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Bramble Savings Bank
February 13, 2006
Mr. Robert E. Feldman
RE: Comments Proposed Interagency Guidance on Nontraditional Mortgage Products
Dear Mr. Feldman:
We appreciate the opportunity to comment on the above noted proposal. Bramble Savings Bank is a small, FDIC-insured, state-chartered savings bank in southwestern Ohio. While we do not offer the nontraditional mortgage products highlighted in the proposal, we see the proposal as another in a long line of proposals that discourages small banks from competing in the marketplace. As such, we felt compelled to comment.
We agree that the nontraditional mortgage products listed in the proposal expose both institutions and consumers to greater risks. The payment shock triggered by interest-only loans, deeply discounted adjustable-rate mortgages (ARM) and minimum payment loans resulting in negative amortization can be considerable and catastrophic. The credit risk to an institution from faulty income verification, credit layering and reduced or no documentation loans when coupled with these nontraditional mortgage products can likewise be considerable. Institutions that have given little rational thought to the consequences of offering these products and have subsequently incurred significant losses should be examined in an unfavorable light.
Our objection to the proposal is with the various and many mandates for formal analytical processes included that may make it virtually impossible for a small financial institution to enter the nontraditional market. The Portfolio and Risk Management Practices Section of the proposal is rife with requirements that need substantial infusions of personnel, time and money; luxuries that are difficult, if not impossible, for small institutions. These include concentration limits by loan types, third-party originations, geographic areas, property occupation status, high LTV ratios, high DTI ratios, low credit scores and layered risks. These conditions are daunting enough but when coupled with monitoring procedures to track the quality of loans by both origination source and key borrower characteristics; reporting systems that isolate key loan products, features and borrower characteristics that may show performance deterioration; tracking systems against expectations, standards and policy limits; variance analysis for inadequacies; qualitative analysis for deviations; sensitivity analysis to identify increasing risks; and stress testing on the economic environment well, the one or possibly two people involved in the project at a small financial institution are likely to be overwhelmed. And one of these is probably the president or chief (only?) lending officer.
We realize that a large financial institution may have an audit or compliance department to handle the noted formal testing and reporting. However, a small institution does not have these resources.
We believe that there is an alternative to the formalized processes noted in the proposal for a small institution. In our thinking, a small institution has less than $250 million in assets although a case could be made for a cut-off of $500 million. A small institution could give its regulator notice of its desire to enter these nontraditional markets in a relatively substantial way, say 15% of its lending portfolio. The regulator could schedule a targeted examination visit for approximately six months after the notice from the institution. This length of time should suffice to tell if the institution is offering the nontraditional product lines in a safe and sound manner. In this way, exposure to potential losses would be limited in the event the institution was engaged in troublesome practices. The institution would then terminate its activity in the nontraditional mortgage market or alter its practices to assure safety and soundness.
We believe that a more equitable way must exist to allow small institutions to compete in the nontraditional mortgage market if they so desire than was presented in the proposed guidelines. Again, we appreciate the opportunity to comment.
James Wm. Gronefeld
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