A bank is fighting the Federal Reserve Board of Governors to roll out a loan program involving real estate purchases that the lender says it needs to compete with local independent mortgage banks.
Upstate New York-based Canandaigua National Corp. is contesting
Under the proposed program, the bank's parent holding company would've bought a seller's home if a CNB pre-approved buyer failed to secure a final approval. The lender would've required a 15% cash deposit from the buyer, which they would forfeit if the company had to buy the property. The company meanwhile would reimburse the buyer with funds remaining after its closing costs and resale expenses.
The institution meanwhile would've sold the property in two years, reimbursing the buyer for their original deposit if the home was sold at a profit. The company would've also capped its total real estate holdings under the program at $5 million.
After submitting the offering for review in 2024, as an acceptable activity under the Gramm-Leach-Bliley Act, the Fed Board a year later unanimously rejected it on "safety and soundness" risks. The governors said permitting banks to buy real estate under such a program would expose the institutions to risks which contributed to past economic crises.
Canandaigua, in its April 21 petition, suggested the Fed Board erred in its interpretation of the law, its thin analysis, and its lengthy delay in responding to the review.
"Further delaying approval of CNC's proposed program will only place CNC even more behind its nonbanking lender competitors and further erode its share of the residential first mortgage market," attorneys for the bank wrote in the petition.
The bank declined to comment Tuesday. A spokesperson for the Fed Board said it had no comment.
Why the lender needs the program
The petitioner says the offering would help it compete with local cash guarantee programs by IMBs, as Canandaigua has seen a "precipitous drop" in its first-time homebuyer originations. The bank cited a rival IMB with a similar program that only recorded 5 failed mortgage approvals among 1,378 transactions under its offering.
Canandaigua cited its final mortgage declination rate of 0.67% after preapprovals, and said it only anticipated buying 2 homes a year under the program. The guarantee wouldn't apply on contracts where the home purchase price exceeds the mortgage preapproval amount.
The Fed Board decision
In its 11-page order last October, the Board said it has previously denied or disapproved proposals by bank holding companies to engage in real estate transactions beyond already-granted authorities.
Canandaigua, in its recent brief, argued the governors erred in analyzing its real estate transaction-related petitions from the pre-Gramm Leach Bliley Act era.
"Characterizing CNC's proposed program as a "real estate investment" illustrates the FRB's fundamental misunderstanding of the program and is not consistent with the record," wrote attorneys for the bank.
The bank suggested the Board did not perform a thorough analysis of its program, and the petition took issue with the Board's hypothesis about such programs exposing more institutions to catastrophic risks. Further, the petition highlighted
The American Bankers Association and other trade groups filed an amicus brief in the case last week, supporting neither party but asking the appellate court to force a new Fed Board review. Among other points, they questioned the thoroughness of the governors' review.
"The Order does not explain how the limited degree of real estate ownership proposed by Canandaigua — even if adopted by every financial holding company nationwide — would pose the type of 'substantial' safety and soundness risk necessary to justify a denial," wrote counsel for the groups.
The upstate New York bank has meanwhile deployed a Cleared to Close+ program, which doesn't involve a real estate purchase. The bank now offers a $25,000 cash payout for sellers if a borrower cannot obtain mortgage financing.
