FDIC Federal Register Citations Bramble Savings Bank
February 13, 2006
Mr. Robert E. Feldman
Federal Deposit Insurance Corporation
RE: Comments – Proposed Interagency Guidance on Nontraditional Mortgage
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
Bramble Savings Bank
954 State Route 28
Milford, OH 45150