Banking, housing finance groups urge Basel III capital rule changes

A broad coalition of banking and housing finance trade groups is urging federal regulators to scale back parts of the proposed Basel III capital rules, arguing that overlapping requirements and elevated risk weights could unnecessarily restrict lending and economic growth.

The Mortgage Bankers Association (MBA), the Community Home Lenders of America (CHLA) and several other groups submitted comment letters this week to the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp.

The groups said that while the Basel reproposal is a “step in the right direction” compared to the 2023 version, it still includes areas of “overcapitalization” that they say are not well aligned with underlying risk. They said the framework would benefit from additional tailoring to the structure of the U.S. financial system, particularly in mortgage lending, servicing and warehouse financing.

In a joint statement, a coalition that includes the Consumer Bankers Association, the American Bankers Association, the Bank Policy Institute, the Financial Services Forum and the U.S. Chamber of Commerce said the proposal “represents a significant improvement over the previous version,” noting progress in simplifying the framework and better aligning capital requirements with risk.

“However, some overlapping requirements remain, leading to excessive capital charges for certain risks. Our recommended changes would further improve risk sensitivity and reduce unnecessary complexity, advancing the proposal’s stated goals. The changes will ultimately benefit bank customers and the economy while promoting a sound banking system,” the statement read.

In their 41-page letter, the groups urged regulators to reduce overlap between the stress capital buffer and the proposed rule, particularly for operational risk. They recommended applying a uniform 12% business indicator coefficient, along with revisions to market risk and credit valuation adjustment frameworks, to eliminate what they described as “double counting” between stress testing and capital requirements.

They also called for retaining current definitions of “commitment” and “unconditionally cancelable,” warning that proposed changes would introduce ambiguity, increase uncertainty in the capital framework and potentially raise lending costs.

To support mortgage market activity, the groups recommended cutting the risk weight for appropriately hedged mortgage servicing assets to 100% from 250%. They also recommended an implementation date no earlier than Jan. 1, 2028, to allow adequate time for compliance and to better align timing with the forthcoming stress test rule.

MBA, CHLA pen separate letters

MBA, in its own 32-page letter dated June 18, said banks play a central role in mortgage lending, mortgage servicing, warehouse financing for independent mortgage banks (IMBs) and commercial real estate lending. The trade group argued that capital rules should preserve banks’ ability to provide liquidity across those markets.

MBA recommended reducing the proposed 250% risk weight on mortgage servicing assets (MSAs) to no more than 100%, and it called for adjustments to warehouse lending rules to better align capital treatment with the risk of underlying mortgage collateral.

It also urged regulators better to recognize private mortgage insurance in residential mortgage capital calculations and to reduce capital burdens on certain securitization exposures, including those through the government-sponsored enterprises.

The MBA said its recommendations reflect nearly three years of engagement with regulators and policymakers, including prior comment letters and congressional testimony.

“MBA is concerned that, without further targeted refinements, the final rules could continue to discourage depository institution participation in residential and commercial mortgage origination and servicing and further reduce housing affordability for first-time homebuyers and underserved communities,” the letter stated.

Separately, CHLA also supported portions of the proposal, including lower capital treatment for mortgages and mortgage servicing rights, while pressing regulators to reduce capital requirements on warehouse lending.

CHLA, which sent its own comment letter on June 17, called for cutting warehouse loan risk weights to 50% from 100%. It argued that the short-term, collateralized nature of the exposures makes current treatment overly conservative.

CHLA, which represents IMBs, noted that nonbank lenders now originate about 84% of U.S. mortgages, up from roughly 30% in 2013. It also pointed to a sharp decline in bank participation in government-backed lending, including Federal Housing Administration (FHA) and Ginnie Mae programs, over the past decade.

The group also reiterated its long-standing call for federal regulators to develop a standby liquidity facility for nonbank Ginnie Mae issuers, arguing that independent mortgage banks lack access to the same emergency funding tools available to banks during periods of market stress.