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RISMEDIA, August 4, 2011—The Independent Community Bankers of America (ICBA) sent a letter urging the regulatory agencies to re-propose the onerous Credit Risk Retention rule, which includes a proposed definition of qualified residential mortgage. ICBA stated that the regulatory agencies should re-propose the rule in a manner that will not so severely restrict credit, yet foster sound underwriting. Regulation must strike the right balance. Unfortunately, the proposed Credit Risk Retention rule does not. It over-regulates to the point of choking off the flow of credit.

“Community banks’ ability to provide mortgages is a vital service to their customers and the communities they serve. Their close ties to their customers and conservative underwriting have resulted generally in lower default and delinquency rates on their mortgages than the industry as a whole,” ICBA said in the letter. “Community banks take care to properly underwrite residential mortgages to ensure that their customers can afford their mortgage payments and keep their homes.”

In the letter, ICBA expressed support for the exemption for loans sold to Fannie Mae and Freddie Mac from risk retention requirements. The risk retention exemption is key to the stability of the fragile residential mortgage market and the ongoing participation of community banks in it. With this exemption, community banks will be able to continue to offer fixed-rate residential mortgages to their customers. If this exemption were not provided, the vast majority of community banks would have serious difficulty providing the capital needed to support risk retention requirements. As community banks are forced to exit the residential mortgage business, only a handful of the largest lenders would remain.

“The serious contraction that would occur in the mortgage market would significantly limit credit availability,” ICBA says. “It’s ironic that the lenders that would remain would be those that played a role in the housing crisis through lax underwriting standards and predatory practices—while community banks that did not contribute to the disaster would be forced out.”

ICBA also reiterated comments sent to the agencies in December that the QRM should not be defined narrowly. ICBA’s opposition to the proposed minimum 20 percent down payment requirement is strong and is shared by the broad mortgage lending industry and consumer groups. “ICBA urges the regulators not to include a specific down payment requirement in any final rule. Rather, a final rule should stress the importance of a down payment requirement that is adequate and appropriate to the specific transaction and its risk profile,” ICBA said.

Furthermore, ICBA pointed out in the letter that the proposed rule would not permit the use of private mortgage insurance to offset down payment requirements. Community banks have a long experience with mortgage insurance and its role in helping their customers buy a new home. It has been a beneficial tool in mitigating risk, and community banks want to continue to use it to help borrowers with less cash for down payments. ICBA has serious concerns that if the use of mortgage insurance is not permitted to offset down payment requirements, the housing recovery will take longer as first-time home buyers and hard working families find it more difficult to obtain a new mortgage or refinance their existing mortgage.

For more information and to read ICBA’s comment letter, visit