Tim Roy: Opening More Doors to Community Bank Mortgage Lending

The housing affordability situation in this country has reached a critical point. Consumers struggle to obtain mortgage credit, housing costs remain elevated in many markets and available inventory stagnates as owners sit on the sidelines waiting for conditions to improve. These issues create a challenging environment for both first-time and subsequent buyers.

Community banks are well positioned to ease some of this pressure, particularly in rural, small-town and underserved markets, where they remain important sources of mortgage credit. Yet regulations like the TILA-RESPA Integrated Disclosure rule (TRID) can drive up mortgage lending costs and complicate the lending process for smaller institutions.

The TRID rule combines mortgage disclosure requirements under both the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA). It governs documents like the Loan Estimate and Closing Disclosure and sets timing requirements for when borrowers receive them. Community banks report that the rule is especially burdensome when loan terms, settlement figures or other details change late in the process, triggering revised disclosures and, in some cases, additional waiting periods.

Why construction-to-permanent loans create unique mortgage disclosure challenges 

Construction-to-permanent loans present one of the most significant challenges. These loans typically finance the building phase first, then convert to permanent mortgage financing once construction is complete. Community banks have traditionally made many of these loans, especially in rural and underserved markets where limited housing inventory can make building a home one of the few options available.

The challenge is that banks have to use the same disclosure forms for these loans that they use for a traditional mortgage on an existing home. Construction-to-permanent loans are a different type of transaction, and those forms were never developed with that structure in mind. That can make it harder for borrowers to understand how the construction phase works, where the money is coming from and when the loan converts to permanent financing. 

Federal Reserve governor Michelle Bowman encouraged ICBA to pursue the project in 2020, and the Consumer Financial Protection Bureau (CFPB) approved it under its Trial Disclosure Program in 2023. ICBA has spent nearly six years developing redesigned disclosures specifically for these loans, and consumer testing of the forms began in August 2026. The CFPB also referenced ICBA’s construction-to-permanent project in its July request for information on possible TRID changes.

Regulatory relief update: executive order on mortgage credit access, appraisal reform and FHLB support

The regulatory picture might finally be starting to shift. In March, the White House issued an executive order on promoting access to mortgage credit, giving community banks an opportunity to revisit long-standing regulatory issues. The order calls on federal agencies to consider changes that could improve mortgage credit availability and affordability, including appraisal requirements, alternative valuation methods and other rules that affect community bank mortgage lending. ICBA and other banking groups have asked regulators to raise the residential appraisal exemption threshold from $400,000 to $625,000 and index it annually.

The executive order addresses many of the same concerns ICBA has raised for years, including the migration of mortgage lending to nonbanks and larger lenders as community banks face higher costs to originate, service and sell loans into the secondary market. Community banks continue to make mortgage loans, of course, but many have scaled back that aspect of their business due to the extra time and cost associated with meeting the same regulatory requirements as larger institutions.

The administration is also looking at the role Federal Home Loan Banks play in supporting community bank mortgage lending. ICBA is pushing for better capital treatment of mortgage servicing rights (MSRs), or the rights to collect and manage mortgage payments after closing. MSRs currently receive a 250% risk weight for capital purposes. Reducing that treatment would make it easier for community banks to retain servicing rights and maintain relationships with borrowers after closing.

What comes next for community bank mortgage lending?

With federal agencies taking a fresh look at mortgage credit availability and the rules complicating the lending process for smaller banks, the current environment is promising. Regulators are issuing requests for information and proposing changes that could ease long-standing burdens around appraisals, disclosures and other mortgage requirements. These changes could lower compliance costs, reduce delays and give community banks more flexibility to originate and service home loans. 

While this is good news for ICBA members and the borrowers and communities they serve, community banks must stay engaged to ensure stakeholders incorporate the community bank perspective and understand where mortgage rules create unnecessary costs, delays or other problems. Member feedback that provides concrete examples for regulators as they consider changes and request public comments is one of the best ways community banks can continue to deliver their messages to decision makers in Washington.

---