Regulatory policy is too often a zero-sum game of winners and losers driven by ideology rather than analysis. In that game, no one wins. The political pendulum swings back and forth, accomplishing little lasting improvements. What one administration proposes, the next disposes. There is a better way, and from time to time, regulators find the right balance and lasting policy is made.
Striking the right balance in regulatory policy is not just a matter of academic debate; it’s a pragmatic necessity. The best regulations are those that foster both economic growth and consumer protection. Achieving this equilibrium is not only possible; it’s imperative for the stability and prosperity of our economy.
In a win-win scenario, regulators are careful to account for the real-world implications of their work, recognizing that the cost of regulation is rarely paid by shareholders. When the cost of compliance forces institutions to rein in investments that yield lower returns, it is frequently the already underserved neighborhoods that bear the brunt.
This should not be taken as a clarion call against regulation; rather, it is an endorsement of a more nuanced and evidence-based rulemaking process. The value of processes like Requests for Input (RFIs), Advanced Notices of Proposed Rulemakings (ANPRs), and Notices of Proposed Rulemaking (NPRs) cannot be overstated. These tools help regulators gather vital feedback from a myriad of stakeholders, thereby creating a framework that can benefit both consumers and financial institutions. The Qualified Mortgage (QM) rule from the Dodd-Frank Act serves as a prime example. It wasn’t a panacea, but it struck a balance, preventing financial institutions from recklessly pursuing market share at the expense of long-term stability — a dynamic partly responsible for the 2008 financial crisis. When given a chance to get rid of QM during the Trump administration, most lenders opted to support thoughtful adjustments instead. As in so many things, getting the balance right is essential to lasting success.
It is useful to think of regulatory policy within the framework of a “regulatory burden budget.” This approach requires weighing the costs of regulation against its benefits, helping us make informed decisions about where to allocate our collective time, political capital, and societal resources. How we manage this budget will directly influence the return on investment for society as a whole.
Today, the regulatory spotlight shines on the final rule of the Community Reinvestment Act (CRA) and new capital standards via the Basel III Endgame rule. Regulators should tread carefully, paying heed to the nuanced feedback from both industry professionals and advocacy groups. A failure to do so could result in rules that paradoxically decrease investments in marginalized areas, augment risks for taxpayers, erode shareholder value, and funnel investment into lesser-regulated sectors — all while diminishing competition through a flurry of mergers.
I am optimistic that the final CRA rule will be a significant improvement from the Notice of Proposed Rulemaking NHC commented on last year. There is a lot of anxiety about the rule as we approach its final release in the coming weeks, but now isn’t the time to speculate on issues that may have been resolved months ago. You’ll be hearing plenty from us and everyone else soon enough.
We want banks to manage their capital prudently, balancing risk and return. We know what it looks like when they don’t (see the Savings and Loan crisis of the 1980s and the Subprime meltdown of the late 2000s). This is a primary function of financial regulators. The new Basel III agreements are an attempt by international financial regulators to find that prudent balance. Like any international agreement, tradeoffs and inelegant compromises have been made. But overall, the result has received decent reviews.
The new Basel III endgame rule released by U.S. regulators in July, however, has received intense criticism from widely diverse political and economic sectors. The proposal was greeted by severe criticism by diverse group of housing groups including NHC, the Mortgage Bankers Association, the National Association of REALTORS®, the NAACP and the National Urban League who wrote to banking regulators warning of the damage that could be done to first-time and especially first-generation homebuyers by a proposed bank capital rule.
The proposed rule would increase the risk weighting of bank-originated mortgages with down payments below 20%, discouraging banks from making loans to low- and moderate-income homebuyers. In our letter, we noted that down payment cost is often the biggest barrier to buying a home for these groups, and warned that the proposed rule would make it harder for them to get a mortgage. Further, the increase would undercut the Community Reinvestment Act (CRA) and Special Purpose Credit Programs (SPCPs) that seek to redress barriers to homeownership.
The deep problems with the proposed rule were not missed by the Federal Reserve Board’s Chair, Jerome Powell, in his opening statement. Powell acknowledged that “recent events have demonstrated the need to strengthen supervision and regulation for firms with assets between $100 billion and $250 billion.” However, he warned that “raising capital requirements also increases the cost of, and reduces access to, credit. And the proposed very large increase in risk-weighted assets for market risk overall requires us to assess the risk that large U.S. banks could reduce their activities in this area, threatening a decline in liquidity in critical markets and a movement of some of these activities into the shadow banking sector.”
The highly respected Urban Institute published a blistering criticism of the proposed regulation in a report released last week, bluntly stating that “there is no logical argument for the bank capital requirements proposed in the NPR.” The report went on to observe that “it is ironic that this change is occurring at the same time the regulators are considering changes to regulations under the CRA to encourage more lending to LMI borrowers and communities as well as to borrowers and communities of color. This proposal also goes against the recent guidance by the bank regulators and other government agencies, including the Consumer Financial Protection Bureau and the US Department of Housing and Urban Development, to encourage lenders to design special purpose credit programs to increase the amount of home mortgage lending to those underserved groups.”
Urban Institute’s report concluded that “the level of capital that banks would be required by the NPR to hold against mortgage loans held in portfolio is excessive, at all LTV levels, and is likely to further discourage bank mortgage lending. The NPR’s impact on lending to LMI borrowers and communities and to borrowers of color is particularly perverse in the face of efforts by the bank regulators and other government agencies to encourage banks to increase their lending to precisely these borrowers and communities.”
NHC is once again working with a broad group of stakeholders from the largest banks to the nation’s most important civil rights organizations to craft thoughtful, constructive comments to the Basel III Endgame proposed rule. We are hopeful that regulators will proceed cautiously, tired and ineffective ideological traps that risk pushing the pendulum harder and faster, making their important work a waste of everyone’s time. We saw that in 2020 when the OCC pursued a widely criticized approach to CRA that was repealed less than a year after next administration took office. Working together, we can get this important work right.