Fed's Duke Says Rules May Impair Lending by Small Banks

Federal Reserve Governor Elizabeth Duke said pending bank regulations may “seriously” impair mortgage lending by community banks, which play a “significant” role in the market for home loans.

Duke, a former community bank executive, said she and other Fed governors, including Chairman Ben S. Bernanke, are concerned about the potential harm from several rules mandated in the Basel III agreement and Dodd-Frank Act. If rules cause small banks to believe they shouldn’t sell mortgages, “it should raise red flags,” and policy makers should weigh whether the benefits of regulation outweigh the costs of reduced lending, Duke said today in a speech in Chicago.

“The totality of new mortgage lending regulations might still seriously impair the ability of community banks to continue to offer their traditional mortgage products,” Duke told community bankers today at an event sponsored by the Chicago Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Housing industry groups, including the Mortgage Bankers Association and the National Association of Realtors, have been warning that the Basel capital standards and the Dodd-Frank regulations will have a chilling effect on mortgage credit as they go into effect at the same time next year.

Risky Mortgages

Regulators are preparing to release the language of two rules taking effect in January to set standards for non-abusive lending and require banks to hold a slice of risky mortgages on their books. The cost of complying with those regulations, in addition to new rules governing loan officer compensation and appraisals, may be too high for many small banks, Duke said.

The Fed, FDIC and OCC said today they don’t expect to finish implementing Basel III on Jan. 1, the deadline set by the Basel Committee on Banking Supervision. The agencies said in a joint statement that the delay came because “many industry participants have expressed concern” the rules would go into effect before bankers understood or were able to adapt to them.

The U.S. housing market has rebounded as mortgage rates driven to record lows by the Fed’s asset buying spur demand. The S&P/Case-Shiller index of property values in 20 cities rose 2 percent from August 2011, the biggest year-to-year gain since July 2010. Purchases of new homes rose in September to a two- year high, according to the Commerce Department.

Duke and her colleagues on the Federal Open Market Committee last month affirmed their September decision to buy $40 billion of mortgage-backed securities each month without specifying the total size or duration of the purchases. The FOMC reiterated at its Oct. 23-24 meeting that it plans to hold the benchmark interest rate near zero through mid-2015.

Duke, 60, was a director at the Richmond Fed from 1998 to 2000. She was appointed as governor by President George W. Bush and took office in August 2008. Before joining the board, Duke was executive vice president and chief operating officer at TowneBank, a Virginia-based community bank. She also served as the first female chairman of the American Bankers Association.

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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