Fed Gov. Duke: Small Banks Need Separate Mortgage Rules
Federal Reserve Governor Elizabeth Duke has called for a separate set of regulations for community bank mortgage lending, distinct from the rules being formulated to apply to larger institutions.
In a November 9 speech at the Community Bankers Symposium in Chicago, Duke said mortgage lending by community banks generally does not pose the same risks that helped to create widespread problems in subprime mortgage lending.
"I am convinced that the best course for policymakers would be to abandon efforts for a one-size-fits-all approach to mortgage lending," she said. "Balancing the cost of regulation that is prescriptive with respect to underwriting, loan structure, and operating procedures against the lack of evidence that balance sheet lending by community banks created significant problems, I think an argument can be made that it is appropriate to establish a separate, simpler regulatory structure to cover such lending."
The key questions
Smaller community banks, those with assets under $500 million, account for about 5 percent of originations each year. Larger community banks, with assets between $500 million and $10 billion, originate an additional 13 percent of mortgages annually. These data do not include loan originations by institutions that operate exclusively in rural areas.
The second question Duke set out to answer was: How important is mortgage lending to the community banking model? It appears to be just as important to community banks as it is to larger banks, she said, as both devote roughly 25 percent of on-balance-sheet loan portfolios to home loans. Additionally, that percentage has increased for community banks since 2008.
Assessing the risks
"The regulators cannot, on their own, craft a new approach to regulating mortgage lending by community banks," Duke said. "However, I hope that this data will be useful to bankers and policymakers as they discuss more broadly the establishment of a regulatory regime that preserves the important role of community banks in mortgage lending."
November 26, 2012