The landmark housing bill winding its way through Congress could change the banking system and make it easier for small banks to return to mortgage lending.

The House and Senate announced a compromise for the 21st Century Road to Housing Act this week, just days before the average rate on 30-year fixed home loans decreased to 6.47%, according to Freddie Mac.

The lawmakers have settled on 45 provisions across 381 pages with major implications for housing. This comes after months of wrangling for a bill that ultimately ends up with all sides meeting in the middle.

Rep. French Hill (R-Arkansas), chair of the House Financial Services Committee, said a late compromise on the bill involved settling on some bank deregulation provisions favored by the House.

“I appreciate the Senate including a three-year sunset on the [Community Development Block Grant Disaster Recovery] program and adopting key House priorities including nine community banking bills and the House’s language limiting institutional investors from outcompeting American families in the housing market,” he said.

In the end, nine of 12 House banking provisions made it into the final bill. Many of these consider the current state of banking, especially as smaller banks have reduced their roles in the market.

Explains Realtor.com® senior economist Joel Berner, small banks are a rarer sight in mortgage lending these days, thanks in part to stringent compliance rules imposed following the Great Recession.

“They don’t have the armies of compliance officers that large banks do. Similarly, technological capabilities are easier to wield at a larger scale,” Berner said. The infrastructure required to process a loan application in hours is expensive, so larger players tend to dominate the space.

Bill reshapes rules for community banks and credit unions

The Bipartisan Policy Center broke down the House’s intent for community banks, which was initially section 900 of the bill. Dennis Shea, chair of the BPC’s J. Ronald Terwilliger Center for Housing Policy, said the rules could help banks provide more construction lending as well as mortgages.

“[French] Hill has always viewed these bank rules as a housing concern,” Shea told Realtor.com.

Several of the sections deal with how much money banks need to keep as a reserve, and deal with how to define some kinds of money on their balance sheets. They involve “brokered deposits,” or those that are aggregated from investors and distributed to banks.

Other rules allow more smaller banks to go through rigorous examinations from regulators less often. The boards of some well-run credit unions won’t have to meet every month under the new law.

And, the bill aims to promote bank startup activity, especially in rural areas. “De novo” new banks are exceptionally rare since the Great Recession.

The Senate kept out three provisions sought by the House. One would reduce the Federal Reserve banks’ surplus fund cap by $115 million.

The other two involve how the Federal Deposit Insurance Corp. deals with failing banks. One involved the “least-cost” rule, and the other creates exceptions to bank concentration limits in the event a bank was in default.

Balancing consumer savings against financial safety nets

For much of this year, congressional Republicans and the Trump administration have been building momentum to change and rescind banking rules. Many of those emerged in the wake of the subprime mortgage crisis and were codified in the Dodd-Frank Act and the Basel III accords.

Those changes added a set of new rules that Republicans say have chased smaller banks out of the housing market.

Banks originated about 60% of mortgages and held servicing rights to about 95% of mortgage balances in 2008, according to data from the Financial Stability Oversight Council. By 2023, banks originated just 35% of mortgages and serviced about 45% of balances.

Says the economist Berner, the market has changed since then.

“Nonbank mortgage lenders have made access to mortgage credit easier for more borrowers,” he said. “They tend to be more technologically advanced than banks, and allowed for all-online experiences sooner. They also extend mortgage credit to borrowers with thinner or weaker credit files than banks do, allowing for more approvals.”

Lawmakers have emphasized that the financial system has changed significantly since the Great Recession, and new guardrails are in place. Berner noted that some of the rules, especially ones that require more security for banks, still safeguard the financial system.

“It’s not just cutting down on paperwork, it’s cutting down the buffers that hedge against massive liquidity crashes in the mortgage market,” Berner said of the proposed reforms. “Those capital requirements help prevent catastrophe when the market takes a sharp turn for the worse.”

“Deregulation creates risk, but it may also allow banks to offer more competitive rates to borrowers if they choose to pass the savings along to their consumers,” Berner said.