October 25, Dear Housing and Urban Development Reviewers:

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1 October 25, 2011 Regulations Division Office of General Counsel Department of Housing and Urban Development 451 7th Street, SW., Room Washington, DC RE: Docket No. FR-5416-P-01; RIN 2502-AI91; Approval of Farm Credit System Lending Institutions in FHA Mortgage Insurance Programs; Federal Register, Volume 76, Number 166, Friday, August 26, 2011, Pages , Proposed Rule Dear Housing and Urban Development Reviewers: The Independent Community Bankers of America (ICBA) 1 appreciates the opportunity to express our views on the proposed rule cited above. We oppose the proposed rule and strongly urge the Department of Housing and Urban Development (Department; agency or HUD) to withdraw the proposed rule. Background of Proposed Rule The proposed rule would amend HUD's mortgagee and lender approval regulations at 24 CFR part 202 to enable the direct lending institutions of the Farm Credit System (FCS) to seek approval to participate in the mortgage insurance programs under the National Housing Act (NHA) as FHA-approved mortgagees and lenders. The proposed rule states, At the time HUD originally published its part 202 regulations in 1997, given the then-ready availability of mortgage credit and the existence of other mortgage assistance programs for rural housing, there was little need to include the Farm Credit Banks and Agricultural Credit Associations. However, the downturn in the mortgage lending market has prompted HUD to reconsider this omission. 1 The Independent Community Bankers of America represents nearly 5,000 community banks of all sizes and charter types throughout the United States and is dedicated exclusively to representing the interests of the community banking industry and the communities and customers we serve. ICBA aggregates the power of its members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever changing marketplace. With nearly 5,000 members, representing more than 20,000 locations nationwide and employing nearly 300,000 Americans. ICBA members hold $1 trillion in assets, $800 billion in deposits, and $700 billion in loans to consumers, small businesses and the agricultural community. For more information, visit ICBA s website at

2 2 The proposal also states, As lenders strive to increase capital reserves and tighten underwriting standards, and as private mortgage insurers retreat from some markets, the availability of financing for housing is reduced, particularly in rural areas. HUD states that the agency believes the proposed extension of FHA program eligibility will better enable the direct-lending institutions of the Farm Credit System to provide sound and dependable mortgage credit to rural communities. The proposed rule also attempts to describe the activities of the FCS lenders information obviously provided to HUD by the Farm Credit Administration (FCA), whose website is listed in the proposal as a source of additional information. HUD s Proposed Rule Should Be Withdrawn The ICBA and our 5,000 community bank members have many reasons for opposing HUD s proposal to grant access to its insurance programs to FCS institutions and for our strong recommendation for the agency to withdraw the proposed rule. FCS is a Unique Government-Sponsored Enterprise (GSE) that Competes with Community Banks at the Retail Level with Tax and Funding Advantages The FCS was chartered by Congress as a unique GSE, unlike Fannie Mae and Freddie Mac, that does not operate as a secondary market but rather competes directly against private-sector lenders at the retail level. The initial purpose of the FCS when it was chartered in the early part of the last century was to provide long-term, fixed-rate financing for agricultural real estate loans. To further this objective, Congress granted FCS lenders a privileged status of being tax exempt on all income earned from mortgage lending. Congress subsequently amended the FCS charter to allow FCS lenders to provide housing loans to rural residents in communities of less than 2,500 people. Congress has subsequently denied FCS s requests to expand their housing lending to towns and cities of larger populations, recognizing that ample credit is available from thousands of rural lenders for residential mortgage loans. Due to their tax-exempt status on income received from mortgage loans, the FCS receives a significant subsidy not available to commercial banks on all housing loans made in towns of under 2,500 populations. The rationale for the tax exemption was to incentivize the FCS to provide housing loans in remote rural areas. With this proposal, HUD is therefore suggesting that a double subsidy be granted to privileged FCS lenders, one that is not available to community banks. ICBA believes it is entirely inappropriate for HUD to sanction the subsidized activities of one lender, the Farm Credit System, in competition against private sector community banks. HUD s Stated Need and Rationale are Unsubstantiated The agency asserts this favorable grant to a subsidized GSE lender that already has privileged advantages over the private sector is necessary because private sector lenders are beginning to tighten underwriting standards and because private mortgage insurers are retreating from some markets resulting in the availability of financing for housing (being) reduced, particularly in rural areas. However, HUD provides no evidence for such a bold claim.

3 Indeed, if the availability for rural housing finance is being reduced, it would be in large part due to FHA s own actions to force community banks out of the FHA program through the agency s recent policy changes dealing with required new audits. These new audit requirements are not likewise required by other government guaranteed lending programs (i.e., USDA guaranteed farm loan programs). ICBA requests HUD provide all documentation verifying these claims that are related to a reduction in rural credit availability suggested in this proposed rule. HUD s claim raises several questions: o How are underwriting standards of community banks in rural areas different today than they were three-to-four years ago? o Specifically, how much have these supposedly higher underwriting standards reduced credit availability? o What documentation does HUD have to backup its claim that credit is less available, particularly in rural areas? o Did HUD meet with the community bank trade association to discuss the use of the FHA program in rural areas and how credit might be made more available through FHAapproved lenders? o Did HUD survey community banks on their available credit for rural citizens, particularly for home loans? If so, where are the survey results? If not, why wouldn t HUD conduct such a survey before concluding that credit is less available in rural areas given that several thousand community banks and their branches are located in and serving rural areas? o Is HUD aware that most community banks, particularly in rural areas, have experienced less credit demand for loans given the extremely robust rural economy, which has fared better than the general economy? o Is HUD aware that USDA projects farm sector net cash income for 2011 to be approximately $115 billion, up nearly 25 percent from 2010, and almost $40 billion above the 10-year average ( )? Is HUD aware that higher farm sector income means fewer agricultural and rural business credit demands upon lenders and more funds available with which to make rural home loans? o Is HUD aware that community banks are actively and aggressively pursuing new lending opportunities, including mortgage loans, due to higher levels of liquidity (credit available for rural lending including for home loans)? o Is HUD aware that its own data has shown rural home ownership rates consistently at a higher level that home ownership rates nationally? 3

4 o Is HUD aware that community banks can now offer their mortgage loans to secondary market sources (Fannie Mae; Freddie Mac; Farmer Mac; Federal Home Loan Banks) thus freeing up even greater liquidity? o Does HUD acknowledge that its own recent increase in underwriting criteria including the requirement for audited financial statements and such criteria s increased costs have driven several hundred community banks away from HUD s program or are forcing community banks who wish to offer FHA loans to sell them to the large national aggregators, thus driving further consolidation of the mortgage business? o Is HUD asserting private sector community banks will have higher underwriting standards than the loosely regulated FCS lenders and if so would this not be a cause for concern due to looser underwriting standards exposing the FHA insurance fund to greater risks? Why would FCS underwriting standards be allowed to be weaker than those of community banks? o If HUD s goal is to make additional funds available for rural areas, why has HUD not worked more closely with the private sector lenders such as the thousands of community banks located in rural areas to further their rural housing objectives in lieu of making it more difficult to work with HUD due to HUD s recent unreasonable, unjustified and costly audit requirements not required by statute? No Evidence of a Lack of Credit in Rural Areas There is no evidence of a lack of credit for borrowers in rural areas. The proposed rule also does not provide any evidence of a lack of credit availability in rural areas. In regards to housing, the level of rural homeownership has trended well above the national average as the chart 2 below indicates. This chart indicates that over a long period of time, rural homeownership exceeds that of the nation as a whole, indicating ample credit availability in rural areas. In addition, due to the strong farm economy and its positive impact on Main Street and rural citizens, community banks are flush with cash and extremely willing to extend loans. 4 2 USDA / ERS: Rural America at a Glance, 2009 edition

5 5 HUD s Rationale is Inconsistent with the Proposed Rule HUD s very limited explanation for the proposed new grant of authority for already heavily subsidized FCS lenders at the expense of the private sector is also inconsistent with its own arguments in favor of the proposal. HUD states that it is seeking additional avenues for mortgage financing in rural areas. How can HUD credibly make such a statement when the agency has just imposed costly and unreasonable audit requirements designed to cause hundreds of the agency s lender participants to exit the agency s loan programs? The proposed rule states that FHA-insured mortgage loans can be securitized by Ginnie Mae and sold in the secondary market, which can significantly improve the availability of funds and permit more favorable interest rates than would otherwise be likely. HUD should understand that if particular community banks faced a lack of liquidity they could also sell their housing loans to a secondary market source. Thus, based on HUD s own rationale, it would be unlikely for there to be a lack of credit availability due to numerous secondary market outlets for thousands of community bank lenders (i.e., Ginnie Mae; Fannie Mae; Freddie Mac; Farmer Mac). HUD s Rationale is Inconsistent with the Agency s Own Actions If HUD truly desired to expand access in rural areas, the agency should have more carefully vetted its recent audit requirements. For example, the FHA suddenly instituted a new audit requirement on all supervised institutions, even though supervised institutions with less than $500 million in assets have a statutory exemption from such audits because Congress recognized they were too expensive and burdensome for small institutions. Furthermore, community bank regulators don t require similar audits as HUD s newly imposed audits. By contrast, FHA has done everything possible to force community banks out of the FHA housing business for both Title 1 & Title 2 loans. HUD's recent audit requirements have forced many community banks out of the FHA business. If HUD wants to provide more access to credit in rural areas, then HUD should permanently repeal all recent burdensome financial, control and compliance audit requirements. While the FHA did finally agree to waive the financial audit for community banks of less than $500mm in assets at the end of the time period - the waiver expires in April, The FHA did not waive the internal control and compliance requirements. These new requirements, contrary to the proposed rule s assertions, are indeed economically burdensome as they will cost community banks tens of thousands of dollars to maintain their status in the FHA program. Such costs are needless and directly contradict the proposed rule s stated goal of seeking to ensure greater credit availability for rural housing finance. The new costs imposed by the FHA will make it impossible for some community banks to continue offering FHA s housing programs because there are not enough eligible loans in their local markets to absorb the high cost of the FHA s new audit requirements. HUD s Actions Signal Intent to Limit the Number of Lenders Using its Programs In fact, with the new audit requirements imposed by HUD in addition to this proposed regulation, HUD is signaling that the agency s real goal is to accelerate the consolidation of the

6 6 mortgage industry s use of their programs to the Too-Big-To-Fail institutions and now another taxpayer supported GSE, but one that directly competes with the private sector utilizing unfair tax and funding advantages. If HUD has concerns regarding rural housing finance, the agency should discuss their concerns with the banking industry and look for alternative solutions rather than try to force consolidation of the industry into the hands of a privileged GSE (i.e., the FCS) and the large megabanks. HUD's current proposal and recent past actions as noted above are themselves the main factors that threaten rural housing finance. FHA s new audit requirements should be repealed completely and immediately. While the eventual removal of the financial audit requirements were welcome since they lessened the newly imposed FHA burdens on community banks by thousands of dollars, the removal or waiver was only temporary and the internal control and compliance requirements will still cost community banks tens of thousands of dollars. As a result, these special and unnecessary control and compliance requirements forced hundreds of community banks out of the program because they did not make enough loans to have their earnings offset by the newly imposed requirements. HUD s Proposal is Inconsistent with the Administration s Housing Goals With these combined actions, HUD is, in essence, forcing many community banks out of the program including some institutions that have worked with FHA for many years. Since the audit requirements forced many community banks out of the program, HUD now seeks to replace them with larger FCS lenders. Replacing community banks with a smaller number of larger lenders, and in this case a direct retail GSE, is outrageous and totally inconsistent with the Administration s and Congress s efforts to downsize the government s role in housing finance while increasing the private sector s role. If HUD is serious about increasing FHA credit in rural areas, there are approximately 40,000 community banks and branches headquartered in non-metro areas. And while HUD has made it more difficult for community banks to work with HUD s housing programs, there are still tens of thousands of community banks and branches ready, willing and able to use federal programs to assist with their customer s housing needs. It is incongruous for HUD to suggest that it is now necessary to add FCS institutions to make up for a purported (or nonexistent) shortfall of available credit for rural housing loans. FCS institutions number less than 100 total institutions, fewer than the number of banks that HUD s recent audit requirements forced to exit the agency s programs. HUD s recent audit requirements combined with this proposal will exacerbate housing finance problems in rural areas as consumers will have fewer credit options. Such an outcome is completely inconsistent with the administration and Congress s objective of returning economic health and vitality to the housing sector.

7 7 Proposed Rule Neglects FHA s Recent Actions and Facts Regarding FCS Allowing large FCS institutions to now use FHA guarantees while seeking to force out smaller community banks is completely at odds with the proposed rule s assertion: This proposed rule would not impose any new regulatory requirements or economic burdens on small entities. To the contrary, forcing small banks out of the market due to a competitive disadvantage and unnecessary and costly audit requirements is an economic burden upon the banks forced out of FHA programs. The rule then misleadingly states: Indeed, the rule imposes no new requirements on any entities. Rather, the proposed rule would merely provide an option for direct lending institutions of the Farm Credit System to participate in HUD's mortgage insurance programs under the NHA as FHA-approved supervised lenders and mortgagees. The proposed rule ignores that HUD now insists upon implementing a new requirement that will make community banks, formerly direct FHA lenders, now use a sponsor and FCS would become such a sponsor. This result stems from the agency s requirement to have a FHA Direct Endorsement underwriter on staff in order to maintain eligibility to approve and close FHAinsured mortgages. Other direct competitors of community banks would become sponsors as well including large national banks. This new FHA requirement is extreme, burdensome, unnecessary and blatantly unfair. Contrary to the proposed rule s assertions, HUD already has imposed new regulatory requirements (and) economic burdens on small entities. Also contrary to the proposed rule s assertion, HUD already has imposed new requirements on many entities. The proposed rule also states: The full financial strength of all of the Farm Credit banks stands behind the debt issued on behalf of the Farm Credit System. In addition, investors in Farm Credit System debt are protected by the assets of the self-funded Farm Credit System Insurance Fund... These comments, obviously provided to HUD by the FCA, are misleading. In the first case, while FCS lenders are joint and severally liable to each other s liabilities in the event of system-wide FCS stress or failure, this fact was not enough to prevent infighting over whether to repay obligations necessitating a federal bailout of the FCS as a result of its reckless lending practices leading up to the farm credit crisis of the 1980s and the resulting bailout which put taxpayers on the hook for a $4 billion rescue of a then much smaller set of institutions. Furthermore, to suggest the subsequently created insurance fund would be sufficient to now bailout a much larger FCS system of well over $200 billion is doubtful at best. Taxpayers would ultimately once again be on the hook to bailout the FCS due to fears of financial contagion. For the FCA and HUD to suggest otherwise is misleading.. It is important to understand the FCS is not just another GSE but rather a unique GSE that competes with the private sector at the retail level. HUD s proposal would allow the FCS to further leverage its tax and funding advantages over the private sector with an additional level of guarantees against losses. For the numerous reasons stated above, this is hardly appropriate. As earlier noted, FCS lenders are granted tax-exempt status on all income from mortgage loans including home loans in areas with populations of less than 2,500. If this inducement has not worked to incentivize FCS lenders to take more risks on housing loans in remote and rural areas,

8 8 it is questionable whether providing a guarantee on these loans would cause FCS lenders to increase their lending to the most remote rural areas. However, to the extent the proposal would enhance FCS housing loans; such an increase would most likely be achieved via housing loans that would readily be made by the private-sector. Community banks mortgage lending business would now be undermined by this proposal and remote rural areas would have fewer lending choices and less credit availability due to HUD s FCS proposal and the new FHA audit requirements. FCS lenders already have access to secondary market outlets for their housing loans made in communities under 2,500, yet they choose not to make a significant number of these loans. However, we realize it is possible, or even likely, the FCS, via their indulging regulator (FCA), is intending to skirt their statutory limitations on rural housing loans through the regulator granted investments authorities. This authority, not granted by Congress and not authorized by any statute, is a regulatory scheme developed between the FCS and the FCA, to extend credit for otherwise illegal purposes if these illegal loans are labeled as investments. By increasing their geographic reach beyond their statutory mandate, FCS lenders would be better able than community banks to recoup the cost of FHA s new audit requirements. In addition, FCS lenders have undergone major consolidation in recent years and are anything but local as HUD s proposed rule suggests. The new Co-Bank merger, for example, will create an $85 billion institution reaching into more than twenty states. FHA s recent actions to make the program more expensive to use, penalizes small institutions and now apparently seeks to usher in large FCS lenders that cover large geographic territories to deliver their loan products. This unwise regulatory approach does little if anything to assist the rural housing finance needs of remote rural areas. FHA Requirement Would Expose Community Bank Activities to Their Competitors HUD has begun to require all mortgagees to have a FHA Direct Endorsement underwriter on their staff in order to maintain their eligibility to approve and close FHA-insured mortgages. This is an expensive resource that many community banks cannot support on small volumes of loans. This requirement risks forcing community banks to have their FHA loans approved by other endorsed underwriters. Larger banks and FCS lenders competing with community banks would therefore receive and review community bank customer contact information and financial details and be enabled to solicit these customers in an effort to lure them away from community banks. This requirement is very unfair for community banks and should be eliminated. Better Options Available to Meet Audit Requirements HUD should adopt a model that follows closely the procedures and requirements of the USDA's Farm Service Agency s (FSA) guaranteed farm loan programs. For example, FSA allows banks to use conventional banking standards and procedures to be approved lenders for their programs. USDA-FSA does random inspections of banks records and files to document internal controls and compliance and to ensure proper underwriting. The USDA-FSA guaranteed loan program loss ratios are extremely low. Over the years, the USDA has worked to make the program more user-friendly.

9 9 The results are that a very low level of appropriated funding leverages over $3 billion per year in guaranteed loans to farmers and ranchers in rural areas. Following a model similar to the FSA guaranteed loan program s methodologies would allow the FHA to actually retain community banks as participants in their programs; enhance the user-friendliness of FHA programs; and actually expand the availability of credit for rural housing finance. Lack of Agency Transparency The proposed rule states: The docket file for this proposed rule is available for public inspection in the Regulations Division, Office of General Counsel, Department of Housing and Urban Development... please schedule an appointment to review the docket file. However, ICBA staff, on at least two occasions, either left a voice mail or spoke to agency staff requesting an opportunity to review the docket file but no such opportunity was granted. This apparent reneging on the opportunity for public review of the document file is apparently based on not wanting anyone to be able to examine interagency communications between HUD and FCA. Given the lack of real justification for the proposal; the false premises underlying the proposed rule; the stated intentions of the proposal; and the recent costly and burdensome audit requirements imposed by FHA; we believe the agency should, as the agency offered publicly, make the docket available publicly. Such information should include all interagency communications with no removal of documentation and no redactions. This would provide a more substantive background in order to comment further on the proposal. ICBA Recommendations The proposed rule states: HUD specifically invites comments regarding any less burdensome alternatives to this rule that will meet HUD's objectives as described in the preamble to this rule. As noted above, HUD made it very difficult and expensive to use the agency s programs due to the burdensome and costly financial audit and control and compliance requirements. If the agency truly desires to enhance rural housing credit availability, ICBA offers the following recommendations: 1) FHA should immediately withdraw this proposal. 2) Work with the 40,000 community banks and branches in rural America to enhance and deliver FHA s rural housing programs. 3) FHA should immediately abandon its recently imposed financial, control and compliance audit requirements. 4) FHA should immediately discontinue its recent requirements that will force many community banks (even if they complied with and paid for the new internal control audits) to make loans through an FHA approved lender whereas they previously were able to close and fund the loans themselves. If this proposal goes forward, FHA would be replacing the community bank direct lender role and inserting FCS institutions and megabanks. This is blatantly inequitable and offensive.

10 10 5) FHA should immediately reinstate all community banks which formerly used the program under previous (not new) agency criteria. 6) FHA should work with ICBA to develop a survey to ascertain ways to improve the FHA s housing programs in rural areas and what, if any, obstacles exist for credit worthy borrowers to obtain home mortgages. Conclusion ICBA is quite concerned with statements made in the proposed rule asserting a reduction and lack of available credit for rural home loans when the opposite appears true. ICBA members find it hard to believe HUD would make such suggestions regarding access to mortgages in rural areas since they have not had difficulty providing the necessary capital with which to make loans. HUD s recent actions were not based on statute, and required community banks to spend tens of thousands of dollars in order to be eligible for a limited number of guaranteed loans within their local markets. This angered many bankers. The additional affront of the agency s subsequent proposed rule to allow GSE lenders, ultimately backed by U.S. taxpayers, to further encroach upon private sector lenders and reduce their ability to make FHA housing loans, has raised many additional concerns among the nation s community bankers. ICBA views this misguided proposal as another effort by the government sponsored FCS institutions to expand their powers to the detriment of the private sector. This proposed rule is completely at odds with the Administration s stated goal and efforts to increase the role of the private sector in housing finance. Therefore, we request the agency adopt ICBA s above recommendations in their entirety including the withdrawal of this proposal and permanent elimination of the agency s recent financial, control and compliance audit requirements; provide access to the complete documents file; and provide any substantive evidence of a serious lack of credit availability in rural areas. Please feel free to contact Mark Scanlan in regards to this letter at or mark.scanlan@icba.org. Sincerely, /s/ Mark Scanlan Senior Vice President Agriculture and Rural Policy