Banks that are concerned about potential fair lending claims if they refuse to make residential mortgage loans that are not “qualified mortgages” or “qualified residential mortgage loans” should be equally concerned about the new proposed bank capital rules. On June 7, 2012, the Federal Reserve approved for publication three sets of proposed regulations to revise the risk based capital rules for banks to make them consistent with the new international capital standard, generally known as Basel III, and certain requirements of the Dodd-Frank Act. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation followed suit on June 12, 2012. Conventional residential mortgage loans with loan-to-value ratios in excess of 80%, regardless of the presence of private mortgage insurance, could trigger material adverse capital requirements if the loans are held for investment and do not comply with certain regulatory underwriting criteria. Such loans could present the legal risk of loss under the “ability to repay” rules, the credit risk of loss under the “risk retention” rules and now increased capital charges under the implementation of Basel III.
Given the interagency nature of the proposed rulemaking, the proposed rules would apply to all FDIC-insured institutions and national banks in the United States, as well as bank holding companies (other than small bank holding companies) and all thrift holding companies. Although these proposed rules would not apply to credit unions, the National Credit Union Administration, the federal regulator for credit unions, has historically implemented credit union net worth requirements that closely track bank capital requirements, making the proposed bank capital rules a harbinger for future credit union net worth requirements.
Among the most significant changes in these far-reaching proposals relate to the capital treatment of mortgage loans, mortgage backed securities and mortgage servicing rights assets held by banks. These rules would vary the amount of capital banks must hold against residential mortgage loans based upon loan-to-value ratios and compliance with regulatory underwriting criteria. They would also impose significant restrictions on the inclusion of mortgage servicing rights in capital. Following the qualified mortgage rules under the Truth in Lending Act and the exemption from risk retention for securitizations of qualified residential mortgages, the new capital rules are one more step in what appears to be an orchestrated campaign of pushing banks to originate plain vanilla residential mortgage loan products. These rules may also affect non-bank lenders through their effect on the market for mortgage products.
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