Bank Risk-Based Capital Issues

In 2018, Congress enacted the regulatory burden relief statute, under which Section 201 provides a simplified process of regulatory capital calculation for small community banks that meet certain enumerated requirements. In effect, Section 201 creates a CBLR framework, which would allow the bank to avoid complex regulatory capital calculations under the normal capital rules if opted into by an eligible community bank. Congress charged the agencies to issue guidance to implement Section 201. In February 2019, the agencies released proposed rules on the CBLR framework.  MBA submitted comments on the proposed rules, specifically objecting to the inclusion of a less than 25% MSA threshold requirement for eligibility. This requirement would work against the goal and intent of simplifying the smallest community banks by excluding such banks simply because their MSAs exceed 25% of tier 1 capital. MBA will continue to advocate for less demanding requirements so that more community banks would qualify for this simplified CBLR framework, as intended by Congress. 

MBA continues to advocate on behalf of our members that Federal Banking Agencies (the “Agencies”) modify their FFIEC Call Report Supplemental Instruction to provide for a reduced risk-weighting for all warehouse loans to non-depository institutions. The current risk weighting is 100%, which does not match the 50% risk weighting that is assigned to mortgage loans made directly by the warehouse lender to borrowers. Bank warehouse lending operations support more than 50% of the single-family mortgage origination, representing an important and growing share of the market over the past decade. MBA strongly believes that reducing this risk weighting to 50% would increase the capacity of warehouse lenders to fund more loans, thereby providing much-needed support to the real estate finance market and ensure the continued flow of mortgage credit for home purchases and refinances. In general, the underlying loans that serve as collateral for these warehouse loans are generally pooled as Ginnie Mae, Fannie Mae, or Freddie Mac mortgage-backed securities (MBS’), and therefore, there seems to be no justification for assigning a higher risk weighting to the warehouse loans (used to fund mortgage lending) than mortgage loans made directly by the bank.  There is no evidence that a non-bank mortgage origination is twice as risky as a bank origination, and therefore, no reason for the differential in risk weighting. Thus, MBA continues to recommend a 50% risk weighting for warehouse loans, thereby conforming the risk weighting of warehouse loans to that of mortgage loans made directly by banks.