreek. It serves 

the Dayton area and communities between Cincinnati and Columbus like Xenia. 

His credit union is the largest lender on this panel, with $3.5 billion in assets. There is some irony in that always at our Committee 

hearings, and I appreciate Ms. Hughes being here as a constituent 

of Chairman Crapo. I also find it interesting that the ABA is almost never represented by the people that stop by my office as the 

CEO of one of the largest banks in America did yesterday. It is always represented by a community bank. I appreciate that. I appreciate your being here, but I also always find that a bit interesting. 

Tim knows how small lenders serve smaller cities and suburban 

markets. His expertise is a valuable addition to our housing finance reform process. I thank him for that. 

As we have heard repeatedly in this Committee, small lenders 

are often the only lenders willing to go the extra mile to underwrite 

mortgages in areas that are too often left behind by Washington 

and by Wall Street—in cities’ urban core and in rural communities. 

Community lenders know their customers and the needs and challenges of the cities and the towns they serve. 

During the Committee’s last effort, 3 years ago, I guess, on housing finance reform, S. 1217 included a small lender mutual, but the 

system created in the bill simply did not include enough protections 

to prevent large lenders from controlling the secondary market. 

Without firewalls between the primary and secondary markets, we 

lose a layer of accountability for underwriting; we create loopholes 

that permit concentration of risk. 

3 

We saw during the housing crisis how consolidation of primary 

market and secondary market operations within a single entity can 

hurt borrowers and hurt entire communities. 

The Financial Crisis Inquiry Commission found that in 2008, private label loans had a delinquency rate of over 28 percent compared to a delinquency rate of just 6 percent for GSE loans. That 

discrepancy is pretty alarming and illuminating. States like Ohio 

and Nevada are still feeling the impact of those predatory private 

loans. 

In the same way that the GSEs are prohibited from originating 

mortgages, originators and their parent companies should be prohibited from any ownership of guarantors. 

Proposals for reform range from a complete overhaul of the mortgage market to narrow, surgical changes. Looking at what current 

and future homeowners and lenders stand to lose in reform is as 

important as the desire to change the system. 

Looking out for Americans who are trying to buy homes and stay 

in homes and build better lives for their families has to be by far 

the number one priority of this Committee and of this legislation. 

I look forward to hearing from our witnesses about how the housing finance system could be improved and should be improved to 

better serve small lenders and their customers, as well as what 

should be preserved and protected. 

While we are discussing the importance of community lenders, 

we should also include the important work of housing counselors, 

CDFIs, and community organizations. 

Their work helped families achieve stable home ownership before 

the crisis and helped families keep their homes during the crisis. 

The importance of pre- and post-purchase housing counseling cannot be ignored during this legislative process. 

As we continue to debate the role of the GSEs, private capital, 

and large financial institutions in providing access to affordable 

mortgages, we cannot and should not create a system that allows 

the GSEs or new players to use a business model that serves only 

the largest lenders, the highest income borrowers, or the well-off 

pockets of our country. I think you all recognize that. We need a 

model that allows all Americans, in every corner of the country, to 

become homeowners and to remain homeowners. 

If the Government is going to have a role backing the housing 

market—and I believe we should—then that market must work for 

everyone, everywhere, not just those with the most lobbyists in this 

town and not just those with the deepest pockets. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator Brown. 

Now we will turn to the oral testimony. First, we will receive testimony from Ms. Brenda Hughes, senior vice president and director 

of mortgage and retail lending at First Federal Savings Bank of 

Twin Falls, Idaho, on behalf of the American Bankers Association. 

And thanks, Brenda, for bringing some of Idaho’s common sense 

here to Washington. 

Ms. HUGHES. Good morning. 

Chairman CRAPO. Next we will hear from Mr. Tim Mislansky, 

senior vice president and chief lending officer of Wright–Patt CredVerDate Nov 24 2008 09:14 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\07-20 ZDISTILL\72017.TXT JASON
4 

it Union, and president of myCUmortage, on behalf of the Credit 

Union National Association. 

Then we will hear from Mr. Jack E. Hopkins, president and CEO 

of CorTrust Bank, on behalf of the Independent Community Bankers of America. 

Following Mr. Hopkins, we will hear from Mr. Charles M. Purvis, 

president and CEO of Coastal Federal Credit Union, on behalf of 

the National Association of federally Insured Credit Unions. 

Then we will hear from Mr. Wes Hunt, president of Homestar Financial Corporation, on behalf of the Community Mortgage Lenders of America. 

And, finally, we will hear from Mr. Bill Giambrone, president 

and CEO of Platinum Home Mortgage, on behalf of the Community 

Home Lenders Association. 

Each witness is recognized for 5 minutes of oral remarks, and, 

Ms. Hughes, you may proceed. 

STATEMENT OF BRENDA HUGHES, SENIOR VICE PRESIDENT 

AND DIRECTOR OF MORTGAGE AND RETAIL LENDING, 

FIRST FEDERAL SAVINGS BANK OF TWIN FALLS, IDAHO, ON 

BEHALF OF THE AMERICAN BANKERS ASSOCIATION 

Ms. HUGHES. Good morning. Thank you. 

Chairman Crapo, Ranking Member Brown, my name is Brenda 

Hughes. I serve as senior vice president and director of mortgage 

and retail lending for First Federal Savings Bank of Twin Falls, 

Idaho. We are a $607 million asset savings association founded in 

1915. I appreciate the opportunity to be here to present ABA’s 

views on GSE reform and community bank access. 

This issue is a critical one for our country. Americans have relied 

on access to long-term fixed-rate mortgages for 70 years. Fannie 

Mae and Freddie Mac have facilitated access to this product by providing access to the capital markets for private market lenders. 

The GSEs have been in conservatorship for nearly 9 years. We 

should not delay reform any longer. 

Absent aggregation and securitization, access to long-term, 

lower-rate funding would be far more difficult to come by for most 

primary lenders. The Government guarantee provided to mortgagebacked securities guaranteed by the GSEs makes them attractive 

to capital markets ensuring liquidity. As we consider reform, these 

elements must be preserved and remain available to support all 

primary market participants regardless of size or location. 

First Federal relies on this access and actively delivers loans directly to Freddie Mac, retaining servicing on these loans. We currently service approximately 5,000 loans. Like so many banks, both 

large and small, access to the secondary market through the federally guaranteed secondary market enterprises is essential to our 

ability to meet the mortgage needs of our customers. 

ABA has worked with bankers from all institutions of all sizes 

and from all parts of the country to develop shared principles 

which should guide reform of the GSEs. From my testimony today, 

I would like to highlight a few key principles. More detail on these 

principles can be found in my written testimony. 

We believe that the following principles should form the basis for 

legislative reform efforts: 

5 

First, the GSEs must be strictly confined to a secondary market 

role, providing stability and liquidity to the primary mortgage market for low- and moderate-income borrowers. They must be strongly 

regulated, thoroughly examined, and subject to immediate corrective action for regulatory violations. 

In return for their GSE status and the associated benefits, entities must agree to support all segments of the primary market and 

all economic environments and provide equitable access to all primary market lenders. This includes preservation of the to-be-announced market and both servicing retained and sold options. 

Mortgage-backed securities issued by the GSEs should carry an 

explicit guarantee from the Federal Government. These guarantees 

should be fully paid for through the guarantee fees equitably assessed. The GSEs must be capitalized appropriately. Strong capital 

must be tied to sound underwriting practices to ensure that it is 

representative of the risk of these institutions. 

Credit risk transfers required by FHFA should be continued and 

expanded. The vital role played by the Federal Home Loan Banks, 

not to be confused with the roles of Fannie Mae and Freddie Mac, 

is working today and must not be impaired. 

Congress has an essential role in providing the certainty necessary to ensure long-term stability of the housing finance system. 

Without legislative reform, past abuses may be repeated. 

Some will argue that this can be accomplished by a regulation, 

and FHFA has done an admirable job in recent years ensuring the 

equitable treatment and addressing other past abuses. However, 

regulators and regulatory approaches can change over time. While 

a strong regulator must be part of the reform, so, too, must be 

clearer statutory guidance. 

Reform need not be radical or extreme, but targeted and surgical. 

Legislation need not create an entirely new secondary market 

structure. In fact, guided by these key principles, we believe that 

relatively tailored legislation that takes a surgical approach to 

making necessary alterations to the current system is both desirable and achievable. 

These legislative reforms are critical. Just as the Federal debt 

market provides the bellwether that makes all private debt markets more efficient and liquid, an explicit, fully priced, fully paid 

for Federal guarantee for a targeted portion of the mortgage market will be a catalyst for broader market growth and development. 

Congress should not defer action any longer. Nine years of conservatorship is more than enough. 

Thank you for the opportunity to share our views with the Committee. I am happy to answer any questions you might have. 

Chairman CRAPO. Thank you, Ms. Hughes. 

Mr. Mislansky. 

STATEMENT OF TIM MISLANSKY, SENIOR VICE PRESIDENT 

AND CHIEF LENDING OFFICER, WRIGHT–PATT CREDIT 

UNION, AND PRESIDENT, MYCUMORTGAGE, LLC, ON BEHALF 

OF THE CREDIT UNION NATIONAL ASSOCIATION 

Mr. MISLANSKY. Good morning, Chairman Crapo, Ranking Member Brown, Members of the Committee. Thank you for the opportunity to testify today. My name is Tim Mislansky, and I am the 

6 

chief lending officer for Wright–Patt Credit Union in Beavercreek, 

Ohio, as well as the president of our credit union service organization, myCUmortgage. I am also the Chair of the Credit Union National Association’s Housing Subcommittee, on whose behalf I testify today. 

Wright–Patt Credit Union has approximately $3.6 billion in assets and proudly serves over 330,000 members. We operate primarily in Dayton and Columbus and have the unique perspective 

of serving the urban core and the suburbs of those cities, as well 

as the surrounding rural areas. Last year, we helped over 4,600 

families with $600 million in first mortgages and an additional 

1,300 families with second mortgages. Our CUSO, myCUmortgage, 

provides a variety of mortgage services to nearly 200 credit unions, 

which range in asset size from $6 million up to $1 billion and are 

located across 25 States. Last year, we facilitated nearly 9,000 

mortgages for $1.2 billion, making us one of the largest aggregators 

of credit union mortgage loans in the country. 

As member-owned, not-for-profit financial cooperatives, many 

credit unions offer mortgages, and we represent an increasingly 

significant source of mortgage credit nationally. In 2016, credit 

unions originated over $140 billion in first mortgages, or 8 percent 

of the total market. It is clear that consumers are choosing locally 

owned and operated credit unions more and more to be their mortgage lenders. And as Congress considers housing finance reform, it 

is critical that credit unions have equitable access to a functioning, 

well-regulated secondary market and a system that will accommodate member demand for long-term fixed-rate mortgage products. 

Credit unions have been largely portfolio lenders, but with historically low interest rates and growing market share, we have found 

it increasingly important to sell long-term fixed-rate mortgages. 

Without a functioning secondary market, many credit unions would 

severely limit mortgage lending. 

Servicing loans is also very important to credit unions for a number of reasons. Again, as member-owned cooperatives, we are driven by a desire to provide high-quality member service, and many 

credit unions are reluctant to sell the core function of servicing to 

others. This is especially important so that credit unions have the 

ability to make modifications to loans to keep borrowers in homes 

when they experience financial difficulties. 

Because of the strength of this servicing relationship as well as 

the member-focused underwriting, the credit quality of credit union 

first mortgages held up remarkably well during the financial crisis, 

especially compared to that of other lenders, where net charge-off 

rates were as much as four times higher. 

As we have testified in the past, CUNA supports the creation of 

an efficient, effective, and fair secondary market. To that end, 

CUNA supports housing finance reform proposals that are consistent with the following principles: 

First, there must be a completely neutral third party independent of any mortgage-originating institution to ensure that no 

participant enjoys an unfair advantage and undue influence in the 

secondary market. 

7 

Second, the secondary market must be open to lenders of all sizes 

on an equitable basis, with access and pricing independent of lender volume. 

Next, the entities providing secondary market services must be 

subject to appropriate regulatory and supervisory oversight. 

The new system must be durable to ensure mortgage loans will 

continue to be made to qualified borrowers even in troubled economic times. This will require some kind of explicit catastrophic 

Federal guarantee funded by appropriate fees with significant private capital in a first-loss position. Any new housing finance system should emphasize consumer education and counseling to ensure that borrowers are able to remain in their homes. 

The housing finance system must provide for predictable, affordable payments to qualified borrowers, including the 30-year fixedrate mortgage. And conforming loan limits should be reasonable 

and take into consideration local real estate prices in higher-cost 

areas. 

Credit unions should have the option to retain or sell the right 

to service their member mortgage loans, regardless of whether that 

loan is held in portfolio or sold in the secondary market. 

And, finally, the transition from the current system must be orderly to prevent significant disruption to the housing market which 

would harm homeowners, potential homebuyers, the credit unions 

who we serve, and the Nation’s housing market as a whole. 

Thank you again for the opportunity to testify, and I look forward to your questions. 

Chairman CRAPO. Thank you, Mr. Mislansky. 

Mr. Hopkins. 

STATEMENT OF JACK E. HOPKINS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CORTRUST BANK, N.A., MITCHELL, 

SOUTH DAKOTA, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA 

Mr. HOPKINS. Chairman Crapo, Ranking Member Brown, Members of the Committee, I am Jack Hopkins, president and CEO of 

CorTrust Bank, a $780 million asset bank in Mitchell, South Dakota. As a third-generation community banker, I am pleased to be 

here today on behalf of ICBA and nearly 5,000 community banks. 

ICBA strongly supports GSE reform, but it is critical to borrowers 

and the broader economy that the details of reform are done right. 

Community bank mortgage lending is vital to the strength and 

breadth of America’s housing market. Community banks represent 

approximately 20 percent of the mortgage market, but, more importantly, our mortgage lending is often concentrated in rural areas 

and small towns, which are not effectively served by large banks. 

For many rural and small-town borrowers, a community bank loan 

is the only option for buying a home. 

CorTrust Bank was founded in 1930 and serves 19 communities 

in South Dakota and Minnesota, from Sioux Falls to rural communities. Today I would like to talk about my bank’s mortgage lending and the importance of secondary market access. 

CorTrust Bank has about a $590 million portfolio consisting of 

approximately 5,500 loans. About two-thirds of our mortgages are 

held by Fannie Mae and a smaller number are held by Freddie 

8 

Mac and by the South Dakota Housing Development Authority. 

The secondary market allows me to meet customer demand for 

fixed-rate mortgages without retaining the interest rate risk these 

loans carry. As a small bank, it is not feasible for me to use derivatives to manage the interest rate risk. Selling into the secondary 

market frees up my balance sheet to serve customers who prefer 

adjustable rate mortgage loans, as well as small business and agricultural loans, which play a vital role in our community. 

ICBA’s approach to GSE reform is simple: Use what is in place 

today and working well and focus reform on aspects of the current 

system that are not working or that put taxpayers at risk. ICBA 

has developed a comprehensive set of secondary market reform 

principles. 

First, the GSEs must be allowed to rebuild their capital buffers. 

Though Fannie Mae and Freddie Mac have returned to profitability, the quarterly sweep of their earnings to the Treasury has 

seriously depleted their capital buffers. Absent a change in policy, 

they are on track to fully exhaust their capita by year end. A draw 

from the Treasury could trigger a market disruption. This self-inflicted crisis can and must be avoided. While Congress debates reform, the FHFA should protect taxpayers from another bailout. 

ICBA urges FHFA to follow HERA and require both GSEs to develop and implement a capital restoration plan. 

Second, community banks must have equal and direct access. We 

must have the ability to sell loans individually for cash under the 

same terms and pricing available to larger lenders. 

Third, there can be no appropriation of customer data for crossselling of financial products. We must be able to preserve our customer relationships after transferring loans. 

Fourth, originators must have the option to retain servicing 

rights at a reasonable cost. Servicing is a critical aspect of the relationship lending business model vital to community banks. 

Finally, an explicit Government guarantee on GSE–MBS is needed. For the market to remain deep and liquid, Government catastrophic loss protection must be explicit and paid for through GSE 

guarantee fees priced at market rates. This guarantee is needed to 

provide credit assurances to investors and will sustain robust liquidity even during periods of market stress. Without these principles, we could see further consolidation of the mortgage market. 

Any version of reform that effectively transfers the assets, infrastructure, or functions of the GSEs to a small number of mega 

firms could devastate the housing market in thousands of small 

communities and put our financial system at risk of another collapse. 

The current system works very well today for lenders of all sizes 

and charters. I urge lawmakers to use caution when evaluating 

major structural changes to the GSEs or their elimination. We 

must not disrupt this very liquid market. 

To conclude, ICBA supports housing finance reform so long as it 

is crafted to maintain access for small lenders, as stated in the title 

of this hearing, not merely on paper but in the real world. 

Thank you again for holding this hearing and for the opportunity 

to testify. 

Chairman CRAPO. Thank you, Mr. Hopkins. 

9 

Mr. Purvis. 

STATEMENT OF CHUCK PURVIS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, COASTAL FEDERAL CREDIT UNION, RALEIGH, NORTH CAROLINA, ON BEHALF OF THE NATIONAL 

ASSOCIATION OF FEDERALLY INSURED CREDIT UNIONS 

Mr. PURVIS. Good morning, Chairman Crapo, Ranking Member 

Brown, my Senator from North Carolina, Senator Tillis, and Members of the Committee. My name is Chuck Purvis, and I am testifying today on behalf of NAFCU. I currently serve as the president 

and CEO of Coastal Federal Credit Union in Raleigh, North Carolina. I thank you for the opportunity to appear before you today to 

talk about the important issue of housing finance reform. 

At Coastal, we have been offering mortgage loans for 40 years. 

Until 2008, Coastal held most of our mortgages in portfolio. As demand grew and long-term interest rates fell, we began to work 

with Fannie Mae to sell many of our loans into the secondary market. Without the GSEs, our capacity to lend in our communities 

would be outstripped by demand. Our ability to sell loans ensures 

liquidity, mitigates our long-term interest rate risk, reduces concentration risk, and keeps rates competitive. If not for access to the 

GSEs, our capacity to meet local demand would be greatly diminished. Consumers would suffer from higher rates and fees, more 

stringent credit requirements, and overall fewer options. A viable 

secondary market is vital to our success as a community lender. 

As a credit union CEO, every day I go to work focused on our 

members and how Coastal can help put more money in their pockets. For many, home ownership is what they aspire to, and Coastal 

is with them every step of the way. 

NAFCU welcomes the thoughtful and practical approach the 

Committee is taking on housing finance reform. We have been active in the housing reform debate and do not believe any proposals 

discussed in previous Congresses adequately protect the needs of 

community-based lenders. 

NAFCU believes there are certain housing finance reform principles that are important to credit unions and should be considered 

in any reform effort. I outline these in detail in my written testimony, and I would like to highlight a few of the key points here 

today. 

Of utmost importance, NAFCU believes that a healthy, sustainable, and viable secondary mortgage market for credit unions must 

be maintained. To achieve this, credit unions must have guaranteed access to the secondary mortgage market. We believe that efforts to fund any new system must be done in a way as to limit 

the cost to smaller lenders and not be a barrier to access. 

NAFCU wants to stress that it is critical that large institutions 

not be given control of the market. Their market dominance would 

have negative consequences for smaller lenders. Congress must ensure that does not happen in a reformed system. 

We believe that any new system must recognize the high quality 

of credit union loans with a fair pricing structure. Because credit 

unions originate a relatively low number of loans compared to others in the marketplace, we do not support a pricing structure based 

on loan volume, institution asset size, or any other issue that will 

10 

disadvantage our member owners. As such, credit unions should 

have access to pricing that is focused on quality, not quantity. 

NAFCU believes that there should be a continued role for the 

U.S. Government to issue an explicit guarantee on the payment of 

principal and interest on mortgage-backed securities. The explicit 

guarantee will provide certainty to the market, especially for investors who will need to be enticed to invest in mortgage-backed securities and facilitate the flow of liquidity through the market. We do 

not think that the GSEs should be fully privatized at this time. 

A transition to a new system should also be as seamless as possible. Credit unions should have uninterrupted access to the GSEs 

or their successors and the secondary mortgage market as a whole, 

in particular through the cash window and small pool options. 

Our partnership with Fannie Mae is critical to Coastal’s mortgage lending function. Our use of Fannie Mae’s Desktop Underwriter on all mortgage loans that we originate ensures conformity 

and consistency across our portfolio, whether we sell the loan or 

not. Access to such technology must be preserved in any reforms. 

Finally, any new housing finance system must ensure credit 

unions can retain servicing rights to loans they make to their members. Our members turn to us for lower rates and fees and because 

they want to work with an organization they trust and know will 

provide them with high-quality service. At Coastal, we retain servicing rights on all of our loans. This was especially beneficial during the financial crisis as it allowed us to work with members on 

their loan to keep them in their home. 

In conclusion, credit unions exist to provide provident credit to 

their members. It is vital that credit unions continue to have legislatively guaranteed access to the secondary market and fair pricing 

based on the quality of their loans. 

Thank you for the opportunity to provide our input on this important issue, and I welcome any questions that you may have. 

Chairman CRAPO. Thank you, Mr. Purvis. 

Mr. Hunt. 

STATEMENT OF WES HUNT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, HOMESTAR FINANCIAL CORPORATION, 

GAINESVILLE, GEORGIA, ON BEHALF OF THE COMMUNITY 

MORTGAGE LENDERS OF AMERICA 

Mr. HUNT. I want to first thank Chairman Crapo, Ranking Member Brown, and the Committee for the opportunity to testify, and 

a special thank you to my Senator, Senator Perdue of Georgia. I 

am the owner of Homestar Financial. We are headquartered in 

Gainesville, Georgia, and have been in business since 2002. We are 

the State’s largest originator of FHA purchase and rural housing 

loans, a major provider of VA loans for our veterans and active 

servicemembers, and a Ginnie Mae issuer. We also sell directly to 

Fannie and Freddie. We survived the downturn by originating welldocumented loans and underwriting them carefully. 

I am here for CMLA, which represents both community banks 

and mortgage bankers, like my own company. CMLA was formed 

to give small lenders a voice in a trade group that does not include 

large banks. 

11 

CMLA is also part of the Main Street GSE Coalition, a policy 

group made up of small mortgage lenders, home builders, civil 

rights groups, and consumer groups. The coalition recently issued 

a set of Common Principles for GSE reform. 

Addressing the topic today, we know why the GSEs went into 

conservatorship. The HERA legislation in 2008 cured many of the 

prior GSE defects, and the Qualified Mortgage Rule addressed risk 

from lax standards and recklessly designed products. I address 

these issues in more detail in my written testimony. 

What remains to be done is to make the level guarantee fee permanent, as it expires in 2021, and apply this same principle to upfront risk sharing. We need a permanent Federal backstop on 

Fannie and Freddie, and the regulator must set strong capital. 

When Fannie and Freddie reach these capital standards, they 

should be released from conservatorship. But a fix must match the 

problem needing repair and not create new ones. 

Small lenders fear that a large, untested, complex housing finance reform plan will do two things that will be a detriment to 

the housing market: 

Number one, create marketplace uncertainty that raises cost for 

homebuyers, small lenders, and constricts mortgage lending; 

Number two, wittingly or unwittingly gives greater market pricing power to Wall Street and large banks at the expense of those 

of us on Main Street. 

GSEs should be regulated closely, as they are now, but capitalized properly, as they currently are not. We agree with the prudential regulator that capital is needed now, and we all have a common interest in ensuring that the housing and banking bailouts of 

2008 do not occur again. 

Part of the past problem with the recklessly designed products— 

excuse me. Part of the past problem with the GSEs was too little 

capital. Today they have even less than what they had in 2008. 

This makes no sense on Main Street. 

Well-capitalized GSEs will be able to balance underwriting 

standards and mortgage risk and fulfill affordable housing obligations. Well-capitalized GSEs that treat all lenders equally in terms 

of fees and up-front risk sharing will avoid concentrations of risk 

and ensure a flow of affordable mortgage money to the families we 

serve in the Southeast and my fellow CMLA members serve 

throughout the country. 

Economic growth remains slow in the U.S., and housing and 

housing construction has certainly underperformed. We need to 

move forward, especially as the largest ever population group, the 

echo boomers, are now of age to purchase their own homes. In the 

history of the country, we have never seen a giant new generation 

like this. Home ownership is already at a half-century low. For a 

supply of affordable mortgage money for this generation, we need 

a safe secondary market independent from the reach of the biggest 

banks. 

I am also a member of the MBA, a great organization, but on 

this crucial topic of GSE reform, I am aligned with CMLA and 

other members of this panel. Main Street lenders did not cause the 

downturn. We are committed to the continued origination of quality 

loans while diligently working to help individuals and families realVerDate Nov 24 2008 09:14 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\07-20 ZDISTILL\72017.TXT JASON
12 

ize the dream of home ownership. Please consider the steps I have 

outlined in my testimony to make this possible. 

Thank you. 

Chairman CRAPO. Thank you, Mr. Hunt. 

Mr. Giambrone. 

STATEMENT OF WILLIAM GIAMBRONE, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, PLATINUM HOME MORTGAGE, 

ROLLING MEADOWS, ILLINOIS, AND PRESIDENT, COMMUNITY HOME LENDERS ASSOCIATION 

Mr. GIAMBRONE. Chairman Crapo, Ranking Member Brown, and 

Members of the Committee, it is a privilege and honor to testify before you today. I am Bill Giambrone, president of Platinum Home 

Mortgage Corporation, based in Rolling Meadows, Illinois. I appear 

before you today as President of the Community Home Lenders Association (CHLA). CHLA is a group of small and mid-sized independent mortgage bankers, also known as ‘‘IMBs’’, committed to 

advocating for affordable, accessible single-family mortgages for 

families in communities where we lend. None of our members are 

taxpayer-backed depository institutions. 

I am here to explain from our perspective why it is important for 

the Committee to design a GSE reform bill in ways that ensure full 

and equitable small lender access to the secondary market. 

Since the 2008 housing crisis, we have seen large banks significantly retreat from mortgage lending. We have provided data in my 

testimony to show that IMBs have filled the access to the mortgage 

credit void that banks left. 

While consumers complained about lack of responsiveness from 

mega servicers, IMBs provided personalized service to distressed 

borrowers in our local communities. So what should we do next? 

CHLA worked with affordable housing and other small lender 

groups to develop the GSE reform principles as part of the Main 

Street GSE Coalition. We appreciate that you entered that document in the record at the last hearing. 

My written testimony also includes CHLA’s detailed GSE reform 

plan, a plan that identifies significant taxpayer reforms that have 

already taken place, and encourages FHFA to continue them. In 

addition, FHFA should take two important steps which we encourage Congress to support. 

First, FHFA should allow Fannie and Freddie to retain a modest 

capital buffer. We believe $10 billion each is the appropriate level. 

This would address what FHFA Director Watt called their ‘‘greatest risk,’’ their lack of capital. 

Second, FHFA should develop and release a capital restoration 

plan detailing how Fannie and Freddie could best recapitalize and 

exit conservatorship. Congress would only benefit from having such 

a plan or road map. 

The CHLA plan also includes details on how congressional GSE 

reform should be done. The overriding objective is to ensure broad 

access to mortgage credit for all qualified borrowers nationwide 

while protecting taxpayers. We know that the well-qualified mortgage borrowers in large urban areas will be served. The question 

is whether families living in rural or other less populated areas 

will have real access to mortgage credit and whether low- to modVerDate Nov 24 2008 09:14 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\07-20 ZDISTILL\72017.TXT JASON
13 

erate-income borrowers will be served. Small lender access is critical to achieving this goal. 

My testimony lists four recommendations for preserving small 

lender access to the secondary market: 

First, preservation and recapitalization of Fannie and Freddie 

using a utility model. This is necessary so the GSEs can continue 

their role of facilitating a secondary market for small lenders. 

Second, no new charters should be authorized to carry out functions that Fannie Mae and Freddie Mac presently carry out. The 

likely impact of authorizing new charters would be to grow the 

Government, increase risk of taxpayer bailout by creating more 

new ‘‘too big to fail’’ entities, increased regulatory risk because regulators may not be able to keep up with the complexities of the numerous competing entities, and undermining the utility model concept. 

FDIC Vice Chairman Thomas Hoenig recently noted that the 

four largest banks have grown from 14 percent of total industry assets in 1992 to 42 percent today, and that they ‘‘dominate the industry and increasingly dominate our economy.’’ We do not want 

this to happen to the mortgage industry. We believe it will happen 

if charters are granted to big banks or other ‘‘too big to fail’’ entities like investment banks or insurance companies. 

Opening the door to new charters also raises longstanding concerns about vertical integration. There is no way to ensure that 

new charters will not be influenced or controlled by the ‘‘too big to 

fail’’ institutions, even with only a small ownership interest in the 

new entity. 

Third, all risk sharing should be done as back-end risk sharing. 

Up-front risk sharing could create significant risks for small lender 

access and could result in practices such as volume discounts or 

vertically integrated investment banks dealing exclusively with 

their bank lending affiliate. The objectives of risk sharing can be 

fully accomplished by exclusively doing it by back-end risk sharing. 

Finally, pricing, underwriting, and variance parity. Previous legislative language had language requiring GSE parity. We agree 

with this. We also believe equitable treatment for small lenders 

should extend to other areas, such as underwriting variances, reps 

and warrants, and any proxy for price advantages. 

I appreciate the opportunity to speak before you today, and I look 

forward to questions. Thank you. 

Chairman CRAPO. Thank you, Mr. Giambrone. 

I will begin the questioning. As I mentioned in my opening statement, there are a number of principles of housing finance reform 

that I believe share bipartisan support, and I would like to just go 

through—there are about five or six I want to read through here. 

These are general principles, and I expect that there is broad 

agreement on them. So what I am going to do is just read these 

principles and ask you if there are any of you who have any concern or would want to make any clarifications about the principles 

that I read. And if not, that is fine. I have got other questions I 

want to go on to. 

The first principle is we need to preserve the 30-year fixed-rate 

mortgage and the TBA market. 

14 

Second, we need multiple levels of taxpayer protections, including strong, robust, loss-absorbing private capital at any guarantors 

that sit in front of the Government guarantee. 

Third, private capital rather than taxpayers should bear noncatastrophic credit risk. 

Fourth, we must have an orderly transition that utilizes existing 

market structure, where possible, and minimizes market disruptions. 

Fifth, the current conservatorships are unsustainable, and Congress must find a long-term solution. 

And then, finally, we need a level playing field to ensure that 

small lenders can access the secondary market equitably. 

I realize those are broad statements, but is there anybody who 

wants to issue some clarification on those? Are those principles acceptable to each of you? All right. I am taking that as a yes. 

Mr. PURVIS. Yes. 

Chairman CRAPO. All right. Thank you. 

Mr. MISLANSKY. Senator? 

Chairman CRAPO. Yes, Mr. Mislansky. 

Mr. MISLANSKY. I believe you may have said—and so I would ask 

you if you would clarify that—the private capital should take the 

catastrophic losses. Is that accurate? I think it was third principle 

you were at. 

Chairman CRAPO. Yes, it should bear the noncatastrophic credit 

risk. 

Mr. MISLANSKY. The noncatastrophic. Thank you. So I would 

agree with that. 

Chairman CRAPO. All right. Then let me go directly to you, Ms. 

Hughes. In your opening testimony, you stated that you reject the 

approach of recapitalizing the GSEs and releasing them back into 

the private market with limited changes. Can you explain a little 

more about that and why you feel it is critical that Congress pass 

GSE reform? 

Ms. HUGHES. In the current such with them under Government 

conservatorship, they have—we have essentially stymied innovation and lending. Community banks, we rely upon the secondary 

market. We rely upon that path to serve our customer base and deliver those loans to the market. And under the current structure, 

neither of the GSEs—speaking of Freddie and Fannie—are operating in a path to grow and improve the mortgage market base. 

And so bringing them back to a position where they can continue 

to operate and function as a partner in the industry would be vital. 

Chairman CRAPO. All right. Thank you very much. 

And, Mr. Mislansky, you mentioned in your opening testimony 

that your credit union makes mortgage loans to consumers and 

also owns a firm that serves as an aggregator of mortgage loans. 

Can you describe those two channels of accessing the secondary 

market for small institutions? And then what are some of the factors that a lender considers in deciding how to access the secondary 

market? 

Mr. MISLANSKY. Certainly. So the credit union has what I would 

refer to as a typical retail production. We have loan officers on staff 

who meet with members, take their applications, help them 

through the process, educate them, and ultimately help them get 

15 

to the closing table so that they can become a homeowner or save 

money with a refinance. 

The subsidiary that the credit union owns, myCUmortgage, we 

refer to it as an ‘‘aggregator,’’ and what we do is we provide backoffice services to credit unions. I mentioned, for example, in my 

written testimony that we have one $30 million institution that is 

a customer or credit union client of ours, TopMark Federal Credit 

Union, which is in Lima, Ohio. Again, they are a $30 million institution, so certainly by any standards they would be considered 

small. They originate $15 to $16 million most years in mortgages. 

That is a lot of originations for an institution that small. And what 

we do with them is, again, we help them process and we help them 

underwrite, help them close, and then we buy their production. 

They do not have the capacity to sell those loans direct—or to hold 

those loans on their balance sheet or to even maybe go direct to 

Fannie Mae or to Freddie Mac. 

So while they need small lender access to the secondary market, 

they have chosen the manner of going through an aggregator such 

as us and leveraging the expertise that we bring to the table to 

help them be able to achieve the same concept of going direct to 

a Fannie Mae or a Freddie Mac. 

Chairman CRAPO. All right. Thank you. 

Senator Brown. 

Senator BROWN. Interesting, thank you. I was not aware of that. 

I will start with Mr. Mislansky, and then I have a question for 

everybody. With Wright–Patt’s footprint across several types of 

communities, help us understand how access to the secondary market helps you serve communities or borrowers that are typically ignored by the larger national lenders. 

Mr. MISLANSKY. So there are multiple ways that occurs. One of 

the ones that I believe is unique to us in our market, we serve the 

core of Dayton. We have several branches, what we call ‘‘member 

centers,’’ in inner-city Dayton or in the near-inner city. And in 

those communities, the home values are relatively low. You can 

buy a home in certain markets in Dayton for $40,000 or $50,000. 

That might be surprising to those people in the District where, you 

know, you would need half a million dollars to buy a home, or upwards. But we make loans without any loan limits on the downside, and what I mean by that is we do not have a minimum loan 

amount. So if you are a member of our credit union and you want 

to buy a $40,000 home, we will still make a loan to you, where 

many lenders will have larger limits—or minimums in place, and 

they use those minimums—those minimums prevent urban areas 

from in some ways revitalizing. 

So what the secondary market—— 

Senator BROWN. And I assume rural areas in, say, northern 

Miami County or places that the homes are not quite as inexpensive as inside of Dayton—— 

Mr. MISLANSKY. Correct. 

Senator BROWN. ——but pretty inexpensive by national standards. 

Mr. MISLANSKY. By national standards, yes. Those rural homes, $60,000, $70,000, $80,000 homes. And what we do to help manage 

the credit risk, to help manage the interest rate risk, and to help 

16 

manage the liquidity risk is we sell those loans in the secondary 

market to either Fannie Mae or we are also a Ginnie Mae issuer. 

Senator BROWN. OK. Helpful. Thank you. 

Let me ask a question of—I will put two questions out that, Ms. 

Hughes, if you would start and just go down the line. GSEs in the 

past used volume discounts to attract business from lenders such 

as Countrywide and Wells Fargo, with large origination volumes, 

as you know. The two questions are this, and I will just work down 

the group. Is equitable pricing for small lenders an essential part 

of the system? And does inequitable pricing impact mortgage access 

for your customers? 

Ms. HUGHES. Yes to both. In the past, it was a competitive disadvantage for us to have pricing against the larger institutions. 

You had more favorable pricing than we could obtain. And equitable pricing across the board is vital to continued success. 

Senator BROWN. OK. Thank you. 

Mr. Mislansky. 

Mr. MISLANSKY. Senator, again, I would agree that the answer 

is yes to both. And while the competitive issues are certainly there, 

I think the other issues to take into account are when volume pricing is provided to, whether it is a lender or to any type of entity, 

what you are trying to do is to gather more volume, and if the entity can earn more revenue because they are sending in more volume, does that create an opportunity for unintended consequences 

such as you take short cuts on making the loans? And maybe the 

credit quality is not as strong, or maybe the underwriting is not as 

strong. And I think that is some of what we saw during the financial crisis when lenders that no longer exist today, such as a Countrywide or a Washington Mutual were receiving volume discounts, 

but the quality of their paper was not there. 

Senator BROWN. Thank you. 

Mr. Hopkins. 

Mr. HOPKINS. It definitely put us at a competitive disadvantage, 

but I think many times we found that the rates were fairly similar, 

so it was really just a transfer of profits to the large institutions 

from the GSEs. And so I felt that they were pocketing the money 

at the expensive of the borrowers. 

Senator BROWN. OK. Thank you. Good comments. 

Mr. Purvis. 

Mr. PURVIS. We think it is important for the mortgage market 

in the U.S. to have local community-based lenders, regardless of 

whether it is a credit union, a community bank, a community lender or otherwise. And the only way that will happen is if the pricing 

is equitable irrespective of size and production volumes of the sellers. 

Senator BROWN. OK. Mr. Hunt. 

Mr. HUNT. We certainly believe that pricing equality is important and must be maintained, and it certainly would be a barrier 

to entry even for a new lender if they come in with a disadvantage 

to pricing. It is going to be even more difficult for them to grow 

their business. So when you put an advantage out there to a larger 

lender who already has a foothold in a marketplace and you have 

a new competitor or new lender coming in, an emerging lender that 

is growing, such as an independent banker, as my company is, you 

17 

put that new company at a further disadvantage so you are going 

to further disadvantage the consumers. There is going to be less access because you are not going to have new lenders coming into the 

marketplaces easily. 

Senator BROWN. Thank you. 

Mr. Giambrone. 

Mr. GIAMBRONE. The short answer would be yes to both. I would 

expand upon it saying that many times they do pass it on in terms 

of a competitive disadvantage and other times they do pocket the 

difference. I think the big difference comes from the consumer 

wanting us many times to retain the loan, and if we are at a price 

disadvantage, we are unable to do that. 

For example, last year, when a large entity had some issues with 

cross-selling, we had many of our customers ask us not to sell their 

loans to aggregators. And if the pricing is disadvantaged, we would 

not have that opportunity. So those folks would be forced into that 

scenario. So that was a big variable. 

And the other one, just to add to it, would be this is also what 

I mentioned in my testimony, risk sharing, that is another way 

that it could be—if it is up-front risk sharing, not back-end, it could 

be manipulated in the form of price advantages up front. 

Senator BROWN. Thank you. 

Chairman CRAPO. Thank you. 

Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chair. Welcome to everybody. A 

special welcome to a constituent and hopefully a voter. 

[Laughter.] 

Senator TILLIS. Down in North Carolina. 

Mr. Purvis, I want to welcome you. I want to ask you a question. 

I thank you for your time this morning. I want to talk specifically 

about what things this body should consider with respect to affordable housing in the context of GSE reform. And in the time allowed, I would like for you to talk a little bit about what we discussed with the work that you are doing with Habitat for Humanity over in the Raleigh area. 

Mr. PURVIS. Sure. Thank you. We need to try to expand housing 

and home ownership opportunities to as broad a sector of the population as we can, and we certainly agree with that goal. 

A couple of things we are doing in our market, we have had a 

100-percent first-time homebuyer program since the late 1990s, 

and that has been very successful, delinquencies and losses very 

low. We work very closely in providing home financial education at 

the front end of the process. And so today we find new individuals 

and couples who are struggling to save money for a downpayment 

because of student loan debt, and so we are able to meet their desire for home ownership through that program. 

Then on the low-income front, we established a partnership with 

Habitat Wade County about 18 months ago to provide $6 million 

in 2-percent mortgages which does two things: it will lead to the 

construction of 60 affordable homes, and then put 60 low-income 

families into those homes. So we are trying to do what we can in 

the local community to expand access to both home ownership and 

affordable mortgages to the low-income community. 

18 

Senator TILLIS. What do we need to be—and this would be to 

anybody who would like to add to it. What should we be particularly sensitive to that would, within the context of the reform discussions we are having, that would either be particularly helpful 

or harmful to some of the things you are already doing? 

Mr. PURVIS. I will answer that. The operational relationship between us and Fannie Mae to the securities market works very well 

today. It has taken decades to build. It is very efficient. Let us 

make sure that we do not break that or lose that in our efforts to 

reform the system. Otherwise, it will be disruptive to the market. 

Senator TILLIS. Yes, sir? 

Mr. MISLANSKY. Senator, I think the other thing that is sometimes missed with the discussion about Fannie and Freddie is the 

standardization that the GSEs brought to the mortgage market, 

the uniform residential loan application. All of us as lenders use 

that same application. All of us either use Desktop Underwriter, as 

Mr. Purvis mentioned, or Freddie Mac’s competing product. There 

are standardizations about the documents that are needed to close 

a loan—to record a loan and to close a loan. All of those aspects 

are important to creating a commodity product in the United 

States that goes into mortgage-backed securities. 

And so as changes are considered with the secondary market, I 

think it is important that the standardization and the assets that— 

the people side and the technology side that Fannie and Freddie 

have built are considered and how to be maintained. 

Senator TILLIS. Just one question in my time remaining, and I 

have got a lot that we will probably submit for the record so that 

we can get more feedback. But I would like the market-based rationale for an explicit Government guarantee. I think there was at 

least in one of your testimonies you think that that is very important. So for those who may differ, give me the market-based rationale for that explicit Government guarantee. 

Mr. HOPKINS. The market-based guarantee, the explicit guarantee is obviously going to help keep the rates low for the homeowner on a going-forward basis because—— 

Senator TILLIS. The Government guarantee. 

Mr. HOPKINS. The Government guarantee standing behind the 

MBS securities, because without that guarantee the rates would be 

higher to the consumers. You know, we are talking about being the 

final line of defense as really that catastrophic type of insurance 

in the guarantee from the Government. 

Senator TILLIS. So the overall return is the rationale—or the 

overall return and market activity is the rationale for the Government guarantee. 

Mr. HOPKINS. Keeping it affordable, I think it is part of the affordability that you are looking for, for particularly first-time buyers to get into the market. 

Senator TILLIS. OK. Thank you. 

Mr. Chair, I yield back my 12 seconds. 

Chairman CRAPO. Thank you, Senator Tillis. 

Senator Menendez. 

Senator MENENDEZ. Well, thank you, Mr. Chairman. I am running between hearings here. Thank you all for your testimony. I 

am pleased to see the Committee highlighting the importance of acVerDate Nov 24 2008 09:14 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\07-20 ZDISTILL\72017.TXT JASON
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cess for small lenders, and I think you all represent community-oriented institutions working to increase affordable options for homeowners and borrowers in cities around the country. 

In reading each of your statements, a common theme emerges in 

favor of targeted precise reforms over wholesale restructuring of 

the system. I think that is a fair statement to make. And one important benefit of the current system is that it allows community 

banks and lenders to sell their loans to the GSEs through the cash 

window but retain the servicing rights to the loans, and in doing 

so preserve the relationship with the borrower. 

So why is it important for borrowers that lenders have the ability 

to retain their servicing rights? And I hope that up to anyone who 

wants to speak to it. 

Mr. GIAMBRONE. Senator Menendez, a great question, and I 

think in my testimony, what I had mentioned earlier, many times 

the customers want the local lender. It is a matter of service, right? 

If they see us in the store or at the ball field and there is a little 

bit of a difference if we are unable to. So, for example, when there 

was big pricing disparity, most of our loans would be sold released, 

and at this point we are able to retain more because the pricing 

differential is not as wide as it was. So a big factor is simply just 

the consumers like it when it is a local lender servicing their loan. 

Senator MENENDEZ. Anyone else? Mr. Hopkins. 

Mr. HOPKINS. Senator, from my perspective, we do servicing of 

mortgage loans, and it allows us to keep our customers from being 

cross-marketed by some of the larger firms. If we were to sell to 

some of the other firms, we might have had accounts opening that 

they were not aware of, et cetera. And we look at it—they can walk 

into any one of our branches and ask any one of our people a question, and they can pull it up in front of them. We have the local 

service in all of our local branches. So rather than calling a 1–800 

number—I call it ‘‘1–800-who-cares’’—we are there for them. We 

are there at the individual branches. 

Senator MENENDEZ. Thank you. 

Mr. Purvis. 

Mr. PURVIS. Most of our mortgage borrowers have a lot of other 

account relationships with us. They have their checking account 

here. They have a savings account. They have an IRA. They have 

a car loan. They have a credit card. And so they can contact us 

with servicing issues, questions across the entire relationship with 

us. It would be very difficult to have to say, ‘‘I am sorry. I cannot 

answer your servicing question on your mortgage because someone 

else is servicing it.’’ So for us, it is about being responsible for the 

entire relationship we have with that member. 

Senator MENENDEZ. Those are fine answers. 

Let me ask you, and maybe just one or two of you could answer 

in the time I have, what challenges would your institutions face in 

assisting borrowers that fall behind on their mortgage, for example, 

if various new guarantors or entities establish disparate loan servicing standards. Mr. Hopkins. 

Mr. HOPKINS. We do servicing for, as I said, Fannie and Freddie 

and our South Dakota Housing Development Authority, and they 

do have different requirements for what we can and cannot do with 

the borrowers. For instance, South Dakota Housing is a little more 

20 

restrictive than Fannie Mae is with their programs and being able 

to work with them. So just creating the complexity of a lot of different servicers, it gets to be difficult for our staff to keep ahead 

of it. 

Senator MENENDEZ. Let me ask a question of all of you, and if 

you can give me a simple yes or no answer, I would appreciate it. 

Would you agree that—and I want to follow up on the Ranking 

Member’s questions. Would you agree that competitive pricing for 

loan sales with a securities option is necessary for small lenders to 

continue accessing the system? Yes or no. 

Ms. HUGHES. Yes. 

Mr. MISLANSKY. Yes. 

Mr. HOPKINS. Yes. 

Mr. PURVIS. Yes. 

Mr. HUNT. Yes. 

Mr. GIAMBRONE. Yes. 

Senator MENENDEZ. That is good. We do not get that type of unanimity around here. 

[Laughter.] 

Senator MENENDEZ. Would you agree that, in order to facilitate 

this competitive pricing, we need a guarantor or entity that can 

pool costs across the market and that has a duty to serve all lenders? Yes or not. 

Ms. HUGHES. Yes. 

Mr. MISLANSKY. Yes. 

Mr. HOPKINS. Yes. 

Mr. PURVIS. Yes. 

Mr. HUNT. Yes. 

Mr. GIAMBRONE. Yes, but not more than two. 

Senator MENENDEZ. Would you be concerned about the workability and accessibility of a system in which so much of the credit 

risk has been transferred on the front end that there is inadequate 

revenue remaining to pool costs and serve a wide range of lenders? 

Yes or no. 

Ms. HUGHES. Yes. 

Mr. MISLANSKY. Yes. 

Mr. HOPKINS. Yes. 

Mr. PURVIS. Yes. 

Mr. HUNT. Yes. 

Mr. GIAMBRONE. Yes. 

Senator MENENDEZ. I am going stop at three for three, so thank 

you, Mr. Chairman. 

[Laughter.] 

Chairman CRAPO. You were on a roll. 

Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. Thank you to the 

panel for being here this morning and answering a lot of questions. 

From my perspective, home ownership is such a big part of the 

American dream, and when you think through the net worth of the 

average American, what we come to conclude is that your equity 

in your home accounts for a significant portion of your net worth. 

That means that those folks who have been trapped out of home 

ownership have a significantly smaller net worth, minority communities to speak specifically. And in many ways, volume discounts by 

21 

the GSEs could work against access to home ownership, particularly when so many small banks and credit unions spend a lot of 

time investing in their members, to understand and appreciate the 

unique lives of those members. It is an intimate relationship. I 

served on a credit union board for about 7 years, and so I have 

great affinity for our credit unions. 

My question is: How do credit unions and community banks get 

squeezed out under volume discounts? For the panel. 

Ms. HUGHES. Again, it comes back to a pricing disadvantage, and 

if you have those larger pricing, the larger institutions can either 

undercut you, they can make more profits, it gives them the opportunity to go out and do more targeted marketing. And the inability 

for us to compete in that space makes us a little uncompetitive. 

Senator SCOTT. Thank you. 

Anybody else? 

Mr. MISLANSKY. Senator, I might try to answer the question a 

slightly different way, not in terms of price advantage and what 

the GSEs would allow in terms of they pay more to one lender than 

another, but there was a practice that used to be in existence 

where variances were given under the master service contracts. 

And what that would mean is that Fannie or Freddie would have 

their standard set of rules by which they would buy a loan. But 

they may negotiate a special variance with another lender to either 

do something or not do something. 

So in my market, one of the lenders had negotiated a variance 

where they did not require title insurance on loans that were sold 

to Freddie Mac, I believe it was. And so what happened is that that 

lender was able to have a substantial price advantage in the marketplace by—if a member compared a Wright–Patt loan versus this 

institution, they saved quite a bit of money. And title insurance, 

granted, does protect the lender. It created that sort of advantage. 

So it is not just how much they will pay for the loan. I think it 

also includes the rules that you can sell loans by. 

Senator SCOTT. Anybody else? 

[No response.] 

Senator SCOTT. On the flip side, I am focused on encouraging 

sustainable home ownership over simple homebuyership. One way 

to do so is the FHFA updating the accepted credit scoring models 

at the GSEs. If a family pays their utility bills or their phone bills 

on time for a decade, it ought to count toward their ability to have 

a home. I will go to Mr. Purvis. Why is it important that the model 

be updated? And who benefits from the capture of this new data? 

Mr. PURVIS. So the FICO models used by Fannie and Freddie are 

decades old. They have certainly been updated over time, but they 

are still based on essentially a loan repayment history and then an 

‘‘I gotcha’’ because you had a delinquency or collections item or so 

forth. 

There are new data sources that capture payment history on cell 

phone bills, utilities, rent, et cetera, that are not being used in the 

determination of creditworthiness by the GSEs, and we think it is 

very important for them to begin updating their credit models to 

take advantage of those other sources, which we think will widen 

the net of folks who become eligible for conforming mortgages 

through the GSEs. 

22 

Senator SCOTT. Thank you, sir. 

Mr. HOPKINS. We do use some of the other scoring models for our 

credit card part of our program, and they do work well. However, 

I would say that if we are going to on the mortgage side, we do 

need some time to make sure we can validate the data. 

Senator SCOTT. Absolutely. 

Mr. HOPKINS. Because that will be key to making it work properly. 

Ms. HUGHES. Mr. Scott, we actually manually underwrite loans, 

consistently deliver these loans to the market. So for those borrowers that have alternative credit sources, we already do that. 

That path already exists. Adding more credit scoring models to the 

market would require some data validation, so some time periods 

it adds cost. It adds cost to the borrowers. And if you have lenders 

who already have that ability, we can already deliver those loans 

to Freddie Mac and Fannie Mae. We can deliver them and insure 

them under FHA/VA. The path already exists. 

The issue comes into play that pricing is usually different if you 

have a manual underwrite. So if the pricing were equitable, the 

systems are already in place. The systems that are in place work 

for the lenders who are willing to do the work for the borrowers. 

Senator SCOTT. Thank you very much. Ranking Member. 

Senator BROWN [presiding]. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. I want to thank you 

all for being here. 

We cannot have a thriving mortgage market if small lenders do 

not have access and the big guys do. You know, it would produce 

a competitive imbalance that will drive smaller guys out of the 

market, and it was one of my primary concerns the last time we 

were considering housing finance reform. So I am very glad we are 

on this topic now. I think it is critically important. 

But even if we agree that small lenders and big lenders should 

have equal access to the secondary market, it leaves an important 

question, and that is, what do we have to do to provide that equal 

access to the secondary market? And, Ms. Hughes, you addressed 

some of this in your written testimony, so I want to follow up on 

this. 

As Senator Brown and Senator Scott both noted, one of the major 

issues about access for smaller lenders is volume discounts when 

the GSEs would give bigger lenders a better price on a bunch of 

loans than a small lender would get for a single loan. So how would 

you propose that Congress fix that problem, Ms. Hughes? 

Ms. HUGHES. Well, I think by simply removing the volume discounts. In addition to paying up for bigger—you know, bigger blocs 

of loans with larger institutions, historically they would also pay 

up for low- to moderate-income loans. 

Senator WARREN. So, basically, you are just saying let us bar any 

secondary market entities from offering a volume discount. 

Ms. HUGHES. From offering volume discounts, yes. 

Senator WARREN. And that would help level the playing field. 

Ms. HUGHES. Yes, correct. 

Senator WARREN. Now, another issue that you all have raised is 

one, as I read it, of customer service, and you write that it is not 

just pricing but that GSEs—other policies were geared toward 

23 

higher-volume lenders, and the GSEs showed little interest in 

working with smaller, low-volume banks. So how would you propose to solve that problem? 

Ms. HUGHES. I also think that the GSEs need to give all partners 

in the industry the same level of service. 

Senator WARREN. Yeah, but you want changes in the law. So I 

take it what you are saying is you want Congress to mandate that 

any secondary market entity treat all lenders equally. 

Ms. HUGHES. Correct. 

Senator WARREN. OK, good. And then a final issue is whether 

larger lenders can operate in both primary and secondary markets, 

that is, whether or not they can both originate mortgages and be 

involved in purchasing and securitizing mortgages. And I think, 

Mr. Giambrone, your organization has raised concerns about this 

issue. So how would you propose that Congress address it? 

Mr. GIAMBRONE. Well, that is a great question, and I think in my 

testimony I explained that the main way to address it is to leave 

the entities the way they are today, make it a utility model, and 

I think there is a consensus on a utility model, where it is regulated what they are allowed to charge that is equal for all. 

Senator WARREN. But I take it on the vertical integration point 

what you are really saying is that Congress should prohibit any 

vertical integration, that is, you have got to be in one space or the 

other but you do not get to be in both spaces in terms of origination. 

Mr. GIAMBRONE. Correct. That is what we are saying, and I 

think the proposals that are on the fringe—I guess it is opening 

Pandora’s Box, so to speak, if they can own a little percentage, but 

not a lot. 

Senator WARREN. OK. 

Mr. GIAMBRONE. And then you have a control issue, and it may 

not look like vertical integration but, in fact, it is. 

Senator WARREN. But I get your point, and that is, your ideal 

would be just prohibit people from—or entities from operating in 

the primary and secondary market simultaneously. 

Mr. GIAMBRONE. Correct. 

Senator WARREN. Good. So I want to thank you all for your testimony. I support ensuring equal access to the secondary market for 

small lenders, and I think it is critical that we get the details right 

on what it is going to take to make that happen. 

But I also want to highlight that ensuring equal access for smaller lenders involves Government intervention on pricing, on customer service, and on the types of entities that can compete in the 

marketplace. And many of my Republican colleagues support equal 

access for smaller lenders, and they seem perfectly happy to sign 

off on Government intervention to help small lenders. But then 

they turn around and oppose any form of Government intervention 

to help lower-income or minority borrowers. And I do not think you 

can have it both ways. 

We need thoughtful Government intervention to make sure that 

the mortgage market works for both small lenders and for creditworthy low-income borrowers. So I want to see us working in both 

spaces at the same time. Thank you very much. 

Thank you, Mr. Chairman. 

24 

Chairman CRAPO [presiding]. Thank you, Senator Warren. 

Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. I think a lot of 

discussion, and good discussion, and actually good consensus 

around this lane. But it is like everything else in Washington. We 

can sit here and yes, yes, yes, yes, yes, yes, yes, yes, yes, and then 

nothing happens. So we need to remain committed to actually taking that consensus and figuring out how we can build legislation 

and how we can bring certainty to small lenders. 

And as you can imagine, North Dakota is a place where small 

lenders have thrived for many, many years, and, unfortunately, for 

many of my small community banks, they are basically priced out 

of the mortgage market by excess compliance costs, which is another whole issue beyond access to the secondary market. 

So we are going to continue to have these conversations, but I 

want to—I do not want to recover—I do not want to plow over the 

same area—we say that in North Dakota, ‘‘plow’’—plow over the 

same area that has been already tilled, but I do want to talk a little bit about duty to serve. In today’s market, many lenders are 

facing challenges extending mortgage credit in some of the more 

rural areas of our State. We can talk about appraisals, and anyone 

who wants to weigh in on that, please do. Both Fannie and Freddie 

have released their public plans aimed at helping rural, and underserved markets get more access to the secondary market. And this 

is for everyone, and maybe just go through it quickly. Do you think 

that the new underserved market plans will be effective tools in 

helping small lenders in rural areas? I will start with you, Ms. 

Hughes. 

Ms. HUGHES. Yes. 

Senator HEITKAMP. Yes? 

Mr. MISLANSKY. I am not substantially familiar with the plans, 

but from what I have read, yes. 

Senator HEITKAMP. OK. 

Mr. HOPKINS. I think it goes part way, but as your neighbor to 

the south, there is a lot of work to be done. 

Mr. PURVIS. Yeah, I am not familiar with that plan. 

Senator HEITKAMP. OK. 

Mr. HUNT. I am not familiar with the plan either. 

Mr. GIAMBRONE. Yeah, I think it is a good start, and I think it 

will help. It will need some tweaking as it evolves, but I think it 

is a good plan. 

Senator HEITKAMP. It is critically important that we understand 

how this will operate, because as we are looking at legislating in 

this space, things that have been done in the regulatory sphere or 

in the implementation, if they are working, then we need to make 

sure that we do not take a step backwards. 

How could housing finance systems increase accountability for 

helping small lenders in the rural part of our country? And maybe 

we will stick to the folks who actually have focused on rural lending, and we will start with you, Ms. Hughes. 

Ms. HUGHES. You know, we are a rural area, but we really have 

not had an issue with affordability. Our issues do surround around 

appraisals, making sure we have timely appraisals coming in, making sure we have qualified appraisers, making sure we have apVerDate Nov 24 2008 09:14 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\07-20 ZDISTILL\72017.TXT JASON
25 

praisers who are not afraid to deal with the Freddie Mac and 

Fannie Mae rules. But as far as access to customers, we have not 

had a huge issue with that. 

Mr. MISLANSKY. So at our institution that is the subsidiary, we 

use the USDA’s Rural Development Program quite a bit, and we 

are one of the larger lenders, at least in the State of Ohio, in terms 

of making that product available to help people become homeowners. So maintaining that sort of product would be critical for us 

to continue serving members in the rural areas. 

Mr. HOPKINS. We have a few counties within our State where we 

are the only mortgage lender, and I think some of the complexities 

and the compliance laws have driven many of the lenders out of 

the market. And I think that is part of the issue we are dealing 

with here, is it has just gotten to be a very, very complex market. 

Some of the appraisal rules and when appraisals are required have 

not been updated for decades, and we are dealing with that. Why 

does a refinance of a property really need an appraisal? I mean, 

some of these things need to be addressed. 

Mr. PURVIS. We historically have served primarily members in 

Wake, Durham, and Orange Counties, Raleigh, Durham, Chapel 

Hill, in central North Carolina, which are urban markets. Through 

a merger last year and some other decisions we made about where 

we wanted to do business, we are now focused on 16 counties in 

central North Carolina. Half of that is rural markets. We are kind 

of newbies beginning to look at what are the tools and programs 

available to help us do mortgage lending in those rural markets, 

and there are quite a number of those in that 16-county market. 

Senator HEITKAMP. Comments? 

Mr. HUNT. As a company who actually is the largest rural housing lender in the State—and we have been for 6 or 7 years—we 

certainly serve a number of rural markets throughout Georgia and 

into the surrounding States. It is extremely important that we keep 

community-based lending, whether that is a one-person office of an 

independent mortgage banker in that community to directly serve 

it or a community bank. Oftentimes in rural areas we see a lack 

of access to high-speed Internet, and with the current TRID regulations, that makes it more difficult on those borrowers when they 

do not have the proper Internet access to interact with their lender 

electronically. Keeping lenders in the communities so the borrower 

can easily drive to the actual location is very important, particularly for low- to moderate-income borrowers who do not have any 

extra money to spare. 

Senator HEITKAMP. OK. 

Mr. GIAMBRONE. Yeah, I would say, not to get too deep into the 

weeds, but Fannie and Freddie have come out with an appraisal 

standard, just to add to the panel, and it is called ‘‘Day 1 Certainty’’ at Fannie, where they give you a grade on your appraisal. 

I can tell you, in the rural areas it just does not work. It is a lot 

bigger process, and you really cannot rely on it. So if there is a way 

to change that model, for example, that—— 

Senator HEITKAMP. We are working on it. 

Mr. GIAMBRONE. OK. 

Senator HEITKAMP. If I could have just a minute to make a comment, I come from a town of 90 people. I know what relationship 

26 

banking is. And I know what it means to be able to just walk down 

or drive 10 miles to your banker. We are losing that in rural America, and we need to figure out how actions here are driving that. 

The other thing people ask me all the time, ‘‘How come I can get 

a loan for a $70,000 pick-up but not a $20,000 house?’’ It is an interesting—you explain that to people in my State with a lot of common sense, and you will be talking in circles by the time you are 

done. So we are with you. Thank you all for your input. Thank you 

for continuing to engage, hopefully, with this Committee, and we 

will hopefully get some results. 

Chairman CRAPO. Thank you, Senator Heitkamp, and you make 

some very important points. I appreciate that. 

Senator Brown has one more question to ask. 

Senator BROWN. Yes, thank you for your indulgence, Mr. Chairman. 

Senator Menendez asked you all a question that Mr. Giambrone 

gave a slightly different answer. He mentioned there should be no 

more than two guarantors in the market, and I would just like to 

hear thoughts from the rest of the panel—and I will start with you, 

Mr. Hunt—on what you regard is the right number and why. At 

what point do multiple entities break the TBA? If you would give 

us your thoughts, starting with you, Mr. Hunt, and moving to your 

right. 

Mr. HUNT. Yes, Senator. So we support—and it is important that 

we do not have multiple GSEs that enter the market. It is already 

a complex market, and when we speak of the complexity of the 

market and you think of a small lender, the more complex it is, the 

more your legal costs rise. Your internal costs rise to try to keep 

up with all of the differences within the different GSEs. So as 

someone else on the panel alluded to earlier, consistency is extremely important, and the consistency that Fannie Mae and 

Freddie Mac provide to the industry today, the clear and concise 

underwriting guidelines that we see from Fannie and Freddie are 

important for smaller lenders to be able to operate. 

So the more GSEs that we have, the less clarity we are going to 

have in the marketplace, and the more complexity we are going to 

add to the marketplace. And all of that complexity is going to continue to be a barrier to entry for small lenders, and it is also going 

to increase the cost to the consumer. 

Senator BROWN. Thank you. 

Mr. Purvis, briefly, if you can. 

Mr. PURVIS. Yeah, we would expect the guarantors to be pretty 

tightly regulated, and unless there is a lot of flexibility within 

those regulations, why do you need two, three, four, five guarantors 

living with a fairly strict definition? 

Senator BROWN. Mr. Hopkins. 

Mr. HOPKINS. I would say that you had two that worked fairly 

well for 70 years until they started straying from their mission and 

the regulator allowed them to. We now have a strong regulator in 

place. Is it really necessary? They have $400 billion into their common securitization platform and another $600 billion to go. Do we 

need to duplicate that cost? I do not think it is necessary. 

Senator BROWN. Tim. 

27 

Mr. MISLANSKY. I would agree with what others have said. I do 

not know that it is necessary to add and sometimes question 

whether it is necessary to have two. And do we need a signal—if 

there is a catastrophic Government guarantee behind these, why do 

you need necessarily two separate companies doing the same work 

essentially? 

Senator BROWN. Ms. Hughes. 

Ms. HUGHES. I would agree that we probably do not need more 

than two. I do like the idea of two because it does help with innovation of the products. We know that with the current regulatory environment we are in, mortgage lending is very complex, and having 

partners in the industry who help us determine the best path to 

get that done is vital. And having two systems helps create that 

innovation. 

Senator BROWN. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you. Thank you for your indulgence. And, excuse me, I have three Committee hearings going on 

at the same time, so I am trying to cover them and listen to some 

of the conversations that are taking place. 

Ms. Hughes, I would like to start with you. In your testimony 

you recommended that banks should get a safe harbor from consumer litigation or CFPB enforcement as it relates to mortgage underwriting, so long as the bank holds the loan in portfolio. And my 

understanding is the thinking behind this is that a bank would 

never make a bad mortgage loan if they held it on their books. 

However, the experience that I have seen, coming from Nevada, 

and particularly with Washington Mutual and Wachovia, suggests 

otherwise, at least for the largest banks. These failed banks were 

able to extract significant fee income up front, and then they would 

squeeze the borrower with fees if they fell behind on their payments. And then they could seize the home and resell it if the borrower went into foreclosure. We saw that in Nevada. I was the Attorney General there for 8 years, and we saw how devastating it 

could be. 

So my question to you is: Would expanding the portfolio mortgage exemption to large Wall Street banks open the door to another Washington Mutual or Wachovia? Wouldn’t you agree that 

the community financial institution relationship lending model is 

different than the model used by big banks? 

Ms. HUGHES. Yes, I would agree with that. From our perspective, 

we—I personally struggle with qualified mortgage rules because if 

you are a partner in the industry and you want your consumers to 

be successful in home ownership, you have already underwritten 

them to a qualified standard. You have already worked with them. 

You know that they qualify. And as they go into—and the benefit 

of servicing locally is if they get into hard times, you know them 

at the consumer level, and you can work with them to work 

through the issues where they have some credit strain. 

So I would agree that the community model definitely works better, and in our case, the regulatory requirements are actually restrictive and inhibit our abilities to serve our customers. 

28 

Senator CORTEZ MASTO. OK. And so to some extent, you would 

agree that narrowly targeting a portfolio mortgage exemption to an 

institution like yours makes sense; I mean, if we are really looking 

out for those protections. 

Ms. HUGHES. Absolutely. 

Senator CORTEZ MASTO. OK. Thank you. I appreciate that. 

Let me move on to Mr. Giambrone. FHA loans are an important 

source of credit, particularly for first-time buyers seeking to enter 

home ownership. When the FHA Insurance Fund was not doing 

well in the aftermath of the Great Recession, the last administration made a series of changes to shore up its finances. One such 

change was requiring mortgage insurance to be paid over the life 

of the loan. Previously, borrowers could stop paying for this expensive insurance once they had 22 percent equity in their house. 

Can you discuss the impact of this change in FHA policy? Has 

it impeded home ownership, particularly for first-time homebuyers? 

And should the FHA reconsider now that the Insurance Fund is in 

a much stronger position? 

Mr. GIAMBRONE. Excellent question. Thanks for asking it. It 

should be reconsidered, yes. When it was done, I think it was done 

at a time when the fund was at a low point. That was in part because they put in the home equity portion. And at this point I 

think it actually hurts the fund because people would be more apt 

to refinance out of an FHA loan, which is actually taking funds 

away from the fund, because they have it for the life of their loan. 

So whether it would be back at 78 percent or 75 percent, it would 

be better to get rid of the life of the loan, and on the topic, we also 

think it is probably time to lower the monthly as well. 

Senator CORTEZ MASTO. Thank you. And let me follow up also, 

which is an issue important for me, on affordable housing, affordable rental housing. In both northern and southern Nevada, we 

have an affordable housing crisis, and that includes rental. In fact, 

our State has the worst shortage of affordable and available rental 

homes in the Nation with only 15 units affordable for every 100 extremely low income households. 

And so let me ask, Mr. Giambrone and Mr. Hunt, your organization signed on to a letter advocating for policymakers to consider 

the affordable rental housing crisis in the context of GSE reform. 

Can you discuss the necessity of not only preserving but expanding 

our commitment to the National Affordable Housing Trust Fund in 

the context of reform? 

Mr. HUNT. Affordable housing, you know, is important across the 

Nation, so, you know, I believe that it is hard to determine exactly 

what the GSEs are going to do for affordable rental housing. You 

know, the multifamily side of things I am not really that familiar 

with, but that is very important, that we do provide avenues, you 

know, to stand up more affordable housing, and a lot of that actually speaks to some of the greater issues of the barrier entry to development at this point in time in the industry, takes much, much 

more capital. I am an independent mortgage banker, so I am not 

answering from the true banking side, but, you know, we all know 

it takes much more capital to enter those markets. And that is 

slowing the entry of continued development in the country. 

Senator CORTEZ MASTO. I appreciate that. 

29 

Mr. Giambrone, do you have any comments? 

Mr. GIAMBRONE. Yeah, just briefly, we have supported both 

funds. It is our understanding they have done great work in the 

past. Rental is a pathway to get to home ownership, and so we support that. I know the funds—and I am no expert at either, but 

whether it be the counseling or the downpayment assistance, 

again, or the rental, they have done good work, so we are supportive. 

Senator CORTEZ MASTO. Thank you. I notice my time is up. 

Thank you all. I appreciate the comments. 

Chairman CRAPO. Thank you very much. And I again want to 

thank all of the witnesses for being here today and providing your 

testimony, both your oral and your written testimony. It is very 

helpful as we move forward. 

I do look forward to working with Senator Brown and the other 

Members of the Committee on this critically important issue. 

For Senators who wish to submit questions for the record, those 

questions are due on Thursday, July 27th, and I encourage the witnesses, as you receive questions from the Senators, to please respond as promptly as you can. 

With that, again, thank you very much, and this hearing is adjourned. 

[Whereupon, at 11:31 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

30 

PREPARED STATEMENT OF BRENDA HUGHES 

SENIOR VICE PRESIDENT AND DIRECTOR OF MORTGAGE AND RETAIL LENDING, FIRST

FEDERAL SAVINGS BANK OF TWIN FALLS, IDAHO, ON BEHALF OF THE AMERICAN

BANKERS ASSOCIATION

JULY 20, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, my 

name is Brenda Hughes. I serve as Senior Vice President and Director of Mortgage 

and Retail Lending for First Federal Savings of Twin Falls, Idaho. I have been with 

First Federal for over 20 years. First Federal is a $607 million asset bank which 

was established in 1915. We currently have 11 branches and one production office 

and have 247 employees. We are the largest lender in our assigned lending area and 

have originated over $1 billion in mortgage loans in the last 10 years. 

I am pleased to be testifying on behalf of the American Bankers Association on 

the important topic of GSE reform and community bank access. The ABA is the 

voice of the Nation’s $17 trillion banking industry, which is composed of small, 

midsize, regional, and large banks that together employ more than 2 million people, 

safeguard $13 trillion in deposits and extend more than $9 trillion in loans. 

In addition to my role at First Federal Bank, I served on Freddie Mac’s Community Advisory Board from 2005 to 2016, serve on ABA’s GSE Policy and Mortgage 

Markets Committees, chaired the ABA’s Mortgage Markets committee from October 

of 2012 until September of 2014, and am the incoming vice chair of the ABA’s GSE 

Policy Committee. I also currently serve on the CFPB’s Community Bank Advisory 

Council. 

First Federal actively delivers loans directly to Freddie Mac and to the Federal 

Home Loan Bank of Des Moines and we retain servicing on these loans. We also 

work with a handful of other market investors to whom we sell loans with servicing 

released. We currently service approximately 5,000 loans. Like so many banks, both 

large and small, access to the secondary market in general, and through the federally guaranteed secondary market enterprises (GSEs) in particular, is essential to 

our ability to meet the mortgage needs of our customers. 

The American Bankers Association, through input and deliberation from banks of 

all sizes and from all parts of the country, has developed a set of principles to guide 

the reform of Fannie Mae and Freddie Mac, which, as you know, have been in conservatorship since 2008. We appreciate the work this Committee has done thus far, 

as well as the opportunity to share our views with you today. 

On GSE reform, and on the importance of preserving access for lenders of all sizes 

and in all regions of the country, ABA believes that: 

• Key shared principles should guide reform efforts; 

• Without legislative reform, past abuses may be repeated, or new ones may arise 

which imperil the mortgage markets and put taxpayers at risk; and 

• Reform need not be radical or extreme, but should be targeted and surgical. 

I will elaborate on each of these in turn. 

I. Key Shared Principles Should Guide Reform Efforts 

ABA has (during the many years that Fannie Mae and Freddie Mac have been 

in conservatorship) worked with bankers from institutions of all sizes and from all 

parts of the country to develop principles which should guide reform of the GSEs. 

For the purposes of this testimony, we highlight the following principles, and note 

that many of these are widely shared among various other trade and industry associations. 

We believe that these principles should form the basis for legislative reform efforts. 

1. The GSEs must be strictly confined to a secondary market role of providing stability and liquidity to the primary mortgage market for low- and moderate-income borrowers and must be strongly regulated, thoroughly examined and subject to immediate corrective action for any violation. 

A reformed system must ensure that the GSEs or their successors stay focused 

purely on advancing stable, affordable and readily available secondary market access to the primary market. Shareholder returns or other investment goals cannot 

be allowed to drive their behavior. While a certain level of competition is desirable 

to ensure innovation and responsiveness to the market, competition cannot be allowed to spin out of control and take the GSEs into other businesses or investment 

areas. For this reason some have suggested that a public utility or member-owned 

cooperative model may be a desirable evolution for the GSEs. We note only that 

31 

while ownership structure is one way to limit and direct activities, strong regulation 

will also be necessary to keep GSEs or their successors focused on their defined role, 

regardless of what ownership structure is ultimately chosen. 

2. In return for the GSE status and any benefits conveyed by that status, these entities must agree to support all segments of the primary market, as needed, in all 

economic environments and to provide equitable access to all primary market 

lenders. 

The GSEs or their successors, including any potential new competitors that may 

be chartered, will benefit from a defined market available only to them and with 

a Government guarantee on the securities that are issued. To ensure that those benefits are available to all, GSEs must be required to provide access to all primary 

market lenders on an equitable basis. 

3. Access must also include preservation of the ‘‘To Be Announced’’ (TBA) market and 

both servicing retained and sold options. 

The To Be Announced market, also known as the Cash Window, allows originators to sell loans on an individual basis to the GSEs. This option must be preserved 

to ensure access to the secondary market for lower volume lenders or those who 

choose for business purposes to sell individual loans. Similarly, to ensure that originators may continue to service loans consistent with their chosen business model, 

flexibility to sell loans servicing retained or servicing released must be preserved in 

any reformed system. 

4. Mortgage Backed Securities issued by the GSEs should carry an explicit, fully 

priced and fully transparent guarantee from the Federal Government. 

The key benefit conveyed by the GSEs to the primary market is access to longterm affordable liquidity for mortgage lending. To preserve that liquidity, the Government guarantee is necessary, but taxpayers need to be fully compensated for the 

risks they bear in providing that guarantee. Fees necessary to support the guarantee must be charged, and must be transparent so that they reflect the true cost 

of the guarantee, and only that cost. Fees should not be assessed to offset other Government spending or priorities. It may be desirable to establish a segregated insurance fund to cover potential losses in the event that the guarantee is tapped in a 

crisis. Further, to ensure equitable access, the fees must be assessed equally on all 

lenders on a cost averaging basis. 

5. The GSEs or their successors must be capitalized appropriately to the risks borne 

and regulated to ensure that they remain so in all market conditions. 

Currently, Fannie Mae and Freddie Mac are operating under conservatorship, 

with little capital and with all profits being swept to the U.S. Treasury as compensation for the Federal investment and risks borne of behalf of taxpayers. It will 

be essential that going forward the GSEs or their successors have adequate capital 

to withstand market downturns, especially as they will be monoline businesses subject to regional and national downturns. Capital support for the guaranteed secondary market can come from a variety of sources, including indirectly from credit 

risk transfers, and injections of new capital from new member/owners/users of the 

GSEs or their successors (depending upon the model ultimately chosen by Congress). 

6. Regulation of the GSEs must include establishment of sound and fair underwriting standards for the loans they purchase, and must be based upon and coordinated with underwriting standards applicable to the primary market. 

Significant underwriting requirements imposed under the Dodd–Frank Act, most 

notably Ability to Repay (ATR) and Qualified Mortgage (QM) rules, while less than 

perfect, have significantly strengthened mortgage underwriting in the primary market. Going forward we believe it desirable that these primary market underwriting 

requirements serve as a basis that supports all secondary market activity, regardless of whether residential mortgages are sold to the GSEs or their successors or 

to private label purchasers. As a general matter, mortgages sold into the secondary 

market with Government guarantees should meet QM standards, whereas private 

label securitizations will only require the less stringent ATR standard as a baseline, 

although investors may establish additional standards at their discretion. 

For the primary market, loans originated and held in portfolio should automatically be granted QM status so long as they meet basic Ability to Repay requirements and do not run afoul of safety and soundness regulations. Such loans are inherently conservatively underwritten as portfolio lenders hold 100 percent of credit 

risk and thus will only make loans that have a high degree of ability to be repaid. 

32 

For the secondary market, the so-called QM Patch currently in place effectively 

allows Fannie Mae and Freddie Mac to confer Qualified Mortgage status to any loan 

they are willing to purchase. As a result, Fannie Mae and Freddie Mac define the 

nature and extent of risks to which taxpayers are exposed. This was a necessary 

but flawed mechanism to ensure that the new rules did not overly restrict mortgage 

credit when regulations in 2014 subdivided ATR mortgages into QM and non-QM 

categories, and was deemed to be manageable as long as the GSEs were in conservatorship. However, the QM Patch is designated to expire when conservatorship 

of the GSEs ends, creating the necessity and opportunity to revise the QM/ATR 

rules so that the GSEs or their successors are not permitted to define what is QM 

without restriction. Whatever regulatory definition replaces the open-ended QM 

patch, GSE guarantees should be limited to loans that have well-defined and fixed 

criteria, and transition to a revised QM designation should be managed to avoid 

constricting credit availability. A properly QM requirement to ‘‘earn’’ a Federal 

guarantee is essential to protect taxpayers, and will help to guide non-QM mortgages to a private label secondary market without taxpayer exposure. 

7. Credit Risk Transfers required by FHFA should be continued and expanded. Credit risk transfer must be a real transfer of risk and must be economically viable 

for the GSEs and the lenders they serve. 

Several mechanisms for credit risk transfers have been critically important innovations introduced to the GSE model in recent years. They have helped to bring private market participation back to the mortgage markets, and have had a real impact on reducing taxpayer exposure to GSE risks. They should become a permanent 

feature of secondary market financing. However, they must continue to be developed 

in ways that make economic sense for the GSEs, investors, primary market lenders, 

and for the borrowers they serve. They must also truly transfer credit risk in a permanent fashion to ensure taxpayer protection. To that end, FHFA (or its successor) 

must vigorously regulate, examine, and enforce credit risk transfer requirements. 

8. Any reform of the secondary mortgage market must consider the vital role played 

by the Federal Home Loan Banks and must in no way harm the traditional advance businesses of Federal Home Loan Banks or access to advances by their 

members. 

The Federal Home Loan Banks (FHLBs) have provided mortgage financing in the 

form of collateralized advances to their member/owners for over 80 years. They have 

performed as intended, ensuring liquidity even in times of market crisis. Their crisis 

performance is traceable in part to mutual ownership status, relatively high statutory capital requirements and fully collateralized lending. Changes to Fannie and 

Freddie may affect the FHLBs, even if unintended or indirect, and potential effects 

must be considered, accounted for, and preferably avoided. Additionally, the FHLBs 

may have the potential to play an expanded role in a revised secondary market system, but any expanded role must be separately capitalized and regulated in such 

a manner that it does not put at risk the traditional advance business of the 

FHLBs. 

9. Affordable housing goals or efforts undertaken by the GSEs to expand the supply 

of affordable rental housing should be delivered through and driven by the primary market, and should be structured in the form of affordable housing funds 

available to provide subsidies for affordable projects. 

The bright line between the primary and secondary market in the single family 

housing finance area should also broadly apply to the affordable housing and multifamily market. Primary market lenders should be the originators of these loans supported by access to stable, long term liquidity from the GSEs. Only in complex originations where the primary market lacks capacity should the GSEs be involved in 

direct financing, and strong regulation and oversight should be employed to ensure 

that there is no ‘‘cherry picking’’ of deals by the GSEs from the primary market. 

II. Without Legislative Reform, Past Abuses May Be Repeated 

Prior to conservatorship, Fannie Mae and Freddie Mac existed as hybrid companies, in a duopolistic system. They had private shareholders who profited from risks 

taken with the implied guarantee of the Federal Government. Changes to the charters of the institutions must be undertaken in legislation to remove this private 

profit/public risk model. The GSEs should be transformed into cooperatively owned 

public utilities or other similar limited purpose, well-regulated entities. 

Early in the conservatorship, Fannie Mae and Freddie Mac were unable to pay 

the 10 percent required interest rate on over $180 billion injected by U.S. taxpayers 

to prevent their collapse. As a result, the two were de facto nationalized with profits, if any, being swept to the U.S. Treasury. Under this arrangement, the interest 

33 

payments on Government bailout funds has been waived. The GSEs operate with 

little and shrinking capital and are, under terms of the conservatorship, expected 

to go to zero capital by 2018. 

Since returning to a positive cash flow in recent years, the terms of the conservatorship as amended have remained in place. Though funds swept to Treasury 

have been substantial, the amount falls substantially short of the taxpayers’ direct 

investment plus the waived interest obligations on that investment. The terms of 

the conservatorship do not provide for a cutoff of payments (or for the debt incurred 

to be considered repaid) and do not allow for the GSEs to retain earnings to build 

capital. 

Some have suggested that the GSEs simply be recapitalized and released back to 

the private market, with limited changes to their charters, noting that reforms to 

the entire mortgage market have addressed many of the problems that lead to the 

financial crisis and the insolvency of the GSEs. 

We reject that approach, as it would return us to the untenable situation of public 

risk-taking to the benefit of private investors. Even with current reforms in place 

it would encourage future abuses and undue risks to U.S. taxpayers. Instead, legislation should establish directed and limited activities, strong capital standards and 

a clear set of benchmarks for implementing and meeting those standards. 

It will also be essential for legislation to firmly establish a mandate that the 

GSEs provide equitable access to all primary market participants, regardless of size 

or geographic location. As cited in principle 2 above, in return for the GSE status, 

these entities must be willing to serve all primary market participants on an equitable basis in all market conditions. That includes access to the To Be Announced 

market (also known as the ‘‘Cash Window’’) with the ability to sell individual or 

groups of loans. 

In recent years, and primarily as a result of a mandate by the FHFA, the GSEs 

have moved to standardized Guarantee fees (G-fees) for all primary market originators selling to the GSEs. Going back to the early 2000s, however, great pricing differentials existed, with the GSEs giving large volume discounts and other preferential pricing to some institutions. This un-level playing field severely hampered 

community banks’ ability to compete and serve their communities. 

Going even further back, some community banks found it difficult to do business 

with the GSEs at all, as their pricing and other policies were geared toward higher 

volume lenders and the GSEs showed little interest in working with smaller, lower 

volume banks. 

It will be necessary to incorporate into statute the mandate that the GSEs serve 

all primary market participants equitably in order to avoid the potential for backsliding. 

Some will argue that this can be accomplished via regulation, and indeed, FHFA 

has done an admirable job in recent years ensuring equitable treatment. However, 

regulators and regulatory approaches can change over time. While a strong regulator must be part of reform, so too must be clear statutory guidance in this area. 

III. Reform Need Not Be Radical or Extreme, But Targeted and Surgical 

Legislation considered by the Senate Banking Committee in the last Congress envisioned a complete restructuring of the secondary mortgage market system. That 

legislative approach was ultimately not able to gain approval at least in part over 

concerns that it was too complex and untested, and that the transition from the current system to a new one envisioned in the legislation would be too disruptive to 

the housing finance system. 

Still, the legislative efforts undertaken by the Senate were helpful in focusing attention on the key services provided by the GSEs in the past, and in delineating 

how some of those services could be separated into component parts, and reassigned 

in a new system to reduce risk and create opportunity for greater competition. 

Consensus is forming around the view that a limited and controlled Government 

involvement in the secondary mortgage market is needed to ensure the availability 

of stable, affordable long term financing for mortgage finance. 

Legislation need not recreate the entire secondary market structure. In fact, guided by the principles detailed above, and incorporating key elements laid out here, 

we believe that relatively tailored legislation that takes a surgical approach to making necessary alterations to the current system is both desirable and achievable. 

In addition to changes to the charters and ownership structure of the GSEs, the 

creation of clear, achievable and strict capital requirements, and the mandate to 

serve all primary market participants equitably, these surgical alterations should 

also include creation of an insurance fund to backstop the GSEs capital to protect 

taxpayers further from again having to bailout the GSEs. While the Government 

should stand behind the securities issued by the GSEs, the insurance fund should 

34 

1 Credit Union National Association represents America’s credit unions and their 110 million 

members. 

stand in front of the explicit Government guarantee to repay taxpayers to reduce 

the likelihood that the Government guarantee is ever drawn upon. The fund should 

be actuarially sound and modeled on the FDIC insurance fund. 

Conclusion 

Americans have relied on long-term, fixed-rate mortgages for affordable mortgage 

finance for 70 years. Fannie Mae and Freddie Mac have facilitated access to this 

product by providing access to the capital markets for primary market lenders. Absent aggregation and securitization provided through the To Be Announced (TBA) 

market, access to long-term, lower-rate funding would be far more difficult to come 

by for most primary lenders. The Government guarantee provided to mortgage 

backed securities issued by the GSEs makes them attractive to the capital markets 

ensuring liquidity. All of these elements must be preserved and remain available 

to all primary market participants regardless of size or geographic location. 

Congress has an essential role in providing the certainty necessary to ensure longterm stability of the housing finance system. Just as the Federal debt market provides the bellwether that makes all private debt markets more efficient and liquid, 

an explicit, fully priced, fully paid-for Federal guarantee for a targeted portion of 

the mortgage market will be a catalyst for broader market growth and development. 

Congress should not defer action any longer. Nine years of conservatorship is more 

than enough. 

Thank you for the opportunity to share our views with the Committee. The American Bankers Association stands ready to work with Members of the Committee to 

advance this important set of issues. 

PREPARED STATEMENT OF TIM MISLANSKY 

SENIOR VICE PRESIDENT AND CHIEF LENDING OFFICER, WRIGHT–PATT CREDIT

UNION, AND PRESIDENT, MYCUMORTGAGE, LLC, ON BEHALF OF THE CREDIT UNION

NATIONAL ASSOCIATION

JULY 20, 2017 

Chairman Crapo, Ranking Member Brown, Members of the Committee: Thank 

you for the opportunity to testify on this important topic. My name is Tim 

Mislansky, and I am the Chief Lending Officer for Wright–Patt Credit Union, 

headquartered in Beavercreek, Ohio, as well as the President of its wholly-owned 

Credit Union Service Organization (CUSO), myCUmortgage. I am also Chair of the 

Housing Subcommittee of the Credit Union National Association (CUNA), 1 on 

whose behalf I testify today. 

Wright–Patt Credit Union has approximately $3.6 billion in assets, and proudly 

serves over 337,000 members. We are located primarily in the Dayton and Columbus, Ohio markets. This gives us a unique perspective on the marketplace as we 

make home loans available in the urban core, the suburbs and the rural areas of 

our markets. We are a relatively large credit union mortgage lender, and helped 

4,631 families in 2015 with $616 million in balances, of which 3,072 were originated 

to Wright–Patt Credit Union members, and an additional 1,340 families with second 

mortgages, totaling $55 million. 

In addition to my role at Wright–Patt, I serve as president of our wholly-owned 

CUSO myCUmortgage, which provides a variety of mortgage related services to 

nearly 200 credit unions. These credit unions range in asset size from $6 million 

to $1 billion and are located in 25 different States. Through the CUSO, we facilitated nearly 9,000 closings for $1.2 billion making myCUmortgage one of the largest 

aggregators of credit union mortgage loans in the country. These responsibilities 

give me a unique perspective of the mortgage lending needs of small lenders and 

their members. 

As member-owned, not for profit financial cooperatives, many credit unions offer 

mortgages to satisfy member demand, and credit unions represent an increasingly 

significant source of mortgage credit nationally. In 2016, more than two-thirds of 

credit unions were active in the first mortgage arena, collectively originating over 

$143 billion worth of these loans—an amount equal to 7.5 percent of the total market. By comparison, in 1996 only 43 percent of credit unions were active and originated a total of less than $20 billion in first mortgages. 

And third party data supports credit unions’ growing presence as a mortgage 

lender. Most recently, Experian, one of the major credit reporting bureaus, indicated 

35 

2http://www.experian.com/assets/credit-unions/reports/cu-state-of-credit-report.pdf 

in a report that in the first quarter of 2017, credit unions accounted for 13 percent 

of the first mortgages originated, representing an increase for its 7 percent market 

share in the first quarter of 2015. 2

It is clear that consumers are choosing credit unions more and more to be their 

mortgage lenders, and as Congress considers housing finance reform, it is critical 

that credit unions have equitable and readily available access to a functioning, wellregulated secondary market and a system that will accommodate member demand 

for long-term fixed-rate mortgage products in order to ensure they can continue 

meeting their members’ mortgage needs. 

Historically, credit unions have been largely portfolio lenders. From 2000 to 2008, 

credit unions sold only a third of first mortgage originations, ranging from a low 

of 26 percent in 2007 to a high of 43 percent in 2003. The decision of whether to 

hold or sell a loan depends primarily on asset-liability-management issues, essentially the need to manage interest rate risk, but also at times, depends on the availability of liquidity in the credit union. Asset liability management hinges on such 

factors as the level of interest rates, the relative demand for fixed versus adjustable 

loans from members, the amount of fixed-rate loans and other longer-term assets 

already on a credit union’s books and the maturity of the credit unions funding 

sources. Managing credit risk is a primary concern of the credit union prudential 

regulator. Without a functioning secondary market, credit unions would most likely 

severely limit the amount of first mortgage lending conducted on behalf of their 

members as they simply would not have the liquidity to fund and hold the loans. 

As long-term interest rates plunged in 2009 and again in 2011, credit unions 

found it increasingly important to sell longer-term, fixed-rate mortgages to avoid 

locking in very low earning assets for the long term. As a result, whereas in 1996 

only about 16 percent of mortgage lending credit unions sold loans into the secondary market, by 2016, nearly 30 percent of mortgage lending credit unions sold 

$56 billion into the secondary market, or 40 percent of total first mortgages originated by credit unions. 

Servicing member loans is very important to credit unions, for a number of reasons. As member-owned cooperatives, credit unions are driven by a desire to provide 

high quality member service. Many credit unions are reluctant to sell the core function of serving members to others. Credit unions may service loans in-house or 

outsource to a trusted third-party, but in doing so they maintain a say in how the 

loans are serviced. This is especially important when borrowers run into financial 

challenges so that the credit union may work to keep the borrower in their home. 

Credit unions are also concerned that if they sell the servicing of the mortgage loan, 

that the third-party servicers will use the data they gather about credit union members to market competing products or services. In addition, credit unions benefit 

from the steady servicing income stream. As such, many credit unions service both 

the substantial portfolios of loans they hold on their own balance sheets, and the 

loans they have sold to the secondary market. Currently, in addition to the $366 

billion of first mortgages that credit unions hold in portfolio, they also service $198 

billion of loans they have sold. 

The credit quality of credit union first mortgages held up remarkably well during 

the recent financial crisis, especially when compared to the experience of other lenders. Other lenders experienced net charge-off rates four times higher than those at 

credit unions. Prior to the Great Recession, annual net charge-off rates on residential mortgage loans at both banks and credit unions were negligible, less than 0.1 

percent. However, as the recession took hold, losses mounted. At credit unions, the 

highest annual loss rate on residential mortgages was 0.4 percent. At commercial 

banks, the similarly calculated loss rate exceeded 1 percent of loans for 3 years, 

reaching as high as 1.58 percent in 2009. 

There are two reasons for this remarkable record at credit unions. First, as cooperatives, credit unions are generally locally owned, community based institutions 

and tend to be more borrower-centric than other lenders. This equates to credit 

unions generally being more risk-averse than stock-owned or privately owned institutions. The environment faced by credit union management (generally uncompensated volunteer boards, the absence of stock options for senior management and 

board members, the absence of pressure from stockholders to maximize profits) discourage management from adopting high-risk, higher-return strategies in pursuit of 

high profits. As a result, credit union operations are more consumer-friendly, less 

risky and subject to less volatility over the business cycle. This largely explains why 

credit unions were able to increase lending as the financial crisis deepened. 

Second, credit unions are member-owned cooperatives and the financial transactions involving a member’s home are typically the biggest of their lives, credit 

36 

unions tend to be concerned with not only the member’s ability to obtain the home 

loan, but also to maintain the home loan. This leads credit unions to pay particular 

attention to such factors as a member’s ability to repay a loan, proper documentation and due diligence, and collateral value before granting loans. 

Credit Union Principles for Housing Finance Reform 

As we have testified in the past, CUNA supports the creation of an efficient, effective, and fair secondary market with equal access for lenders of all sizes. To this 

end, CUNA supports housing finance reform proposals that are consistent with the 

following principles, and have been subject to full and fair consideration with respect to potential impact as well as unintended consequences on all market participants: 

Neutral Third Party 

There must be a neutral third party or parties in the secondary market, with the 

sole role as a conduit to the secondary market. This entity must be independent of 

any firm that has any other role or business relationship in the mortgage origination and securitization process, to ensure that no market participant or class of participants enjoys an unfair advantage in the system. In addition, this party must be 

prohibited from holding mortgage loans as individual loans or mortgage backed securities to avoid additional interest rate risk being held and managed by the entity. 

Some proposals have suggested that the new solution would allow financial companies to own up to 10 percent of an entity. This idea is troublesome as it could create 

potential conflicts of interest and increases the likelihood that larger lenders could 

band together to create and own a secondary market entity, thereby controlling the 

market and forcing their financial will on smaller lenders. 

Equal Access 

The secondary market must be open to lenders of all sizes on an equitable basis. 

Access should not only be provided to individual lenders, but to companies that act 

as loan aggregators. Despite today’s relatively equal access to the GSEs, some lenders choose to work with an aggregator, such as a company like myCUmortgage, 

which buys loans to pool and sell to the GSEs. These institutions find it a better 

financial and operational alternative to partner with an aggregator than to sell directly to the GSEs. The secondary market must remain open to both direct lenders 

and aggregators to allow small lenders to continue making mortgage loans in the 

manner they choose to help consumers with home ownership. 

CUNA understands that the users (lenders, borrowers, etc.) of a secondary market 

will be required to pay for the use of such market through fees, appropriate risk 

premiums and other means. However, guarantee fees or other fees/premiums should 

not have any relationship to lender volume. The fees must be tied to the risk of the 

individual loan or pools of loans. 

Additionally, CUNA cautions strongly against regimes that require lenders to retain significant amounts of risk beyond that represented by actuarially appropriate 

guarantee fees, as these risk retention arrangements may have a disproportionately 

negative impact on small lenders that are less able to manage such risk or who have 

the balance sheet capacity to hold such risk, and could therefore result in less consumer choice. 

One such example is a client of myCUmortgage, TopMark Federal Credit Union 

in Lima, Ohio is on pace to help their members with over $16 million in mortgage 

loans this year. TopMark is a $30 million depository, yet manages to generate nearly half its assets per year in mortgage loans. Without a functioning secondary market, or if onerous risk retention arrangements were imposed, TopMark may have 

to stop helping its members with home financing in just a few short years. 

Strong Oversight and Supervision 

The entities providing secondary market services must be subject to appropriate 

regulatory and supervisory oversight to ensure safety and soundness by ensuring accountability, effective corporate governance and preventing future fraud; they 

should also be subjected to strong capital requirements and have flexibility to operate transparently and develop new programs in response to marketplace demands. 

Durability 

Any new system must ensure mortgage loans will continue to be made to qualified 

borrowers even in troubled economic times. Without the backstop of an explicit federally insured or guaranteed component of any revised system, CUNA is concerned 

that private capital could quickly dry up during difficult economic times, as it did 

during the financial crisis, effectively halting mortgage lending altogether. In addition, the introduction of private capital, in a highly regulated industry, such as 

37 

3The Evidence of Homeownership Education and Counseling https://www.huduser.gov/portal/periodicals/em/spring16/highlight2.html. 

mortgage lending, will be discouraged without the explicit Federal guarantee. The 

costs and barriers to entry for other entities will most likely be high and the potential returns may not justify entry with the guarantee. This could lead to higher risk 

lending in order to gain short-term larger profits at great potential long-term risk 

as we saw during the financial crisis with exotic mortgage products and tremendously relaxed underwriting standards. 

Financial Education 

Credit unions have a noble history of offering a wide variety of financial counseling and other educational services to their members, and numerous studies, including an analysis from HUD in 2016, 3 have shown that first time home buyers 

who complete pre-ownership home buying courses perform statistically better in 

terms of default risk and repayment than those who do not. In one case, a study 

cited by HUD indicated that those who took pre-purchase education had a 1⁄3 less 

chance of ending up in default. Any new housing finance system should emphasize 

consumer education and counseling as a means to ensure that borrowers receive appropriate mortgage loans. 

Predictable and Affordable Payments 

Any new system must include consumer access to a variety of products that provide for predictable, affordable mortgage payments to qualified borrowers. Traditionally this has been through fixed-rate mortgages (such as the 30-year fixed-rate mortgage), but other products that may be more appropriately tailored to a borrower’s 

specific circumstances, such as certain borrower-friendly, standardized adjustable 

rate mortgages, should also be available. 

We believe that in addition to ensuring access to the secondary market for credit 

unions, it is also important that the housing finance system Congress puts in place 

accommodates the demand of credit union members and other consumers for long 

term, fixed-rate mortgage products. The data suggest that credit union members 

overwhelmingly prefer fixed-rate mortgages. Over the past 10 years, our members 

have chosen a fixed-rate mortgage about 80 percent of the time. Congress should 

acknowledge that the American homebuyer prefers fixed-rate mortgages and do everything in its power to ensure this important mortgage product remains a valuable 

part of housing finance. 

Loan Limits 

Our Nation’s housing market is diverse, with wide variation geographically and 

between rural and urban communities. Any new housing finance system should 

apply reasonable conforming loan limits that adequately take into consideration 

local real estate prices in higher cost areas. It should also ensure that lower balance 

mortgage lending is not discouraged. Many lenders have established minimum loan 

amounts as the profitability of a mortgage loan is impacted by loan size. These 

smaller loan amounts can be typical in urban areas where the cost of a home is significantly less. For example, in Dayton, Ohio, a member can buy a home for less 

than $50,000 but often cannot find a lender available to them. Wright–Patt Credit 

Union does not have minimum loan amounts as we believe, as a financial cooperative, that we should help every qualified member buy a home regardless of the size 

of the home or the mortgage loan. 

Affordable Housing 

The important role of Government support for affordable housing (defined as 

housing for lower income borrowers but not necessarily high risk borrowers) should 

be considered a function separate from the responsibilities of the secondary market 

entities. The requirements for a program to stimulate the supply of credit to lower 

income borrowers are not the same as those for the more general mortgage market. 

We believe that a connection between these two goals could be accomplished by either appropriately pricing guarantee fees to minimize the chance of taxpayer expense, and/or adding a small supplement to guarantee fees, the proceeds of which 

could be used by some other Federal agency in a more targeted fashion in furtherance of affordable housing goals. 

Credit unions historically have played an important part in low and moderate income mortgage lending. An analysis of publicly available HMDA data from 2013 to 

2015 shows that 25 percent of credit union lending is considered ‘‘CRA’’ lending. 

This compares to 23 percent for non-credit union institutions. While the difference 

is a relatively minor 2 percent, it must be remembered that credit unions are not 

38 

subject to the Community Reinvestment Act, yet a larger percentage of our loans 

are CRA equivalent compared to those lenders that are primarily subject to CRA. 

Mortgage Servicing 

In order to ensure a completely integrated mortgage experience for member-borrowers, credit unions should continue to be afforded the opportunity to retain or sell 

the right to service their members’ mortgages, at the sole discretion of the credit 

union, regardless of whether that member’s loan is held in portfolio or sold into the 

secondary market. Consumers align the mortgage loan with where they make their 

payment and this impacts their choices in selecting a mortgage lender. To lose control over this servicing relationship would be detrimental not only to a large majority of credit union member-borrowers, but could also result in fewer mortgage 

choices available to credit unions and their members, with higher interest rates and 

fees alike. Moreover, to the extent national mortgage servicing standards are developed, such servicing standards should be applied uniformly and not result in the 

imposition of any additional or new regulatory burdens upon credit unions. 

Reasonable and Orderly Transition 

Whatever the outcome of the debate over the housing finance system in this country, the transition from the current system to any potential new housing finance 

system must be reasonable and orderly, in order to prevent significant disruption 

to the housing market which would harm homeowners, potential homebuyers, the 

credit unions who serve them, and the Nation’s housing market as a whole. 

Small Lender Access to the Secondary Market 

The secondary market must be open to lenders of all sizes on an equitable basis. 

Credit unions need to know that as long as they produce even a single eligible mortgage, they will be able to sell it to an issuer of Government-backed securities, directly or through an aggregator, at market prices, for cash, without low-volume penalty, or through the TBA market, and with the option to retain servicing on the 

loans. In addition, standardization of all steps of the process is very important to 

credit unions. 

Some form of issuer should be established so that small lenders, including credit 

unions, will have unfettered access to the secondary market. This entity should be 

independent of any firm that has any other role or business relationship in the 

mortgage lending process. 

Government Guarantee 

The new system must include consumer access to products that provide for predictable, affordable mortgage payments to qualified borrowers. Traditionally this 

has been provided through fixed-rate mortgages (such as the 30-year fixed-rate 

mortgage), and it is important that qualified borrowers continue to have access to 

products that provide for predictable and affordable mortgage payments. 

In order to facilitate the continued availability of affordable, long-term, fixed-rate 

mortgages for American homeowners, some form of ultimate Government guarantee 

should be available for qualifying mortgage-backed securities. However, the taxpayer must be protected from the unnecessary exercise of this guarantee by appropriate standards in mortgage lending, and by layers of sufficient private capital for 

loss absorption. The Government guarantee should be the last, not the first line of 

defense. 

In addition to an 80 percent maximum loan-to-value for each mortgage in a covered security (provided by downpayment, private mortgage insurance or a combination of the two), sufficient private capital should be available to absorb the first loss 

on any mortgage in a covered security. The amount of private capital necessary to 

protect the taxpayer is of course important. Too little capital places the taxpayer 

at risk. Too great a capital requirement unnecessarily raises the cost of mortgages 

to borrowers. The appropriate amount depends on: the amount of capital held by 

the ultimate Government guarantor, the amount of loss on any security that the private capital will be responsible for (the attachment point), and the maximum loanto-value of mortgages in covered securities and required underwriting standards for 

eligible mortgages. Assuming an attachment point of 10 percent, the amount of private capital necessary to cover a maximum 10 percent loss on any covered security 

will be substantially less than the amount necessary to cover a maximum 10 percent 

on all covered securities. So long as eligible mortgages must have maximum loanto-value ratios of 80 percent, or private loan-level mortgage insurance and must 

comply with the Qualified Mortgage (QM) rule, the likelihood that all covered mortgage backed securities would simultaneously suffer losses of at least 10 percent during anything short of a total economic and financial collapse (such as the Great Depression of the 1930s) is negligible. Further, the required amount of capital or reVerDate Nov 24 2008 09:14 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\07-20 ZDISTILL\72017.TXT JASON
39 

serve funds should depend on the seasoning of the securities on which a bond guarantor provides first loss coverage. Older securities should require lower (not zero) 

reserve funds. 

For all the reasons just listed, substantially less than 10 percent of the total exposure of private bond guarantors would be necessary to provide the 10 percent first 

loss coverage. Legislation should require the 10 percent first loss coverage, but leave 

it to the Federal guarantor to determine the amount of private capital or reserve 

funds necessary to provide that 10 percent first loss coverage under conditions no 

less severe than the recent Great Recession. 

In the event of the failure of a mortgage in a covered security, the Federal guarantor should ensure timely payment of principle and interest to investors in covered 

securities, and immediately demand payment from the bond guarantor. The fact 

that investors could look to the Federal guarantor rather than a collection of private 

bond guarantors for payment would contribute to the homogeneity of covered securities, increasing the liquidity of the securities. Payment from the private guarantor 

to the Federal guarantor would be required so long as total losses on a security (or 

a defined group of securities, such as a vintage) had reached 10 percent of the value 

of the security. In the event total losses on mortgages in a security or group exceed 

10 percent of the value of the security or group, the Government backup fund should 

cover losses in excess of 10 percent. 

It is likely that under this arrangement there could actually be instances when 

the Government backup fund covered losses on covered securities without the bond 

guarantor itself having to fail, i.e., if one or more but not all of the securities covered by a private bond guarantor experienced losses of greater than 10 percent, but 

the private guarantor’s capital was not depleted. Indeed, a properly reserved guarantee fund should be able to cover losses up to 10 percent of the balance of covered 

securities and still remain in business. In other words, the payment of losses by 

Federal guarantor after the 10 percent first loss coverage should not require a catastrophic event, i.e., the exhaustion of a pool of private capital. 

A 10 percent attachment point would likely make recourse to the Government 

backup fund extremely rare, but not unheard of. A reformed housing finance system 

that envisages no payments out of the privately funded reserve balance of the Government guarantor would be erring on the side of being too conservative. The goal 

should be absolute protection of taxpayers, and that should allow the Federal guarantor to occasionally operate as a shock absorber, using funds it has collected from 

market participants. This would be similar to the way the National Credit Union 

Share Insurance Fund (NCUSIF) and the Federal Deposit Insurance Company 

(FDIC) pay depositors in failed federally insured credit unions and banks, not with 

taxpayer funds, but with reserves paid for by insured institutions. 

The Government should be prohibited from assisting private guarantors. In other 

words, the Government should insure the mortgage bonds but not the mortgage 

bond issuer. Instead, the Government should be prepared to quickly pay all legitimate claims not covered by a private guarantor, and to resolve the private guarantor if the Government is not reimbursed for such claims in a timely fashion. The 

Government should also be prepared to temporarily sell first loss coverage to issuers 

in times of market stress. 

The entity that provides the Government guarantee should also have regulatory 

responsibility. Since the entity that provides the Government guarantee will be responsible for protecting the taxpayer from losses resulting from that guarantee, that 

entity must have the authority to establish regulations to ensure that all of the 

many players in the complex housing finance system act in a fashion that does not 

expose the taxpayer to any losses. 

Underwriting and Other Mortgage Standards 

Ultimately, the underwriting standards for a loan to qualify for inclusion in a covered security should be controlled by the Government entity responsible for covering 

losses on such securities. A similar system has worked fairly well for the FDIC and 

NCUSIF in establishing prudential standards for bank and credit union operation. 

Therefore, the less explicitly underwriting standards are prescribed in legislation, 

the better. Whereas QM standards could serve as a starting point for standards established by the Federal issuer, the law should not explicitly require that only QM 

loans could be eligible mortgages. The ability of a borrower to repay a loan depends 

on a number of characteristics; not just the absolute level of each characteristic, but 

also the interplay among those characteristics. Many of the underwriting standards 

of the QM rule are appropriate for an eligible mortgage: documentation requirements, payment and debt ratio calculation methods, prohibition of harmful loan features such as negative amortization, etc. But a bright line ceiling of 43 percent on 

the debt-to-income ratio, without any ability to consider other factors, would exclude 

40 

too many qualified borrowers from enjoying the benefits of covered mortgages. For 

example, consider a borrower applying for an adjustable rate mortgage with annual 

adjustments after 1 year, a low downpayment and a barely prime credit score. For 

such a borrower, even a 43 percent debt ratio could be far too high. However, for 

another borrower applying for a 30-year, fixed-rate loan with a large downpayment, 

an active and pristine credit record and other positive characteristics, a 50 percent 

debt ratio could be completely acceptable. 

The Federal issuer should be instructed by Congress to create standards that facilitate consumer access to mortgage credit consistent with the overriding goal of 

minimizing risk to the taxpayer of paying for losses on covered securities, recognizing that those standards should evolve through time. Those standards may be 

similar to QM standards, but should not be required to be the same as QM standards. 

This system currently exists with Fannie Mae and Freddie Mac. Their underwriting standards are the standards of the mortgage industry. A new or revised system should build upon these standards rather than start from scratch. In addition, 

the current GSE system has developed standardization across the mortgage industry in the Uniform Residential Loan Application, loan documents, appraisal standards, income calculation and many other areas. These standardizations have benefited consumers and lenders by creating consistency and efficiency in the marketplace and contribute to a well-functioning secondary market. As a new secondary 

market is envisioned, these standardizations must be considered so that standardization in mortgage lending remains. The unintended consequences of a failure to 

continue the standardization would be higher costs to borrowers and a sort of Wild 

West of mortgage lending in relation to a secondary market. 

Regulatory Structure 

The entities providing secondary market services must be subject to appropriate 

regulatory and supervisory oversight to ensure safety and soundness, for example 

by ensuring accountability, effective corporate governance and preventing future 

fraud; they should also be subjected to strong capital requirements and have flexibility to operate well and develop new programs in response to marketplace demands. 

The regulator created through any reform of the housing finance system must 

have a role centered on supporting securitization that does not duplicate the role 

of other regulators in the process. Both issuers and servicers are heavily regulated 

by a myriad of Federal agencies, including the Bureau of Consumer Financial Protection (CFPB), Department of Housing and Urban Development, Department of 

Veteran Affairs and Department of Agriculture, in addition to the supervision performed by prudential regulators. Credit unions and other small lenders are drowning in regulation in the mortgage area, and we fear curtailing products and services 

as a result. Credit union members, and our housing recovery, lose as a result of regulatory burden. It is essential that any housing finance reform not create additional 

regulatory burden at the originator or servicer level; in fact, if done properly, the 

implementation of a new housing finance system could provide an opportunity to reduce credit unions’ and other small lenders’ regulatory burden, as we discuss later 

in this testimony. 

That said, the secondary market needs strong regulatory oversight to ensure 

equal access for small institutions and an orderly functioning of the system. At a 

high level, the regulator should be a neutral third party that would ensure the secondary market is open to lenders of all sizes on an equitable basis, with equal pricing regardless of lender volume. Ideally, the regulator would provide issuers who 

feel they are not receiving equal treatment in the secondary market with an administrative process to protest. In turn, the regulator should have substantial authority 

to order a remedy, including banning a violating secondary market participant from 

accessing the Federal issuer. 

We envision a regulator in the mold of the National Credit Union Administration 

(NCUA) or the Federal Deposit Insurance Corporation (FDIC), with direct examination and supervisory authority, given that the full faith and credit of the United 

States stands behind the Federal backstop, as it does with NCUA or FDIC insurance. The entities providing secondary market services must be subject to appropriate supervisory oversight to ensure safety and soundness, for example by ensuring accountability, effective corporate governance and preventing future fraud; they 

should also be subjected to strong capital requirements and have flexibility to operate well and develop new programs in response to marketplace demands. In terms 

of specific powers, at a minimum, the regulator should have the authority to make 

rules, examine and supervise secondary market participants, suspend or revoke the 

power of any secondary market participant to enjoy a Federal backstop, place any 

41 

secondary market participant into conservatorship or involuntary liquidation and 

study the operation of the secondary mortgage market to determine if its regulations are leading to the most efficient operation. 

In terms of the regulator’s governance structure, we recommend a board appointed by the President with the advice and consent of the Senate that would serve 

for fixed terms of 5 or more years (so as to be longer than the term of any one President). It is important for credit unions that, by statute, the board be required to 

include credit union representation. The board members should have minimum 

qualifications set by statute and come from the private marketplace, not be representatives of another regulatory agency. We leave it to Congress to set the minimum criteria for service on the board, but note that a minimum of 10 years of 

mortgage lending experience should provide the operational knowledge necessary to 

understand issuer concerns. Staggering terms of service makes sense to ensure continuity of the board. 

The regulator could be funded by a small portion of the guarantee fee. We believe 

the regulator should have an Office of Small Lender Access and Equality, dedicated 

to the concerns of credit unions and banks under a certain threshold in assets. That 

office should have the authority to study the pricing small institutions receive in 

the secondary market to determine if small institutions receive fair pricing. 

In terms of the regulatory issues surrounding ‘‘too big to fail’’ and the housing regulator’s interaction with other regulators, the new housing regulator should have a 

seat on Financial Stability Oversight Council (FSOC) and generally should be given 

similar authority as the FDIC and Federal Reserve over systemically important entities under the Dodd–Frank Act. The regulator should be required to consult with 

FSOC before placing a systemically important secondary market participant into 

conservatorship. To the extent not already the case under current law, any nonbank 

that is a participant in the secondary market should be subject to a possible systemically important designation, and should have to draft a ‘‘living will’’ if so designated. The new regulator should have a direct role in reviewing the living wills 

of any secondary market entity, as is the case with the FDIC and Federal Reserve. 

Where State-chartered entities, including insurance companies, are concerned, the 

company would be resolved under State law, but the Federal housing regulator 

would have the authority to step in to handle that resolution if the appropriate 

State authority did not take what the regulator deemed to be the necessary action, 

as is true of the FDIC’s similar authority under the Dodd–Frank Act. 

Servicing Standards 

Credit unions should continue to be afforded the opportunity to provide mortgage 

servicing to their members in a cost-effective and member-service oriented manner, 

in order to ensure a completely integrated mortgage experience for credit union 

members. To lose this servicing relationship would be detrimental not only to a vast 

majority of credit union members, but could also result in fewer mortgage choices 

available to credit unions and their members, with higher interest rates and fees 

being imposed on both. 

Initial national mortgage servicing standards will likely be part of the common 

securitization platform being developed under the auspices of FHFA. They should 

be applied uniformly and not result in the imposition of any additional or new regulatory burdens upon credit unions. Going forward, private market participants 

should be able to revise servicing standards subject to oversight by the successor 

issuer(s), which should also have legal authority to ensure that the development and 

implementation of all servicing standards are reasonable and fairly applied for all 

servicers; legislation should ensure that eligibility requirements, compensation to or 

fees collected from servicers are not strictly based on volume but also reflect other 

reasonable factors such as in the case of compensation, the performance of the loans 

serviced. 

To ensure that all servicers are treated fairly and appropriately by the mutual 

securitization company, the legislation should establish an ombudsman to interact 

with servicers and create a review process under which complaints raised by 

servicers will be investigated and resolved in a timely manner. 

The regulation of servicing should be bifurcated with the successor Federal 

issuer(s) overseeing how standards for servicing necessary to support securitization 

are developed while the protection of consumers in the servicing process should be 

left to the CFPB. In other words, no entity should be granted authority to impose 

any additional consumer protection servicing requirements on regulated financial institutions that service mortgage loans. Such protections have already been established under a statutory and regulatory framework under the purview of the CFPB. 

While improvements to the current framework, such as changes to the servicers’ exemption levels to ensure regulatory burdens on smaller servicers are minimized, 

42 

should be considered, the regulation and oversight of the servicing process, including standards, should be left to the CFPB. 

Transition Issues 

The transition from the current system to any new housing finance system must 

be reasonable and orderly. The transition should end when the new system is fully 

functional, rather than after any specified period. Further, we recommend that the 

common securitization platform now being developed under the direction of the 

FHFA should be available to all market participants. Finally, once the earnings of 

the GSEs have fully paid back all Government costs of their conservatorship, any 

further GSE earnings during the transition should be available to cover costs of 

standing up the new system, and beginning the funding of the reserve balance of 

the successor issuer(s). 

The Federal Credit Union Act limits the types of investments that credit unions 

can hold. Since Government agency securities are one of the few investments allowed, they tend to purchase and hold many of these securities. Therefore, in order 

to ensure the safety and soundness of credit unions, and to ensure the new securities perform on par as the current GSE securities we suggest a phased in approach 

to issuing the new security that would be blended with the Fannie and Freddie 

issued securities to ensure the investments hold their value and market stability is 

maintained. 

To minimize market disruption, we would suggest that Fannie Mae, Freddie Mac, 

and the new issuer be allowed to operate simultaneously so that all parties can get 

acquainted with the new system. In addition to gaining familiarity with the new 

system, it would be appropriate for both the GSE’s and the new issuer to start 

issuing securities with each trying to mirror or have very similar characteristics of 

the other. As the last step in the process before Fannie Mae and Freddie Mac are 

wound down, blending the two securities together and selling them for a period of 

time under the new issuer name may provide the market the necessary time to become comfortable with the new security. Ideally, market participants will not notice 

any sudden changes on the day that the GSEs are shuttered and the new system 

takes over. The many changes necessary to move from the old to the new system 

would already have happened gradually during the transition. 

Finally, the common securitization platform now being developed under the direction of the FHFA should be available to all market participants. It could be ‘‘owned’’ 

and controlled by the new issuer, or a separate entity made up of all issuers of covered securities. Its use should be required for all covered securities, which would 

likely make it the default for private label securities. Regardless of who owns it, if 

its use were required for all covered securities, the new issuer would have de facto 

regulatory control over it. 

Additional Concerns Specific to Credit Unions 

Statutory limitations restrict the ability of credit unions to more fully serve their 

members and may inhibit their ability to be complete participants in the reformed 

housing finance system. Therefore, we would strongly encourage the Committee to 

consider the following statutory changes specific to credit unions as part of the reform of the housing finance system. 

Investment Authority 

Section 107(7) of the Federal Credit Union Act (12 U.S.C. 1757(7)) limits the types 

of investment that Federal Credit Unions may make to loans, Government securities, deposits in other financial institutions, and certain other limited investments. 

We believe that depending on the nature of the entity created as a successor to the 

GSEs, credit unions may need additional investment authority in order to capitalize 

that entity, and we encourage the Committee to provide that authority. 

Multifamily Housing 

Credit unions are not significant participants in the multifamily mortgage market 

primarily because of the statutory cap on business lending imposed in 1998. This 

cap limits credit unions business loan portfolio to essentially 12.25 percent of the 

credit unions assets. Compounding the matter, the Federal Credit Union Act considers a loan made on a 1-4 family non-owner occupied residence a business loan; 

whereas the same loan made by a bank would be considered a residential loan. 

Comprehensive housing finance reform legislation may provide the opportunity to 

correct this disparity in the statute. We encourage the Committee to include language that would amend the Federal Credit Union Act and consider loans made on 

1-4 family residential properties as residential loans. 

43 

Relief From Dodd–Frank Act Mortgage Regulations 

As Congress considers comprehensive housing finance reform legislation, it also 

may be prudent to consider changes to Dodd–Frank Act related mortgage regulations. The CFPB has finalized many thousands of pages of regulations with which 

credit unions and other community-based financial institutions must comply, despite 

the fact that they did not cause the mortgage crisis and have, throughout history, 

employed the strong underwriting principles the rules are designed to require. 

The compliance obligations imposed by these rules—some of which were finalized 

in September and are effective in January—are simply overwhelming to many credit 

unions, and the tight timeframe for compliance puts the availability of mortgage 

credit at risk. While there has been suggestion by the CFPB and other regulators 

that they may not cite financial institutions for noncompliance for a period of time 

after the compliance date, the law carries a private right of action which would 

make credit unions and others vulnerable to lawsuits for noncompliance even as 

they work in good faith toward compliance. Another year would ensure that mortgage credit remains available to millions of credit union members while credit 

unions all over the country continue to understand how to implement the most 

sweeping regulatory changes to mortgage lending in U.S. history, and would be welcome relief to credit unions. We encourage Congress either through this legislation 

or as a separate bill to address this issue. 

In addition to addressing the compliance dates of the mortgage regulations, we 

encourage the Committee to address several other areas of the mortgage regulations, including the definition of points and fees for the purposes of the CFPB’s ability-to-repay rule, the credit risk retention requirements for the ‘‘qualified residential 

mortgage’’ rule and changes to the qualified mortgage rule. 

We note that legislation has been considered which would exclude from the definition ‘‘all title charges, regardless of whether they are charged by an affiliated company, provided they are bona fide and reasonable.’’ Defining points and fees in this 

way will maintain a competitive marketplace, prevent over-pricing or limited choice 

in low-moderate income areas and allow consumers to enjoy the existing benefit of 

working through one entity for their new mortgage or refinance. A statutory revision would make this definition clearer and stronger than the CFPB’s amended rule. 

We hope the Committee will also consider including language in the housing finance reform bill to repeal the credit risk retention requirement in the ‘‘qualified 

residential mortgage’’ rule, and to allow the consumer to waive the requirement that 

mortgage disclosures be provided to the consumer three business days before closing. 

Finally, we encourage the Committee to consider language to repeal the defense 

to foreclosure provision of the Dodd–Frank Act. The litigation risk created by the 

defense to foreclosure provision has caused many credit unions to worry that prudential examiners will severely restrict the ability of credit unions to keep non-QM 

loans that do not enjoy the QM rule’s safe harbor in their portfolio after the rule 

goes into effect. This would make QM the effective requirement for safety and 

soundness and risk mitigation purposes. These changes would do a great deal to alleviate the very real concern of credit unions that they will not be able to offer mortgages to their members who do not meet all of the QM standards but who nevertheless have the ability to repay a mortgage loan. These changes will also help facilitate the kind of creative products that are possible through portfolio lending that 

individualize the process of getting a mortgage based on the individual circumstances of each member. 

Conclusion 

We are encouraged that the Committee has engaged in a process to consider comprehensive housing finance reform. Unquestionably, the housing finance system is 

in need of repair. A conservatorship is not meant to last nearly a decade. It is critical that Congress get reform legislation right as it impacts the overall economy and 

perhaps more importantly, the housing needs of Americans. We appreciate that the 

Committee has sought our views on this legislation and look forward to providing 

continued assistance as the legislation moves through the process. On behalf of 

America’s credit unions and their 110 million members, thank you for your consideration of our views. 

44 

1 ICBA Mortgage Lending Survey. September 2012. 

PREPARED STATEMENT OF JACK E. HOPKINS 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, CORTRUST BANK, N.A., MITCHELL, 

SOUTH DAKOTA, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

JULY 20, 2017 

Chairman Crapo, Ranking Member Brown, Members of the Committee, my name 

is Jack E. Hopkins and I am President and CEO of CorTrust Bank in Sioux Falls, 

South Dakota. CorTrust is a national bank with more than $780 million in assets. 

As a third-generation community banker, I am pleased to testify today on behalf of 

the Independent Community Bankers of America and nearly 5,000 community 

banks nationwide at this important hearing on ‘‘Housing Finance Reform: Maintaining Access for Small Lenders’’. We are grateful for your recognition of the critical 

importance of preserving community bank access in any reforms to the housing finance system. ICBA strongly supports reform, but it is essential to borrowers and 

the broader economy that the details of reform are done right. ICBA looks forward 

to providing ongoing input on the impact of reform on community banks and their 

customers. 

Community Banks and the Mortgage Market 

Community bank mortgage lending is vital to the strength and breadth of America’s housing market. Community banks represent approximately 20 percent of the 

mortgage market, but more importantly, our mortgage lending is often concentrated 

in the rural areas and small towns of this country, which are not effectively served 

by large banks. For many rural and small-town borrowers, a community bank loan 

is the only option to help families buy a home. 

A vibrant community banking sector makes mortgage markets everywhere more 

competitive, and fosters affordable and competitive interest rates and fees, better 

customer service, and more product choice. The housing market is best served by 

a diverse group of lenders of all sizes and charter types. Nearly 8 years after the 

financial crisis, an already concentrated mortgage market has become yet more dangerously concentrated. We must promote beneficial competition and avoid further 

consolidation and concentration of the mortgage lending industry. 

CorTrust Bank was founded in 1930, at the outset of the Great Depression, and 

was built, tested and proven under historically challenging economic conditions. We 

survived the Great Depression and numerous recessions since that time, including 

the most recent financial crisis, by practicing conservative, commonsense lending 

and serving our community through good times and bad. We emerged from the crisis well-capitalized and our lending has supported the recovery. CorTrust Bank 

serves 19 communities in South Dakota and Minnesota, from Sioux Falls to rural 

communities with populations of less than 140, such as Artesian, where we were 

first chartered under the name Live Stock State Bank. 

Many American community banks have similar stories—some have been in business for more than 100 years. I fully expect the community bank business model 

will thrive in the future, to the benefit of consumers, communities, and the broader 

economy. 

Residential mortgage lending has been an important component of CorTrust’s 

business since its founding and has grown more important over the years. In 1988, 

we first began to sell mortgages into the secondary market to access additional 

funding. Today, we have a $590 million portfolio consisting of approximately 5,500 

loans. About two thirds are held by Fannie Mae, and a smaller number are held 

by Freddie Mac and by the South Dakota Housing Authority. CorTrust bank and 

our customers depend on our access to Fannie Mae and Freddie Mac. 

Fair Access to the Secondary Market 

Secondary market sales are a significant line of business for many community 

banks. According to an ICBA survey, nearly 30 percent of community bank respondents sell half or more of the mortgages they originate into the secondary market. 1

When community banks sell their well-underwritten loans into the secondary market, they help to stabilize and support that market. Community bank loans sold to 

Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs) are underwritten as though they were to be held in the bank’s portfolio. Selling loans to the 

GSEs allows the community bank to retain the servicing on those loans, thereby 

keeping their relationship with that borrower. Loans that are serviced by locally 

based institutions tend to lead to better outcomes for borrowers and their commuVerDate Nov 24 2008 09:14 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00048 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\07-20 ZDISTILL\72017.TXT JASON
45 

nities. Many non-GSE secondary market investors require transfer of servicing 

when they purchase a loan. 

While community banks choose to hold many of their loans in portfolio, it is critical for them to have robust secondary market access to support lending demand 

with their balance sheets. Selling mortgage loans into the secondary market frees 

up capital for more residential mortgages or other types of lending, such as commercial and small business lending, which support economic growth in our communities. 

Even those community banks that hold nearly all of their loans in portfolio need 

to have the option of selling loans in order to meet customer demand for long-term 

fixed-rate loans. Meeting this customer demand is vital to retaining other lending 

opportunities and preserving the relationship banking model. As a community bank, 

it is not feasible for me to use derivatives to offset the interest rate risk that comes 

with fixed-rate lending. Secondary market sales eliminate this risk. The ability to 

sell a single loan for cash, not securities, is critical to my bank because I don’t have 

the lending volume to aggregate loans and create mortgage backed securities, before 

transferring them to Fannie Mae or Freddie Mac. In addition, I’m assured that the 

GSEs won’t appropriate data from loans I’ve sold to solicit my customers with other 

banking products. 

Recapitalization of the GSEs Cannot Wait 

Before discussing reforms to the secondary market, I would like to highlight for 

this committee an immediate risk facing the GSEs, the mortgage market, and taxpayers. 

Though Fannie Mae and Freddie Mac have returned to profitability and have resolved the majority of their defaulted loans, the quarterly sweep of their earnings 

to the Treasury—some $265 billion in 8 years—has seriously depleted their capital 

buffers. In fact, Fannie Mae and Freddie Mac have less capital today than when 

they were placed in conservatorship 8 years ago and, absent a change in policy, are 

on track to fully deplete their capital by year end. When this happens, one or both 

companies are likely to require a draw from the Treasury. This in turn could trigger 

a market disruption that spikes interest rates and freezes home purchases and refinancing. This self-inflicted crisis can and must be avoided. FHFA and the Treasury 

should protect taxpayers from another bailout. 

Key Features of a Successful Secondary Market 

The stakes involved in getting housing-finance market policies right have never 

been higher. Housing and household operations make up 20 percent of our economy 

and thousands of jobs are at stake. 

ICBA’s approach to GSE reform is simple: use what’s in place today and is working and focus reform on aspects of the current system that are not working or that 

put taxpayers at risk. If reform is not done right, the secondary market could be 

an impractical or unattractive option for community banks. Proposals that would 

break up, wind down, sell or transfer parts of the GSEs’ infrastructure to other entities would end up further concentrating the mortgage market in the hands of the 

too-big-to-fail players, putting taxpayers and the housing market at greater risk of 

failure. Further they run the risk of disrupting liquidity in the $5 trillion housing 

market that community banks and homebuyers depend on. 

Below are some of the key principles community banks require in a first-rate secondary market. 

• The GSEs must be allowed to rebuild their capital buffers. ICBA believes the 

first step in GSE reform must be restoring the GSEs to a safe and sound condition. Regardless which approach or structure reform takes, the existing system 

must be well capitalized to prevent market disruption or additional taxpayer 

support in the event of one or both GSEs requiring a draw from the U.S. Treasury during what’s likely to be a lengthy debate and transition period to any new 

structure or system. 

• Lenders should have competitive, equal, direct access on a single-loan basis. The 

GSE secondary market must continue to be impartial and provide competitive, 

equitable, direct access for all lenders on a single-loan basis that does not require the lender to securitize its own loans. Pricing to all lenders should be 

equal regardless of size or lending volume. 

• An explicit Government guarantee on GSE MBS is needed. For the market to 

remain deep and liquid, Government catastrophic loss protection must be explicit and paid for through the GSE guaranty fees, at market rates. This guarantee is needed to provide credit assurances to investors, sustaining robust liquidity even during periods of market stress. 

46 

• The TBA market for GSE MBS must be preserved. Most mortgage lenders are 

dependent on a liquid to-be-announced (TBA) market that allows them to offer 

interest rate locks while hedging interest rate risk with GSE mortgage-backed 

securities (MBS) that will be created and delivered at a later date. Creating 

new GSE MBS structures, or using customized capital markets structures that 

provide front end credit risk transfers, generally makes the resulting MBS 

‘‘non-TBA.’’ 

• Strong oversight from a single regulator will promote sound operation. Weak 

and ineffective regulation of the GSEs enabled them to stray from their primary 

mission as aggregators, guarantors, and securitizers. As required by HERA, the 

FHFA must ensure the secondary market operates in a safe and sound manner 

so taxpayers are not put at risk. It is incumbent upon FHFA to ensure the 

GSEs are adequately capitalized commensurate with their risks and compliant 

with their primary mission. 

• Originators must have the option to retain servicing, and servicing fees must be 

reasonable. Originators must have the option to retain servicing after the sale 

of a loan. In today’s market, the large aggregators insist that lenders release 

servicing rights along with their loans. Transfer of servicing entails transfer of 

customer data which can be used for cross-selling. While servicing is a low-margin business, it is a crucial aspect of the relationship-lending business model, 

giving originators the opportunity to meet the other lending or financial services 

needs of their customers. Additionally, in general, consumers receive better 

service when their loans are serviced on a local level than when they are serviced by entities that did not originate their loan and are located out of their 

market area. 

• Complexity should not force consolidation. Under the current GSE model, selling 

loans is relatively simple. Sellers take out commitments to sell loans on a single-loan basis and are not required to obtain complex credit enhancements, except for private mortgage insurance for loans exceeding 80 percent loan-to-value 

or other guarantees. Any future secondary market/GSE structure must preserve 

this relatively simple process for community banks and other small lenders that 

individually do not have the scale or resources to obtain and manage complex 

credit enhancements from multiple parties. 

• GSE shareholder rights must be upheld. Any reform of the housing finance system must address the claims of GSE shareholders and respect the rule of law 

that governs the rights of corporate shareholders. 

ICBA’s Way Forward 

ICBA’s approach to GSE reform is simple: use what is in place today and is working, and address or change the parts that are not. Our approach has two parts: reforms that can be accomplished administratively by FHFA within HERA, and reforms that will require Congressional action. 

Administrative Reforms 

• FHFA should end the net worth sweep of revenues to Treasury and, following 

HERA, require both GSEs to develop capital restoration plans. These plans 

would include continued use of credit risk transfers, provided they meet a targeted economic return threshold that balances GSE revenue and capital building needs with prudent credit risk management standards. 

• FHFA should review and approve those capital plans, establish prudent risk 

based capital levels as required by HERA, and set reasonable timeframes and 

milestones for achieving re-capitalization goals. 

• FHFA should monitor the GSEs’ performance against their respective plans and 

release each GSE from conservatorship as they become well-capitalized. 

• The GSEs should complete construction of the Common Securitization Platform 

and issue their respective MBS from the platform. Ownership/management of 

the CSP should remain with the GSEs through the current LLC structure. Expanding access to the CSP to other entities should be up to Common 

Securitization Solutions, LLC (CSS) board, with final approval by FHFA. 

• Launch of the Uniform Mortgage Backed Security (UMBS) should be deferred 

until both GSEs are recapitalized and released from conservatorship. 

Legislative Reforms 

• Congress should create a catastrophic mortgage insurance fund to be administered by the FHFA which would be funded through GSE guaranty fees. The size 

of the fund should be determined based on actuarial standards and should be 

47 

similar to the FDIC’s deposit insurance fund. The fund would stand behind the 

explicit U.S. Government guarantee of the GSE MBS. 

• Congress should change the GSE corporate charters from the current Government-chartered, shareholder-owned, publicly traded companies, to regulated financial utilities that are shareholder owned. All current shareholders should be 

able to exchange common and junior preferred GSE shares for a like amount 

of shares in the new structures. The Treasury should exercise its warrants for 

senior preferred shares of GSE stock and convert those shares to stock in the 

new structure. No dividends should be paid to any shareholders until the company is deemed well capitalized per its recapitalization plan by the FHFA. The 

Treasury should be required to divest itself from its shares once a company is 

well capitalized. 

The worst outcome in GSE reform would be to allow a small number of megafirms 

to mimic the size and scale of Fannie and Freddie under the pretense of creating 

a private sector solution strong enough to assure the markets in all economic conditions. Moral hazard derives from the concentration of risk, and especially risk in the 

housing market because it occupies a central place in our economy. Any solution 

that promotes consolidation is only setting up the financial system for an even bigger collapse than the one we’ve just been through. 

The GSEs must not be turned over to the firms that fueled the financial crisis 

with sloppy underwriting, abusive loan terms, and an endless stream of complex 

securitization products that disguised the true risk to investors while generating 

enormous profits for the issuers. These firms must not be allowed to reclaim a central role in our financial system. 

ICBA is pleased to see a robust debate emerging on housing finance reform. A 

number of serious proposals have been put forth to date—both from within Congress 

and from outside—all of which combine promising features with others that warrant 

additional consideration and reworking. 

Closing 

Thank you again for the opportunity to testify today. It is critically important the 

details of reform are done right to ensure community banks and lenders of all sizes 

are equally represented and communities and customers of all varieties are served. 

PREPARED STATEMENT OF CHUCK PURVIS 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, COASTAL FEDERAL CREDIT UNION, RA- LEIGH, NORTH CAROLINA, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDER- ALLY INSURED CREDIT UNIONS

JULY 20, 2017 

Introduction 

Good morning, Chairman Crapo, Ranking Member Brown, Senator Tillis, and 

Members of the Committee. My name is Chuck Purvis and I am testifying today 

on behalf of the National Association of Federally Insured Credit Unions (NAFCU). 

I appreciate the opportunity to share NAFCU’s views on Housing Finance Reform 

and the importance of maintaining secondary market access for small lenders. 

NAFCU appreciates the bipartisan approach committee leadership and members 

have demonstrated on this critical issue. In addition to our testimony, NAFCU 

member credit unions look forward to continuing to work with you beyond today’s 

hearing to ensure access to the secondary mortgage market for credit unions and 

their 110 million members. 

I currently serve as the President and CEO of Coastal Federal Credit Union in Raleigh, North Carolina. Coastal Federal Credit Union is a $2.9 billion institution 

serving 235,000 members with 22 branches in central North Carolina. Coastal was 

originally chartered in August of 1967 to serve employees of IBM in Raleigh. Today, 

we offer our employer groups a full range of financial products and services, including checking accounts, deposit accounts, credit cards, auto loans, mortgages and 

home equity loans. We also provide a suite of ancillary services, including wealth 

management and residential real estate brokerage services. In 2016, Coastal received a low income designation from NCUA, meaning at least 50 percent of our 

members live in census tracts that are identified as being low income by the Federal 

Government. 

I joined the team at Coastal in May of 2001 and became President/CEO on July 

1, 2012. I have 35 years of senior management experience with credit unions, including serving on the board and as chairman of the National Credit Union Foundation. I was also recently recognized by the Triangle Business Journal as the 2016 

48 

Business Person of the Year, the first time that a credit union executive has been 

honored with that award. 

I go to work every day with three things in mind: 

1. How can I make Coastal a great place to work for our 475 employees? If they 

don’t enjoy coming to work, find their work rewarding, and love to serve, we 

will not succeed in providing exceptional service and value to our members; 

2. How do we best use our resources to put more money into the pockets of our 

members every day? They are who we are here to serve; and, 

3. How do we help make the dreams of our members come true—whether their 

first home, first car for a college graduate, or a basic car to allow someone to 

work every day and support their family? These dreams and aspirations are 

why we exist. 

NAFCU’s Perspective on Emerging Senate Debate 

NAFCU applauds Chairman Mike Crapo and Ranking Member Sherrod Brown for 

their continued bipartisan attention to housing policy as the Banking Committee 

agenda aggressively pursues housing finance reform ideas from the perspective of 

all stakeholders. NAFCU is the only national organization exclusively representing 

the interests of the Nation’s federally insured credit unions. NAFCU-member credit 

unions collectively account for approximately 69 percent of the assets of all federally 

chartered credit unions. My testimony today will explore the longstanding and vital 

relationships credit unions have with the Government sponsored enterprises (GSEs) 

and how important it is for any housing finance reform package to ensure credit 

union access to the secondary market under fair pricing conditions. 

We appreciate the approach the committee has taken to not rush any efforts on 

housing finance reform, and to carefully consider the practical implications of any 

changes that may be made. Although we have not endorsed any particular plan at 

this time, we appreciate the stakeholder focused approach and the Committee holding this hearing. We do, however, have several housing finance reform principles 

that should be included in any reform effort to guarantee the continued safety and 

soundness of the credit union industry. 

We believe that efforts to fund a new system be done in a way as to limit the 

cost to smaller financial institutions as much as possible. High costs of entry into, 

or establishment of, a new system, could be a major barrier of access for small lenders. To date, we do not believe that any housing finance reform solution suggested 

in previous Congresses fully took into account the needs of small lender access. For 

instance, the legislation before the Committee in 2014, S. 1217, had a $15 billion 

cap for participation in a new mutual securitization company designed for smaller 

lenders. With that model, we remain concerned that institutions below that arbitrary asset size threshold would be unable to generate enough volume to ensure liquidity and that smaller lenders would have a difficult time capitalizing such an 

entity. If the Committee were to consider such an approach again, we believe it 

should be open to a full range of institutions to ensure that these concerns are addressed. 

We also want to stress that it is critical that large institutions not be given control of the market. Even though large institutions play an important role, including 

serving as a loan purchaser for small lenders, their market dominance would have 

negative consequences for smaller institutions. In many instances, they compete for 

mortgage business with small lenders. They may be willing to buy small lender 

loans to package them in good economic times, ensuring liquidity for small lenders. 

However, in an economic downturn, they may limit this activity, drying up liquidity 

for small lenders and reducing competition for them on the front-end. In that scenario, the consumers and communities small lenders serve lose access to mortgage 

credit. Congress must ensure that does not happen in a reformed system. 

Credit Union Principles in Housing Finance Reform Efforts 

Recently, as the future of housing finance has become a focal point in Congress, 

with the Administration and among regulatory agencies, NAFCU established an updated set of principles that the association would like to see reflected in any reform 

efforts. The objective of these principles (listed below) is to help ensure that credit 

unions are treated fairly during any housing finance reform process. The principles 

are: 

• A healthy, sustainable and viable secondary mortgage market must be maintained. Credit unions must have unfettered, legislatively guaranteed access to 

the secondary mortgage market. In order to achieve a healthy, sustainable and 

viable secondary market, there must be vibrant competition among market participants in every aspect of the secondary market. Market participants should 

49 

include, at a minimum, at least one GSE, the Federal Home Loan Banks 

(FHLBs), Ginnie Mae, and private entities. 

• The U.S. Government should issue an explicit Government guarantee on the payment of principal and interest on mortgage-backed securities (MBS). The explicit 

guarantee will provide certainty to the market, especially for investors who will 

need to be enticed to invest in MBS, and facilitate the flow of liquidity through 

the market. 

• The GSEs should be self-funded, without any dedicated Government appropriations. Although the U.S. Government should be involved in the secondary mortgage market, the GSEs should not be Government-funded mortgage programs. 

The GSEs’ fees should provide the revenue necessary for sustained independent 

operation. Those fee structures should, in addition to size and volume, place increased emphasis on the quality of loans. Risk-based pricing for loan purchases 

should reflect that quality difference. Credit union loans provide the high quality necessary to improve the salability of the GSEs’ securities. 

• Creation of a FHFA board of advisors. A board of advisors made up of representatives from the mortgage lending industry should be formed to advise the 

FHFA regarding the GSEs and the state of the secondary mortgage market. 

Credit unions should be represented in such a body. 

• The GSEs should be allowed to rebuild their capital buffers. Rebuilding capital 

buffers ensures the safety and soundness of the GSEs, maintains investor confidence, prevents market disruption, and reduces the likelihood of another taxpayer bailout in the event of a future catastrophic market downturn. The GSEs 

should be permitted to begin rebuilding capital slowly over a period of several 

years. 

• The GSEs should not be fully privatized at this time. There continues to be serious concerns that in a fully privatized system, in which the GSEs are sold off 

to the secondary market, small, community-based financial institutions could be 

shut out of the secondary market. Any privatization efforts should be gradual 

and ensure that credit unions have continued access to the GSEs and the secondary mortgage market. 

• The FHLBs must remain a central part of the mortgage market. The FHLBs 

serve an important function in the mortgage market as they provide their credit 

union members with a reliable source of funding and liquidity. Housing finance 

reform must take into account the consequence of any legislation on the health 

and reliability of the FHLBs. 

• Credit risk transfer transactions should be expanded and the Common 

Securitization Platform (CSP) and Single Security retained. Although there are 

concerns regarding credit unions’ ability to participate in certain credit risk 

transfer (CRT) transactions, the GSEs should continue to expand CRT as well 

as initiatives to create deeper mortgage insurance to further disperse risk 

among private investors. Credit unions should be permitted to participate in 

transactions such as front-end CRTs through a special purpose vehicle, such as 

a credit union service organization or the FHLBs. The CSP and Single Security 

have the potential to simplify the sale of loans to the GSEs and allow greater, 

more affordable access to the secondary mortgage market. 

• The FHFA or its successor should continue to provide strong oversight of the 

GSEs and the new system, whatever it may look like. A strong, reliable single 

Federal regulator helps to provide consistency and focus to the GSEs so they 

can stay on track with their core missions and objectives. The FHFA helps 

maintain safety and soundness in the secondary mortgage market. A new system should also utilize the current regulatory framework and GSE pricing and 

fee structures. 

• The transition to a new system should be as seamless as possible. Regardless of 

whether the GSEs in their current form are part of a new housing finance system, credit unions should have uninterrupted access to the GSEs or their successor(s) and the secondary mortgage market as a whole, in particular through 

the cash window and small pool options. 

Background on Credit Unions and Credit Union Mortgage Lending 

Historically, credit unions have served a unique function in the delivery of necessary financial services to Americans. Established by an act of Congress in 1934, 

the Federal credit union system was created, and has been recognized, as a way to 

promote thrift and to make financial services available to all Americans, many of 

whom would otherwise have limited access to financial services. Every credit union 

is a cooperative institution organized ‘‘for the purpose of promoting thrift among its 

50 

members and creating a source of credit for provident or productive purposes.’’ (12 

§U.S.C. 1752(1)). Congress established credit unions as an alternative to banks and 

to meet a precise public need-a niche credit unions fill today for nearly 110 million 

Americans. Despite the passage of over 80 years since the Federal Credit Union Act 

(FCUA) was signed into law, two fundamental principles regarding the operation of 

credit unions remain every bit as important today as in 1934: 

• Credit unions remain totally committed to providing their members with efficient, low-cost, personal financial service; and, 

• Credit unions continue to emphasize traditional cooperative values such as democracy and volunteerism. Credit unions are not banks. 

The Nation’s approximately 5,700 federally insured credit unions serve a different 

purpose and have a fundamentally different structure than banks. Credit unions 

exist solely for the purpose of providing financial services to their members, while 

banks aim to make a profit for a limited number of shareholders. As owners of cooperative financial institutions, united by a common bond, all credit union members 

have an equal say in the operation of their credit union—‘‘one member, one vote’’— 

regardless of the dollar amount they have on account. These singular rights extend 

all the way from making basic operating decisions to electing the board of directors—something unheard of among for-profit, stock-owned banks. Unlike their counterparts at banks and thrifts, Federal credit union directors generally serve without 

remuneration—a fact epitomizing the true ‘‘volunteer spirit’’ permeating the credit 

union community. 

Credit unions continue to play a very important role in the lives of millions of 

Americans from all walks of life. Since the financial crisis of 2008, consolidation of 

the commercial banking sector has progressed at an increasingly rapid rate. With 

the resulting depersonalization in the delivery of financial services by banks, the 

emphasis in consumers’ minds has begun to shift not only to services provided, but 

also—more importantly—to quality and cost of those services. Credit unions are second-to-none in providing their members with quality personal financial services at 

the lowest possible cost. 

As has been noted by members of Congress across the political spectrum, credit 

unions were not the cause of the economic crisis, and an examination of their lending data indicates that credit union mortgage lending outperformed bank mortgage 

lending during the recent downturn. This is partly because credit unions did not 

contribute to the proliferation of sub-prime loans. Before, during, and after the financial crisis, credit unions continued to make quality loans through sound underwriting practices focused on placing their members in solid products they could afford. 

While the housing market continues to recover from the financial crisis, and Congress works to put into place safeguards to ensure such a crisis never happens 

again, credit unions continue to focus on providing their member-owners with the 

basic financial products they need and demand. The graphs below highlight how 

credit union real estate loan growth has outpaced banks since the downturn and 

how credit unions have fared better with respect to real estate delinquencies and 

real estate charge-offs. It is with this data in mind that NAFCU urges members of 

the Committee to recognize the historical performance and high quality of credit 

union loans as housing finance reform moves forward. 

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A primary concern of credit unions is continued unencumbered access to the secondary mortgage market. This includes adequate transition time to any new system. 

A second concern, equally as important, is recognizing the quality of credit union 

loans through a fair pricing structure. Because credit unions originate a relatively 

low number of loans compared to others in the marketplace—federally insured credit unions had just over 7 percent of the first mortgage originations in 2016 (see 

chart below)—we do not support a pricing structure based on loan volume, institution asset size, or any other geopolitical issue that will lend itself to discrimination 

and disadvantage their member-owners. As such, credit unions should have access 

to pricing that is focused on quality not quantity. 

Recent trends in asset portfolios, coupled with the current interest rate environment, present a unique challenge to credit union management. Until recently, interest rates had fallen to record lows, credit unions experienced vigorous share growth, 

and credit union participation in the mortgage lending arena increased to historic 

heights. Even as interest rates have begun to rise again, credit union first mortgage 

originations have continued to grow. Between 2007 and 2016, the credit union share 

of first mortgage originations expanded from 2.6 to 7.5 percent. The portion of first 

mortgage originations sold into the secondary market increased overall from 26 percent in 2007 to 40 percent in 2016, according to National Credit Union Administration (NCUA) call report data (see chart below), although it has leveled off in recent 

years. 


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Credit unions hedge against interest rate risk in a number of ways, but selling 

products to be securitized and sold on the secondary market remains a key component of safety and soundness. Lenders must have guaranteed access to secondary 

market sources including Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal 

Home Loan Banks (FHLBs) as they are valuable partners for credit unions who 

seek to hedge interest rate risks by selling their fixed-rate mortgages. Not only does 

this allow credit unions to better manage risk, but we are also able to reinvest those 

funds into their membership by offering new loan products or additional financial 

services. A 2015 NAFCU real estate survey highlights the growing use of GSEs 

among credit unions. More than three-quarters of respondents indicated that credit 

union board policy restricted the percentage of real estate loans that could be held 

on their balance sheet, with a median limitation of 40 percent of total loans. Without these critical relationships, credit unions would be unable to provide the services 

and financial products their memberships demand and expect. 

Home Mortgage Disclosure Act data shows how heavily credit unions have come 

to rely on the GSEs. Between 2007 and 2015, the portion of credit union first mortgages that were sold to Fannie Mae grew from 28 percent to 49 percent. The portion 

sold to Freddie Mac fell slightly from 13 percent to 11 percent over the same period. 

Credit unions sold a total of 60 percent of their first mortgages sold to the secondary 

market to the GSEs in 2015. The total market for mortgage resales is also heavily 

dependent on the GSEs. The portion sold to Fannie Mae and Freddie Mac in 2007 

was 43 percent in 2007 and 59 percent in 2015. 


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Finally, it should also be noted that the Government plays an important role in 

helping to set standards and bring conformity to the housing market. Any changes 

to these standards that result in decreased conformity could make it harder for 

credit unions to sell loans onto the secondary market as they do not have the economies of scale that larger market participants enjoy. 

Mortgage Lending at Coastal 

Coastal has been offering mortgage loans for the past 40 years. Until 2008, Coastal held the majority of our mortgages in portfolio. As demand grew and long term 

interest rate risk came into play, we began to work with Fannie Mae to sell many 

of our loans into the secondary market. From 2008 to 2009, we experienced a 300 

percent increase in the value of loans sold to Fannie Mae. 

It’s important to note that Coastal never participated in the type of risky mortgage lending that contributed to the economic downfall of 2008 and 2009. We did 

not get into negative amortizing ARMs, ALT-A loans, subprime loans, or ‘‘no income, 

no job, no assets (NINJA)’’ loans. The demand existed. We had members who asked 

for these types of loans, but we took our fiduciary responsibility to our members seriously and would not put them into a home they could not realistically afford. As 

a result, we only experienced 70 foreclosures over the past decade, including a period of time where other lenders saw double-digit percentages of their portfolio going 

bad. 

Since 2011, Coastal has made more than 11,700 mortgage loans, for a total $2.25 

billion. During that same time period, we sold 72 percent of those loans directly to 

Fannie Mae, because they offer competitive pricing for affordable lending to our 

members, diverse mortgage products, and allow us to maintain the servicing relationship with our members. 

We currently service 10,738 mortgages valued at nearly $1.8 billion. Of that, 

7,310 loans valued at $1.2 billion are with Fannie Mae. To us, these are more than 

just loans. Each one represents a family in a home, and each mortgage application 

is a new opportunity to help make a family’s dream of home ownership come true. 

Even though most of our mortgage business is within central North Carolina, we 

do have members in all 50 States. 

Within our primary 16-county market footprint, Coastal ranks 10th in market 

share out of 620 lenders. We achieve this, in part, because of the trust we’ve built 

with our membership and the value we return to them. We receive volumes of posiVerDate Nov 24 2008 09:14 Dec 13, 2017 Jkt 046629 PO 00000 Frm 00059 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\07-20 ZDISTILL\72017.TXT JASON

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tive feedback from our members in regard to our mortgage process and our servicing. 

We firmly believe that access to affordable credit for homebuyers is essential to 

middle class financial well-being. Even people who rent can benefit. We represent 

a market that’s home to some of the highest rents in the State, in part due to supply 

constraints in a high-demand market. By continuing to make home loans accessible 

and affordable, we can help do our part to relieve some of that market pressure. 

But, without the GSEs, our capacity to lend would be outstripped by demand. The 

GSEs benefit consumers because access to the secondary market and access to capital provides us with additional lending capacity. Our ability to sell loans, versus 

keeping them on our balance sheet, also mitigates our long term interest rate risk, 

reduces concentration risk, and keeps rates competitive. If not for access to the 

GSEs, our capacity to meet local demand would be greatly diminished, and local 

consumers would suffer from higher rates and fees, more stringent credit requirements and overall fewer options. I urge you to keep this in mind as you consider 

reform. 

Coastal serves many members who are seeking to buy their first home. We feel 

an obligation to help make that first mortgage affordable, and are committed to 

walking members through the home-buying process. We offer a variety of seminars 

and educational resources for first-time homebuyers, including Fannie Mae’s Framework. 

Coastal has been making special first-time homebuyer loans since the 1990s. We 

currently offer two first-time homebuyer mortgages, a 30-year fixed-rate loan and 

a 7/1 adjustable rate loan. The program is available to home buyers who have not 

owned a home in the last 3 years. The product conforms to Fannie’s standards, so 

only one spouse needs to be a first-time home buyer. Our first-time homebuyer 

mortgage is a 100 percent loan with no mortgage insurance, no income or area limits and up to a $300,000 sale price. We currently service 787 first-time homebuyer 

loans, totaling $124 million. Our 60-day delinquency rate on those loans is below 

1 percent. 

In 2016, due to the increasing number of extended and multi-generational households in our market, we began offering the Fannie Mae HomeReady® loan. 

HomeReady® allows consideration of income from non-borrower household members 

(relatives or non-relatives) as a compensating factor to allow for a debt-to-income 

(DTI) ratio above 45 percent and up to 50 percent. It also considers non-occupant 

borrowers, such as parents. 

We are also a member of the Federal Home Loan Bank of Atlanta, and through 

them, we have access to additional funding to allow us to continue to make home 

loans at times where loan demand outstrips deposit growth. Currently, we have 

$110 million outstanding with the FHLB. 

Term advances from the FHLB are also a tool to help us manage interest rate 

risk created by longer term loans. 

Key Elements of the Current System 

Our partnership with Fannie Mae is critical to Coastal’s mortgage lending function. We use Fannie’s Desktop Underwriter® platform to underwrite all mortgage 

loans that we originate. This ensures conformity and consistency across our portfolio, whether we sell the loan or not. 

Our reliance on Desktop Underwriter® provides Coastal with a level of efficiency 

that we might not otherwise have. Additionally, it enhances the member experience 

by automating and expediting parts of the loan process. If governmental reform creates any significant changes to the Desktop Underwriter® platform, it would have 

widespread effects on our operations. 

Fannie Mae has recently launched a new program, Day One CertaintyTM, which 

automates and expedites income and employment verification as part of the application process. This speeds up the mortgage underwriting process by as much as ten 

business days, adds a level of data integrity, and greatly reduces the risk of fraud. 

Coastal participated in the pilot program for Collateral Underwriter® for property 

evaluations, one of four segments of the Day One CertaintyTM program. 

As Congress considers reform, access to such technology must be preserved in any 

new model. The GSEs’ tools provide critical benefits to small lenders. Desktop Underwriter® and Day One CertaintyTM are important tools for Coastal and we want 

to ensure stability with these platforms. There are some opportunities for improvement, including updating the Agency’s antiquated credit risk scoring platform, 

which would subsequently lessen some punitive results in loan level pricing adjustments borne by the consumer. 

The current aggregation model at the GSEs has also had benefits for credit 

unions. We do not want to see a regression to the previous aggregation model used 

57 

before conservatorship—where market share agreements with the largest lenders 

created underwriting exceptions and lower guarantee fees based on volume, not on 

the underlying loan risk. This priced out smaller lenders and forced them to sell 

to larger lenders, instead of directly to Fannie Mae. These practices created huge 

volumes of underpriced risk that were a part of the culture and precipitated the financial crisis. We want a system that ensures equal market access for lenders of 

all sizes and business models and maintains a deep, liquid market for long-term options. Furthermore, even though Coastal is not currently using it, the function of 

the cash window at the GSEs as a single loan execution process is also vital to credit unions moving forward. 

Transition to a New Housing Finance System 

Should Congress act to reform the Nation’s housing finance system, getting the 

transition right will be critical. More than anything, to ensure a smooth transition 

to a reformed system, credit unions need certainty that changes outlined in legislation and accompanying regulation will function as intended. Credit unions must be 

kept up-to-date during this transitional period and lawmakers should build flexibility into the transitional period to account for unforeseen implementation challenges. NAFCU believes that Congress should first agree on a set of reforms and 

then, based on the nature and complexity of such reforms, establish a timeframe 

for transition. Arbitrarily pledging to adhere to a transitional timeframe before a 

set of reforms are agreed upon could create otherwise avoidable issues for new entities created under any proposal and outside stakeholders. 

In an effort to ease the transition, Congress should consider moving currently approved Fannie and Freddie lenders into a new system en bloc and giving them an 

expedited certification. This could reduce confusion and, if executed properly, could 

make the process run more smoothly for all involved. It can take time for lenders 

to be certified with the GSEs, and this time to certify, whether to the GSEs or to 

a new system, should be factored in to the transition time. 

NAFCU also believes it is important that a new system be up and running before 

Fannie Mae and Freddie Mac’s ability to securitize MBS is shut down. One way to 

accomplish this may be to have the two entities exist in a winding down capacity 

during the early stages of a new system. 

The Importance of Servicing Rights to Credit Unions 

Any new housing finance system must contain provisions to ensure credit unions 

can retain servicing rights to loans they make to their members. Many consumers 

turn to credit unions for lower rates and more palatable fee structures, but they also 

want to work with a reputable organization they trust will provide them with high 

quality service. Because credit unions work so hard to build personal relationships 

with their members, relinquishing servicing rights has the potential to jeopardize 

that relationship in certain circumstances. 

At Coastal, we retain servicing rights on all of our loans. This was especially beneficial during the economic crisis, as it allowed our members to approach us when 

they got in trouble and allowed us to work with them on their loan and keep them 

in their home. 

Underwriting Criteria in Any New System 

NAFCU has concerns about using the ‘‘Qualified Mortgage’’ (QM) standard as the 

standard for loans to be eligible for the Government guarantee, as was proposed in 

previous legislation before the Committee. We believe underwriting standards may 

be best left to the new regulator and do not think that they should be statutorily 

established. Doing so would allow the regulator to address varying market conditions and act in a countercyclical manner if needed. 

Furthermore, given the unique member-relationship credit unions have, many 

make good loans that work for their members that do not fit into all of the parameters of the QM box. Using the Consumer Financial Protection Bureau’s (CFPB) QM 

standard for the guarantee would continue to discourage the making of non-QM 

loans. 

We would also like to caution against the perpetuation of the use of one brand 

of credit scoring model. Both Fannie Mae and Freddie Mac require loans that are 

underwritten using FICO scoring models. We believe any new system should be 

open to other possible credit scoring models as well. 

Regulatory Relief and Mortgages 

NAFCU supports changes to QM standard to make it more amenable to the quality loans credit unions are already making. We would like to highlight two such 

changes: 

58 

Loans Held in Portfolio 

NAFCU supports exempting mortgage loans held in portfolio from the QM definition as the lender, via its balance sheet, already assumes risk associated with the 

borrower’s ability-to-repay. The following is a real-life example of a loan we would 

approve to hold in portfolio that we would not approve now: 

• Nonconforming loan (jumbo) 

• 53 percent LTV 

• Existing long relationship 

• Substantial deposit relationship 

• 810 FICO score 

• DTI is above 43 percent creating a non-QM loan 

Debt-to-Income Ratio 

NAFCU supports Congress directing the CFPB to revise aspects of the ‘‘abilityto-repay’’ rule that dictates a consumer have a total debt-to-income (DTI) ratio that 

is less than or equal to 43 percent in order for that loan to be considered a QM. 

This arbitrary threshold will prevent otherwise healthy borrowers from obtaining 

mortgage loans and will have a particularly serious impact in rural and underserved 

areas where consumers have a limited number of options. The CFPB should either 

remove or increase the DTI requirement on QMs. 

We would also support changes to the TILA/RESPA requirements, such as removing the requirement to deliver the Closing Disclosure (CD) 3 business days prior to 

closing. There are myriad reasons why this issue creates hardship for all involved. 

A ‘‘real-life’’ situation includes a final property inspection triggering ‘‘last minute’’ 

changes to the contract that are in the best interest of the borrower. Because of the 

rigid, mandatory, no exception nature of the requirement, these examples ‘‘re-start’’ 

the timer and push back closing affecting moving schedules, utility setups, etc. 

There may also be examples where a borrower may be able to get better terms on 

rates, but cannot afford to move the closing and cannot waive this requirement. 

Another frustration relates to third party fees. The lender is required to know exactly what third parties will charge and if the actual invoice exceeds the tolerance, 

the lender must pay the difference. Situations arise where an inspection or appraisal may be more involved than originally thought and vendors may justifiably 

incur more expenses to perform the work. Again, the rigidity of the rules requires 

the lender to absorb these amounts. 

Conclusion 

In conclusion, NAFCU appreciates the Banking Committee’s bipartisan approach 

to housing finance reform and the inclusive nature of the process. As you consider 

reform, we urge you to adhere to the credit union principles outlined in my testimony. Whatever approach is taken to reform the system, it is vital that credit 

unions continue to have unfettered access to the secondary market and get fair pricing based on the quality of their loans. The Government must also continue to play 

a role by providing an explicit Government guarantee to help stabilize the market. 

Thank you for the opportunity to provide our input on this important issue. 

NAFCU and our member credit unions look forward to working with you and your 

staffs as housing finance reform legislation moves through the legislative process. 

I thank you for your time today and welcome any questions that you may have. 

PREPARED STATEMENT OF WES HUNT 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, HOMESTAR FINANCIAL CORPORATION, 

GAINESVILLE, GEORGIA, ON BEHALF OF THE COMMUNITY MORTGAGE LENDERS OF

AMERICA

JULY 20, 2017 

On behalf of the Community Mortgage Lenders of America (CMLA) I am pleased 

to submit testimony to the Senate Committee on Banking, Housing, and Urban Affairs on Housing Finance Reform. CMLA is a trade group representing small lenders that serve the housing finance needs of their customers. CMLA’s members, 

which include both mortgage companies and community banks, are active originators of loans that are sold to, and securitized by, both Fannie Mae and Freddie Mac 

(collectively the ‘‘GSEs’’). 

None of CMLA’s members received TARP bailout money and among our members 

there were very few loans from either GSE or FHA that they were required to repurchase. 

59 

CMLA is a member of the Main Street GSE Reform Coalition, which recently published a set of Common Principles for GSE reform. The Common Principles emphasize the need for strong capitalization of the GSEs, equal treatment and access for 

all lenders and fulfillment of the GSEs’ affordable housing obligations. 

Summary of CMLA Housing Finance Reform Recommendation 

We are pleased that the Committee is moving forward on the subject of housing 

finance reform. Since the depths of the 2008 financial crisis, the U.S. mortgage market has made great strides in addressing the issues that created and drove the crisis. The last significant piece of unfinished business from the crisis is to resolve the 

status of Fannie Mae and Freddie Mac. In order to best serve the home finance 

needs of American consumers we need to allow these two vital sources of liquidity 

for the home mortgage market to emerge from their nearly 9 year-long 

conservatorships. Listed below are CMLA’s recommendations of how to accomplish 

the final steps in housing finance reform: 

• The Housing and Economic Recovery Act of 2008 (HERA) addressed many of 

the shortcomings and lapses that led to the financial failure of Fannie and 

Freddie, and the Qualified Mortgage provision in Dodd–Frank successfully addressed lax underwriting standards and poorly designed products. However, 

there are a few important steps left to be accomplished; 

• The completion of housing finance reform includes both administrative actions 

and targeted, specific Congressional legislation; 

• The Federal Housing Finance Agency (FHFA) must exercise its authority under 

HERA to set capital standards for the GSEs and oversee and approve the GSEs 

creating and executing a recapitalization plan to build a strong base of private 

capital to provide financial stability and reduce taxpayer risk; 

• Congress should make permanent the mandate of equal fees for all lenders and 

the FHFA’s authority to regulate the guaranty fees charged by the GSEs as 

well as extending these two safeguards to upfront risk sharing arrangements 

as well, in order to ensure a level playing field for America’s homebuyers and 

all lenders, and 

• Congress must also provide a Federal backstop for the GSEs, so their MBS will 

continue to command strong prices in the marketplace, which translate to affordable interest rates for home buyers and continued availability of 30-year 

fixed-rate loans 

State of the Mortgage Market 

The state of the mortgage market in the U.S. in 2017 is good with some improvements definitely required. Lenders are projected to originate approximately $1.6 trillion in single family mortgages this year. Home values are on a steadily upward trajectory and many individuals and families are able to obtain financing to purchase 

their home of choice. Interest rates for a 30-year fixed-rate mortgage remain in the 

4 percent range and the credit performance of existing loans is strong. 

According to Core Logic, a California-based real estate data and analytics firm, 

delinquency and foreclosure rates among existing home loans are at quite moderate 

levels, and down from a comparable period in 2016. Both early (30 day) and late 

stage delinquencies (120 days+) are down .5 percent since the comparable period in 

2016, while loans in foreclosure have declined from 1.0 percent in 2016 to 0.7 percent in 2017. All of these delinquency and foreclosure statistics are a fraction of the 

comparable numbers during the height of the financial crisis and its immediate 

aftermath in the 2008–2010 period. 

Credit parameters have loosened somewhat in the past year, but remain more 

stringent than they were early in the century prior to the relaxation that led to the 

financial crisis. Fannie Mae, for example, recently announced that the maximum 

debt to income ratio they would accept on loans they purchase, would be 50 percent. 

Previously the maximum was 45 percent, with 50 percent acceptable only under certain qualifying circumstances. 

However, there has been little to no increase in mortgage risk as a result of these 

modest loosening in credit parameters. As measured by Core Logic’s Housing Credit 

Index, which tracks the risk inherent in mortgages being currently originated, the 

risk in mortgage being originated today is equivalent to the risk inherent in mortgages originated early in this century, which was a period of low risk and robust 

credit performance for single family mortgages in the U.S. By comparison the Housing Credit Index in the first quarter of 2007, at the height of the pre-crisis relaxation of underwriting standards and origination of exotic mortgage products, was 

more than double what it is today. 

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To be sure, there are some issues in today’s market that need to be addressed. 

Credit parameters, while having loosened somewhat, are still stricter than they 

were in the 2000–2003 time period. That early 21st century time period is seen as 

having had the optimum balance between ample credit availability and strong underwriting standards. In addition, the supply of homes, both existing and new, is 

quite restricted in many major markets. Overhanging all of this is the continued low 

rate of home ownership, which in turn has contributed to sharp increases in rents 

as potential buyers remain as tenants and compete for rental housing with new entrants. 

A significant, and from the standpoint of small lenders, beneficial change in the 

mortgage marketplace since the immediate aftermath of the financial crisis has 

been the lessening of market share concentration among the big bank lenders. In 

2011 three big bank lenders accounted for 50 percent of all residential mortgages 

in the U.S. Today the market share held by those three same banks is just above 

20 percent. What has changed is the market share of small and mid-sized independent lenders, which has grown to 40 percent plus in 2016 and the first half of 

2017. 

The growth in the independent lender segment has translated into more choices 

for consumers and less risk concentration among a few large lenders, both positives 

for the marketplace and for borrowers. 

State of Mortgage Market Reform 

The shortcomings that led to the GSEs’ conservatorship are well known. Too little 

capital, a weak and ineffective regulator, executive compensation that encouraged 

excessive risk taking and discounted guaranty fees to large lenders that led to a 

concentration of risk, were the four primary causes. Fortunately, HERA corrected 

three of these issues and legislative action by Congress in 2011 corrected the fourth, 

at least temporarily. 

HERA created FHFA as a robust regulator, armed with sufficient authority to 

oversee the operations of the GSEs. The legislative change in 2011 authorized FHFA 

to regulate the guaranty fee charged by the GSEs and mandated equal guaranty 

fees for all lenders for a 10-year period ending in October, 2021. 

FHFA’s actions, as both regulator and conservator we believe, have fulfilled the 

expectations of HERA’s drafters. Under FHFA’s direction and control Fannie Mae 

and Freddie Mac have been steady, dependable and significant sources of liquidity 

for the conventional mortgage market. The credit quality of the mortgages purchased and securitized by the duo have been outstanding, as has the performance 

of the mortgages backing the GSE-issued securities. Fannie Mae and Freddie Mac 

are once again the linchpins of the conventional mortgage market in the U.S. 

FHFA has also moved to address some issues that have made the mortgage market less efficient and more expensive for consumers—notably the price difference between Freddie Mac and Fannie Mae securities. As noted recently by the Urban Institute, the price gap between the Freddie Mac and Fannie Mae mortgage backed 

securities has largely disappeared. This price gap, with Freddie Mac securities commanding a lower price in the capital markets, had persisted for many years, well 

prior to conservatorship. Now with the product uniformity and other operational efficiencies introduced by FHFA, as well as the promise of a common securitization 

platform and a single security, have led to the market pricing the securities on a 

relatively equal basis. 

The other major shortcoming that FHFA has not addressed, though HERA provided it with ample authority to do so, is the inadequate capitalization of Fannie 

Mae and Freddie Mac. HERA authorizes the FHFA Director to set both minimum 

capital standards and risk-based capital standards, ‘‘to the extent needed to ensure 

that the regulated entities operate in a safe and sound manner.’’ 

Unfortunately, with Fannie Mae and Freddie Mac in conservatorship, FHFA has 

chosen to not exercise its capital authority under HERA. In fact, the Preferred Stock 

Purchase Agreements (PSPAs) between the U.S. Treasury and each GSE specifically 

ignore the capital provisions of HERA and require each entity to reduce its capital 

level each quarter until it reaches zero in January 2018. We find this to be a reckless and ill-advised action put in place by the former administration and we shall 

address this issue further, later in this testimony. 

FHFA has also acted to ensure that executive compensation provides the appropriate incentives to keep GSE management focused on fulfilling their mission of providing ample liquidity to the mortgage market and a flow of affordable housing finance for lenders to make available to consumers. 

The fourth shortcoming, the discounting of guaranty fees tied to lending volume, 

was a serious misstep by Fannie and Freddie. The combination of a 10-year grant 

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of statutory authority to FHFA and strong, effective administrative action, have 

eliminated this issue. 

In the pre-crisis era both Fannie Mae and Freddie Mac utilized the technique of 

discounted guaranty fees in return for exclusive business arrangements with large 

lenders as a competitive tool to garner larger loan volumes. 

This discounting of guaranty fees to large lenders had several detrimental effects 

on the financial stability of the GSEs and the mortgage market. Through the discounts the large lender recipients were able to translate their favorable pricing into 

a competitive advantage in the primary mortgage market that allowed them to 

underprice small lenders and gain larger market share for themselves. As pointed 

out above these larger market shares led to a dangerous concentration of mortgage 

originations among a handful of lenders. As we pointed our earlier in the testimony, 

in 2011 three big bank lenders commanded a combined market share of 50 percent. 

Smaller lenders were not offered the same pricing by either Fannie Mae or 

Freddie Mac and thus could not offer these lower prices to the consumers whose financing needs they served. Small lenders could obtain not-quite-as-favorable pricing 

by agreeing to sell their closed loans to one of the large lenders who enjoyed the 

discounted guaranty fees. The downside for small lenders was that large lenders 

would only purchase loans from small lenders bundled with the loan servicing 

rights. So, small lenders forfeited the opportunity to establish a long-term customer 

relationship. Small lenders also were deprived of the opportunity to build additional 

financial stability for their companies through the ongoing income stream from loan 

servicing fees. 

The situation is very different today for small lenders. With the equal pricing policy mandated by Congress and implemented by FHFA, small lenders pay the same 

guaranty fees as large lenders. Small lenders can compete on an equal pricing basis 

with large lenders in the primary mortgage market with the option of selling the 

loan directly to Fannie Mae or Freddie Mac and retaining the servicing rights to 

the loan. Retaining the loan servicing rights allows small lenders to build a longterm relationship with their customers and to create greater financial stability for 

their company with the ongoing income from loan servicing fees. 

Since the major shortcomings that led to the GSEs’ conservatorship have been addressed through legislative action by Congress and administrative action by FHFA, 

what remains to be done? What can be accomplished administratively, by FHFA 

and/or other agencies or departments in the executive branch and what further action do small lenders believe Congress needs to take? 

Scope of GSE Reform That Remains To Be Accomplished 

There are several critical and specific actions that remain to be taken in order 

to complete housing finance reform. Some of these actions can be accomplished administratively and some require targeted, narrowly scoped Congressional legislation. 

Among the required actions are the following: 

• Congress must make permanent FHFA’s authority to regulate the guaranty fees 

charged by Fannie Mae and Freddie Mac; continue the prohibition on discriminatory or unequal pricing and extend that administrative authority and prohibition to upfront risk sharing transactions and all other actions that may foster 

or encourage vertical integration of the primary and secondary mortgage markets; 

• Congress should make permanent the current PSPAs as an explicit Federal 

backstop support for the GSEs with two important changes—eliminate the capital reduction and profit sweep provisions and mandate payment of an ongoing 

fee by the GSEs for the backstop; 

• FHFA must exercise their existing statutory authority to draw up both minimum and risk-based capital standards for Fannie Mae and Freddie Mac; 

• FHFA must require Fannie Mae and Freddie Mac to draw up plans to meet 

both the risk-based and minimum capital standards. As mandated by HERA the 

GSE capital plans are then subject to approval by FHFA 

• Once each GSE has an approved plan to meet the risk-based and minimum capital standards FHFA should oversee the implementation of those plans by the 

GSEs; and 

• Once the GSEs have met the capital standards FHFA should release them from 

conservatorship. 

Permanent FHFA Authority—Vertical Integration 

For small lenders, this is the paramount issue within housing finance reform. As 

detailed earlier in this testimony, discriminatory pricing of guaranty fees by Fannie 

Mae and Freddie Mac in favor of the large lenders in the pre-crisis era led to both 

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market distortions as well as a concentration of risk for the GSEs. The statutory 

prohibition of such discriminatory pricing, and the authority of the regulator to 

oversee and control the GSEs’ guaranty fees is an essential cornerstone of housing 

finance reform and must be made permanent by Congress. 

In addition, the extension of this prohibition to upfront risk sharing is equally essential, as is the authority for FHFA to regulate such activities. Our concern is that 

upfront risk sharing, while potentially an important technique for the GSEs to control their risk, also offers the same opportunities for discriminatory action favoring 

one group of lenders over another. So, an amendment to current law to accomplish 

these dual objectives is important. 

Finally, we also believe that an amendment should extend the prohibition, and 

grant of FHFA regulatory authority, to any and all other techniques, transactions 

or actions by the GSEs that could provide great marketplace leverage, or lead to 

vertical integration of the primary and secondary markets, to any group of lenders 

at the expense of all other lenders. Congressional policy should be a strong endorsement and affirmation of equal pricing and equal treatment for all lenders that do 

business with the GSEs. 

Permanent Federal Backstop 

The national and international capital markets have accepted the PSPAs as proof 

of a Federal backstop to Fannie Mae and Freddie Mac, that has led to favorable 

pricing for both their debt and the mortgage-backed securities that they issue. Such 

favorable pricing has led directly to benefits for home buyers, who continue to enjoy 

an adequate supply of conventional mortgage financing at affordable rates. In addition, this market acceptance of Fannie Mae and Freddie Mac mortgage-backed securities is directly linked to the continued availability of the 30-year fixed-rate mortgage for American home buyers. 

In the interests of keeping legislative action by Congress to complete housing finance reform as specific and targeted as possible, while preserving all the benefits 

to home buyers that flow from the current system, we believe the best course of action for Congress would be to make the PSPAs a permanent Federal backstop for 

the GSEs with a couple of important changes. The first would be to eliminate the 

capital reduction requirements currently built into the PSPAs. 

As referenced above, we believe it is a reckless and ill-advised policy to run two 

organizations that are so vital to the smooth functioning of the U.S. mortgage market on a thin and rapidly diminishing capital level, as required by the current provisions of the PSPAs. As we have stated publicly, FHFA has the authority, as conservator, to suspend the dividend payments under the PSPAs, to allow the GSEs to 

build a capital buffer. Such a capital buffer is important to reduce the possibility 

that either of the GSEs may experience a quarterly accounting-driven loss due to 

their hedging activities, which in turn could require another draw under the PSPA. 

Such a draw could lead to market disruption or turmoil, which is entirely avoidable 

if the GSEs have a capital buffer, rather than a thin to nonexistent capitalization 

as they have now. 

We would support administrative action now, or in the immediate future, by 

FHFA to address this situation, either through a suspension of the dividends or 

other means to allow the GSEs to build a capital buffer. The smooth functioning 

of the GSEs is too important to the housing finance needs of American consumers 

to allow an entirely avoidable quarterly fluctuation to disrupt their operations. 

Capital Standards 

Under existing law (12 U.S.C. 4611 et. seq.) the FHFA Director is authorized by 

Congress to establish and enforce both risk-based and minimum capital standards 

for Fannie Mae and Freddie Mac. Regrettably FHFA has failed to exercise this authority while the GSEs have been in conservatorship. 

We believe a vital part of housing finance reform is for FHFA to immediately 

begin exercising its statutory authority to set both risk-based and minimum capital 

standards that ‘‘ensure that the enterprises operate in a safe and sound manner, 

maintaining sufficient capital and reserves to support the risks that arise in the operations and management of the enterprises.’’ (12 U.S.C. 4611) 

The single more important lesson from the ’08 financial crisis is that capital is 

key. Those institutions that were well capitalized survived, those that were not, 

failed, or were bailed out. There will inevitably be another financial crisis at some 

point in the future. How it will come about, and how it will either resemble, or be 

starkly different, from the 2008 financial crisis is impossible to know today. But 

what we do know is that strong capitalization will be a decisive factor, as it has 

been in every financial crisis in the past 100+ years. 

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Capital Plans 

Current law (12 U.S.C. 4622) grants the FHFA Director the authority to require 

a GSE that does not meet the minimum or risk-based capital standards to submit 

a capital restoration plan. Once FHFA has established minimum and risk-based 

capital standards for the GSEs, it should utilize this authority to require submission 

of capital restoration plans by Fannie Mae and Freddie Mac. 

These plans are subject to FHFA’s approval and must meet the following standards: 

‘‘Each capital restoration plan submitted under this subchapter shall set 

forth a feasible plan for restoring the core capital of the regulated entity 

subject to the plan to an amount not less than the minimum capital level 

for the regulated entity and for restoring the total capital of the regulated 

entity to an amount not less than the risk-based capital level for the regulated entity. Each capital restoration plan shall 

1. specify the level of capital the regulated entity will achieve and maintain; 

2. describe the actions that the regulated entity will take to become classified as 

adequately capitalized; 

3. establish a schedule for completing the actions set forth in the plan; 

4. specify the types and levels of activities (including existing and new programs) 

in which the regulated entity will engage during the term of the plan; and 

5. describe the actions that the regulated entity will take to comply with any 

mandatory and discretionary requirements imposed under this subchapter.’’ 

Release From Conservatorship 

Once FHFA approves these plans the GSEs should remain in conservatorship 

until they have met the minimum capital standards set by FHFA. Once they have 

met the minimum capital standards, and any other conditions set by FHFA, the 

GSE should be released from conservatorship. 

What Small Lenders and Their Consumers Do Not Need From Housing Finance Reform 

There are a number of items that small lenders and the consumers whose housing 

finance needs they serve, do not need or want from any housing finance reform effort. Chief among those are the following: 

• Massive, complex legislation to create someone’s vision of what the U.S. housing 

finance system should look like if we were designing it from scratch today; 

• Creating avenues or loopholes that could be exploited by the large banks and 

their Wall Street enablers to reestablish the un-level, concentrated mortgage 

market that existed in the pre-crisis era, with dominant positions for the large 

banks in both the primary mortgage origination and secondary capital markets; 

• Examples of such avenues or loopholes would include— 

• Advocacy of incomplete or limited prohibitions on unequal pricing and risk 

sharing 

• Proposals to either break up Fannie Mae and Freddie Mac, remove the Common Securitization Platform (CPS) from GSE ownership, or permitting the 

chartering of additional GSEs 

• Permitting ownership of such ‘‘new’’ GSEs by large lenders, consortiums of 

large lenders or Wall Street investment banks; and 

• Coupling such ownership with a proposal to establish a Federal guaranty on 

the MBS issued by each chartered GSE. 

Massive Complex Legislation 

As we have stated previously in this testimony—we know the causes of the GSEs 

financial failures in 2008 and we know how to remedy those failures. As we have 

demonstrated in this testimony, such remedies do not require broad, sweeping remakes of the entire housing finance system in this country. 

Such proposal for broad, sweeping remakes either from think tanks, consultants 

or financial trade associations representing large lender and/or Wall Street interests 

primarily exist for two reasons. They satisfy the ego needs of their author(s) and 

seek to advance the financial interests of those who funded the creation of the proposal. Neither reason is sufficient to justify the scrapping or replacement of a housing finance system that has provided affordable mortgage finance for millions of 

Americans and has worked reasonably well in the post-crisis era. 

We know what went wrong and how to fix it. That is what we should do. 

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Avenues or Loopholes 

As small lenders, we have noted the consistent theme of the debate over housing 

finance reform and the various proposals that have been put forth to address the 

issue. Restoration of the primary role of the large lenders has been the overriding 

objective of most of the players, and many of the proposals, that have been put 

forth. 

Initially in the immediate wake of the crisis, with the GSE conservatorships in 

their infancy, the debate and proposals did little to cloak the primary objective of 

restoration of the large lender roles. 

As the debate has gone on the various players have perceived that many in Congress, as well as small lender, consumer and other interest groups are either 

unsupportive, or actively opposed, to the restoration of the large lenders in their 

pre-crisis dominant roles. In recognition of this development the large lender proponents have shifted their tactics. 

Their proposals now cloak their objective more carefully, but create avenues or 

loopholes that are designed to facilitate the efforts of the large lenders to regain 

their dominant role. Such avenues include a number of different items: 

Limited prohibitions on unequal pricing—Various proposals seemingly embrace 

the current prohibition on unequal pricing and requirement of equal pricing for all 

lenders, but do not advocate extending that pricing to unequal risk sharing terms, 

or other means to favor large lenders over small lenders. 

Proposals to break up the GSEs or Remove CSP—As currently constituted the 

GSEs are coherent, well-functioning entities that are serving the needs of the marketplace. As outlined previously in this testimony this current state of affairs can 

be transitioned to a post-conservatorship era with modest legislative action and appropriate regulatory action by FHFA. Breaking up the GSEs and/or removing a vital 

component of their ability to create a mortgage-back security to access the capital 

markets (the Common Securitization Platform (CSP)), serves no good purpose except 

to create opportunities for Wall Street and the large banks to regain their dominant 

positions, which they previously demonstrated they use to favor their financial interests and disadvantage small lenders and the consumers they serve. 

Proposals to charter new GSEs—The U.S. housing finance system previously had 

hundreds of GSEs. They were called savings and loans (S&Ls) and either through 

direct experience, or by reading our history books, we all know how well that turned 

out for our country. In addition, these proposals to charter new GSEs do not contain 

an absolute prohibition on ownership of the newly chartered GSEs by consortiums 

of big banks and/or Wall Street investment banks. Thus, creating an avenue for attainment of the principal objective outlined above. The ability of small lenders to 

establish a mutually owned GSE is not an effective counter to this situation. The 

capital to establish a new GSE will be a large sum, well beyond the ability of small 

lenders, who constantly work to ensure the adequacy of their own capitalization, to 

free up cash to invest. 

Proposals to federally guarantee GSE–MBS—On the surface proposals to establish 

a Federal guarantee for MBS issued by the GSEs appear worth considering. With 

an explicit Federal guarantee investors could feel secure that principal and interest 

on their MBS would be paid no matter what turmoil engulfs the marketplace. However, a closer examination of the issue reveals several troubling facets: 

• Securities carrying the full faith and credit guarantee of the U.S. Government 

would permit banks, particularly large banks, to own such securities without 

holding any capital against them. The capital free nature of such securities 

would give large banks an advantage not enjoyed by other investors, which in 

turn could lead to ownership concentrations, that in turn could grant undue leverage and influence to the large banks. 

• If this capital-free securities status for large banks were coupled with the ability of large bank consortiums to establish and own a GSE, you could easily see 

how this would facilitating the reestablishment of the dominant role for large 

banks in the mortgage marketplace and extend that dominant role to the secondary market as well 

• Currently the only mortgage security that has a full faith and credit Federal 

guaranty is the Ginnie Mae mortgage-backed security, which is the financing 

vehicle for FHA-insured, VA-guaranteed and Rural Housing loans. Each of 

these loan programs serves groups for whom the lower interest rates afforded 

by the Federal guaranty is critical: first time buyers, low and moderate income 

buyers, veterans, and rural borrowers. What impact will there be on the GNMA 

program and the borrowers it serves, if GSE MBS received the same guaranty? 

We believe this issue merits further exploration and discussion, at the very 

least. 

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Conclusion 

We would ask members of the Senate Banking Committee to note the contrasts 

between the testimony you are hearing today, from groups whose membership consists solely of small lenders, and previous testimony from groups whose membership 

includes large lenders. 

Hopefully you have noted the consistent message from small lenders, simply asking Congress for limited action sufficient to address the well-known reasons why the 

GSEs entered conservatorship. Further that Congress should take legislative action 

that contains specific provisions to address those issues, without upending the current mortgage market. We would ask the Committee to remember that the organizations that have testified before you today do not need to take into account, or negotiate the views they have expressed to you today with the large lenders, many of 

whom were responsible for much of what led to the 2008 financial crisis. Our views 

are the distillation of the observations and beliefs of our members, small lenders all, 

who have faithfully served the mortgage finance needs of their communities through 

thick and thin and were not responsible for the actions and conditions that led to 

the 2008 financial crisis. 

Thank you for this opportunity to present out testimony. Please contact us with 

any questions and if you desire additional detail. 

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PREPARED STATEMENT OF WILLIAM GIAMBRONE 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, PLATINUM HOME MORTGAGE, ROLLING

MEADOWS, ILLINOIS, AND PRESIDENT, COMMUNITY HOME LENDERS ASSOCIATION

JULY 20, 2017 


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RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM BRENDA HUGHES 

Q.1. On Extending the Safe-Harbor for Qualified Mortgages to Portfolio Loans—A Qualified Mortgage (QM) is a designation created by 

the Dodd–Frank Act and is reserved for loans that meet certain requirements: i.e. if the lender obtained the required paperwork from 

the borrower and the borrower has thus demonstrated an ‘‘ability 

to repay.’’ Loans that meet the Qualified Mortgage standard are 

given a legal safe harbor from litigation regarding the borrower’s 

true ability to repay. 

A key reason for the QM standards was to give those who bought 

these mortgages on the secondary market some assurance that borrower’s ability to pay was properly assessed. 

But the loans that lenders keep in their own portfolio—that they 

don’t sell to anyone—don’t have this safe-harbor protection afforded 

to them. 

Do you support expanding the definition of Qualified Mortgage to 

include all loans held in portfolio? Please explain your reasoning. 

A.1. Yes. Specifically, as it relates to First Federal, we approve 

loans where we feel we have appropriately underwritten the borrower’s ability to repay. This underwriting standard is not new to 

First Federal and is applied whether we originate a loan to be held 

on our books or sold in the secondary market. Additionally, if I 

were to look at a broader application, I cannot see where there 

would be a benefit to a financial institution to put a loan on their 

books where they do not have confidence in the borrower’s ability 

to repay Portfolio lending is among the most traditional and lowest-risk lending in which a bank can engage. Loans held in a 

bank’s portfolio are well underwritten because if a loan is to be 

held in the portfolio, the bank carries all of the credit and interest 

rate risk of that loan until it is repaid. Therefore, it must be sufficiently conservative to protect the safety and soundness of the 

bank. However, existing QM mortgage rules are too restrictive and 

have made it difficult, and in some cases impossible, for creditworthy borrowers—especially low-income families—to obtain safe 

and sound loans from portfolio lenders. I urge you to support legislation that, would treat any loan made by an insured depository 

and held in that lender’s portfolio as compliant with the Ability to 

Repay and Qualified Mortgage requirements and would provide an 

important and much needed correction to the unnecessarily restrictive standards that now exist. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM JACK E. HOPKINS 

Q.1. On 18-Month Exam Cycle—Currently credit unions and community banks with assets of less than $1 billion in assets can earn 

the right to move to an 18-month exam cycle instead of being examined every 12 months. They earn this only when regulators give 

them stellar results on their annual exams. 

To those of us who approve of this policy, the appeal of this incentive is 3-fold: 

78 

• Lenders that have earned the 18-month exam cycle want to 

keep it and are thus incented to stay in excellent shape. 

• Lenders that are currently on a 12-month exam cycle have an 

additional incentive to improve their performance. 

• Regulators can focus on the lenders that do in fact have significant problems. 

What are the tangible benefits, both to customers and to the 

lender, when a lender moves to the 18-month exam cycle. 

A.1. First, ICBA fully agrees with you that the 18-month exam 

cycle for well-rated banks creates positive incentives for performance that make the banking system safer and allows regulators to 

focus on the banks that pose the greatest risk. We appreciate your 

support for this policy. 

I would add to this that too frequent or intrusive exams create 

a significant distraction for community bankers that prevents them 

from serving their customers to their full potential. The examination process is lengthy and its repetition at too-frequent intervals 

leaves little time when a bank is free of examiners and management can give their full attention to its customers. Ultimately, the 

customer is adversely impacted. 

Q.2. Should we extend this incentive to more lenders, for example 

by raising the asset threshold so that lenders with $2bn, $5bn, or 

perhaps $10bn of assets can earn 18-month exam cycles via stellar 

exam performance? 

A.2. Following on the rationale set forth above regarding the positive performance incentives created by a longer exam cycle, ICBA 

advocates both a higher asset threshold and a longer exam cycle. 

ICBA’s Plan for Prosperity recommends a 2-year exam cycle for 

well-rated banks with up to $5 billion in assets. A higher asset 

threshold would reflect recent and ongoing industry consolidation 

which has raised the average asset size of community banks. A 

longer exam cycle would strengthen performance incentives, better 

target exam resources, and allow bank management to better focus 

on their communities. A longer exam cycle for well-rated banks 

could be safely implemented because examiners would continue to 

monitor bank performance through quarterly call reports. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM CHUCK PURVIS 

Q.1. On 18-Month Exam Cycle—Currently credit unions and community banks with assets of less than $1 billion in assets can earn 

the right to move to an 18-month exam cycle instead of being examined every 12 months. They earn this only when regulators give 

them stellar results on their annual exams. 

To those of us who approve of this policy, the appeal of this incentive is 3-fold: 

• Lenders that have earned the 18-month exam cycle want to 

keep it and are thus incented to stay in excellent shape. 

• Lenders that are currently on a 12-month exam cycle have an 

additional incentive to improve their performance. 

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• Regulators can focus on the lenders that do in fact have significant problems. 

What are the tangible benefits, both to customers and to the 

lender, when a lender moves to the 18-month exam cycle? 

A.1. An 18-month exam cycle would lower our exam preparation 

and support costs by one-third. We estimate our internal costs of 

preparing materials in advance and responding to examiner inquiries during the 2–3 week exam to be approximately $200,000. Many 

internal projects are suspended for 2–4 weeks during each exam 

cycle. 

These savings would be available to improve rates and lower fees 

for our members, or to enhance services used by members. 

Q.2. Should we extend this incentive to more lenders, for example by raising the asset threshold so that lenders with $2bn, $5bn, or 

perhaps $10bn of assets can earn 18-month exam cycles via stellar 

exam performance? 

A.2. Yes. NAFCU believes that all well-run credit unions should 

have access to an 18-month exam cycle. As a credit union, we provide an extensive set of management, financial, operational and 

risk reports to our Board every month. These are available online 

for our examiner to review each month. NCUA should look at ways 

of reducing examiner time in credit unions. This can be done be reviewing these financials remotely, or collecting more data remotely 

during this 18-month period. This could allow NCUA to follow what 

is going on at the credit union, while not adding the burden of 

more frequent examiner visits. 

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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

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STATEMENT SUBMITTED BY THE MORTGAGE BANKERS ASSOCIATION 


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JOINT LETTER SUBMITTED BY CONSUMER AND HOUSING INDUSTRY 

GROUPS 


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LETTER SUBMITTED BY THE MORTGAGE BANKERS ASSOCIATION 


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JOINT LETTER SUBMITTED BY SENATOR SCOTT 


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JOINT LETTER SUBMITTED BY SMALL AND MID-SIZED TRADE 

ASSOCIATIONS 


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