Lawmakers in the House and Senate reached a deal to reconcile their respective versions of the 21st Century ROAD to Housing Act on June 16, bringing Congress seemingly to the precipice of passing the long-awaiting housing legislation.
The bill includes a variety of measures aimed at addressing issues affecting affordability through key reforms advocated by the financial services industry.
These include the restoration of specific community banking supports, the creation of a pilot program for small-dollar mortgages with original principal balances of $100,000 or less and limiting the ability of large institutional investors to acquire single-family homes, in line with an executive order issued in January.
The legislation is also intended to pave the way for localities to build new housing, decrease regulations and incentivize different types of housing, such as modular homes.
Garris Horn Co-Managing Partner Troy Garris described some of the components of the bill, which are particularly pertinent to residential mortgage banking companies on his firm’s website. Dodd Frank Update requested and received permission to share some of his takeaways in this article.
“The 21st Century ROAD to Housing Act is the most significant piece of federal housing legislation in decades, and its effects will be felt across the mortgage industry for years to come,” Garris wrote.
What mortgage lenders should know
One of the first provisions Garris addressed would direct the Consumer Financial Protection Bureau to prepare and submit a report to Congress examining how various aspects of loan originator compensation (LO Comp) affect the availability of small-dollar mortgages.
He emphasized that the study, as described in the bill, should not be mistaken for a rulemaking that might change existing LO Comp rules. However, he noted that “CFPB studies sometimes serve as a foundation for action.”
“The study will examine the relationship between LO Comp structures and access to small-dollar loans,” Garris explained. “This is an area where regulators have long expressed concern that current comp models create economic disincentives to originate smaller loans.”
He advised mortgage lenders and their compliance teams to pay attention to the scope of the study, as well as its methodology and its findings, given their potential to “shape the regulatory conversation around LO Comp for years to come.”
Garris noted the small-dollar mortgage market has historically been economically difficult to serve, with origination costs roughly comparable to larger loans while generating less revenue. He urged lenders in lower-cost housing markets to pay attention to how the pilot program evolves and is used as proving ground for new approaches aimed at making these types of loans more viable for them to originate and to hold.
Once implemented, the legislation would permit more appraisers to perform valuations of properties involved in transactions insured by the Federal Housing Administration (FHA). Specifically, it would allow both licensed and credentialed appraisers to qualify, not just those with full certifications.
Garris framed this provision as a “workforce capacity measure designed to address persistent appraisal shortages, particularly in rural and underserved markets.” Upon implementation, he suggested it would reduce delays tied to appraiser availability, which “have been a real friction point in FHA lending” while potentially helping to reduce turn times and associated costs.
Garris urged lenders to review their appraisal vendor relationships and policies to understand how this flexibility can be incorporated into their FHA origination process.
One provision of the House’s version of the bill that did not survive the negotiation process would have required institutional investors to divest “built-to-rent” properties within seven years. Although the agreed upon version would restrict future acquisitions by institutional investors, it does not require forced divestitures of existing portfolios, Garris noted.
Industry advocacy
The Independent Community Bankers of America (ICBA) and its state affiliates have been among the staunchest advocates for the passage of H.R. 6644. Following news that both chambers of Congress were in agreement regarding a final version of the bill, the organization wrote to members of the Senate reiterating their support for provisions listed under Title IX of the legislation, dubbed “Strengthening Community Banks’ Role in Housing.”
Title IX includes sections incorporating provisions previously introduced as separate pieces of legislation, including the Community Bank Deposit Access Act (Sec. 901), the Keeping Deposits Local Act (Sec. 902), the TRUST Act (Sec. 903), the Advancing the Mentor-Protégé Program for Small Financial Institutions Act (Sec. 906), the American Access to Banking Act (Sec. 907) and the Rural Depositories Revitalization Study Act (Sec. 909).
Per the letter, the ICBA-backed provisions included in Title IX would help community banks to better serve local families, small businesses and underserved communities without compromising financial stability by:
- Allowing community banks to hold custodial deposits and more reciprocal deposits without having them classified as brokered deposits, subject to restrictions.
- Adding six months to current 12-month exam cycle, along with other examination relief provisions, for banks with $6 billion or less in total assets.
- Promoting the formation of de novo community banks by streamlining the application process, as well as creating a two-year pilot program to promote the creation of de novo banks, particularly in rural areas, by providing more regulatory, capital, and lending flexibility.
- Establishing a “Treasury Financial Agent” program designed to enable partnerships between minority depository institutions, rural community banks, and other financial institutions.
- Requiring the federal banking agencies to study improving the growth, capital adequacy and profitability of rural depository institutions.
For more stories on affordable housing, visit our sister publicationThe Title Report's Housing Inventory & Attainability Watch library.