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The Latest SERVICING Reforming Little by Little With about half of Dodd-Frank requirements still waiting to be addressed, the Government Accountability Office says future reforms will come slowly. issues discussed in Dodd-Frank. Adding to the difficulty is the fact that many rules are interconnected, requiring a level of coordination between agencies that can often delay their procedures. Regulators have also prioritized responsiveness over timeliness when it comes to finalizing the reforms. "For example, to implement the act's ban on proprietary trading—trading activities conducted by financial institutions for their own accounts as opposed to those of their clients—the regulators issued draft rules that contained over 750 questions for the public's input and spurred over 19,000 comment letters," the report notes. Furthermore, the effectiveness of those reforms that actually have been implemented has yet to be seen, GAO says. The agency offers as an example the requirement that certain institutions create and submit "living wills" to promote a rapid and orderly resolution s the banking industry faces increasing regulation from the federal government, sentiment among some community bankers is sour. In a speaking engagement at the University of Georgia, Federal Reserve Gov. Elizabeth A. Duke addressed the plight of community bankers and maintained "the future of community banking is bright." Duke admitted the government has heard an outcry from community bankers who worry their banking model might not survive as new regulations severely limit their lending capabilities while also making lending much more costly. She further admitted, "Federal Reserve research over the years has confirmed that the burden of regulations falls disproportionately on smaller banks." However, she insisted community bankers' concerns are being heard, and the Federal Reserve is working to address the discrepancies. "I can't remember a time when I have seen more regulatory proposals drafted that differentiate between banks based on size or complexity," Duke stated. One area of concern surrounds residential mortgage lending. While it is evident most community banks did not employ many of the risky lending practices for which the financial sector has been so disparaged, often, community bank loans did include high interest rates and balloon payments—characteristics of "the subprime lending that proved to be so disastrous," Duke said. Challenges fall to both regulators and community bankers in the current environment as regulators are charged with drafting rules that address risky lending without inhibiting responsible lending, while community banks must find a way to comply with regulations while continuing to conduct business in the residential mortgage market. While community banks were exempt from many of the problems facing the residential mortgage market during the financial crisis, they did encounter problems in the commercial real estate market. In 2006, the federal government distributed new guidance for commercial real estate lending. The Federal Reserve has continued to observe how community banks have fared in the market since that time. "We now recognize the importance of the rapid growth criterion, which may have received less attention than the criteria for construction and overall CRE lending concentrations," Duke said, adding that the Fed will use what they have learned to further develop communication and training for bank examiners. Duke admits "the regulatory changes under way are not without costs to community banks," but reiterated "the future for community banking is bright." "I can't remember a time when I have seen more regulatory proposals drafted that differentiate between banks based on size or complexity." —Elizabeth A. Duke, Federal Reserve Gov. The M Report | 63 se c on da r y m a r k e t Elizabeth Duke says regulators are working to draft fair proposals for smaller banks and insists there's a bright future ahead. in case of bankruptcy. While many financial firms have submitted their resolution plans, the effectiveness of these provisions can't be known until the first large failure. In addition, GAO says a number of other concerns still exist, including continued federal overexposure to Fannie Mae and Freddie Mac as they operate under conservatorship. Until the GSEs' status is resolved, the report notes, "these entities continue to represent financial exposures for the federal government, a risk to taxpayers and an impediment to the transition to a housing market that functions effectively without the current level of substantial federal support." Although the GSEs' conservator, the Federal Housing Finance Agency (FHFA), has put out proposals to change their procedures and encourage private market participation, no definitive plan has been developed. a na ly t ic s he last few weeks have seen a deluge of new rules from the Consumer Financial Protection Bureau (CFPB) and other regulatory agencies, but a new report from the U.S. Government Accountability Office (GAO) says the reform process is still coming along slowly. As of the end of 2012, GAO estimates regulators have issued rules for approximately 48 percent of the DoddFrank provisions that call for them. Most of the effective deadlines for those rules have not yet been reached, the agency says. Of the remaining Dodd-Frank provisions, GAO says regulators have proposed rules for about 29 percent, while the remaining 23 percent have yet to be addressed. According to the report, the biggest obstacle standing in the way of new rulemaking and implementation is the sheer number and complexity of s e r v ic i ng T Fed Governor Addresses Community Banker Concerns over Regulation A Or ig i nat ion and it will get you a reasonably priced mortgage," he said. In fact, Allen advised borrowers with even lower credit scores to feel somewhat confident, pointing out some types of mortgage loans, such as FHA and VA loans, have lower credit requirements than traditional loan types. While California topped MortgageMarvel.com's list of highest-ranking states with an average credit score of 755, Hawaii followed close behind with an average score of 754. Oregon ranked third with an average score of 751, and Connecticut and Wisconsin rounded out the top five with scores of 747 and 746, respectively. The list of bottom five states was dominated by Southern states, starting with Mississippi with an average credit score of 689. Arkansas (693), Louisiana (698), and West Virginia (702), ranked next, followed by Oklahoma with an average credit score of 704 among online mortgage applicants.