A House subcommittee rejected a bill Thursday morning that would have allowed banks to count a recently modified mortgage as an accrual or repaid.

The Common Sense Economic Recovery Act of 2011, or H.R. 1723, was sponsored by several House Republicans. According to the bill, modified mortgages can be considered accrual for accounting purposes as long as it is current and the borrower did not miss a monthly payment in the previous six months since the modification.

Rep. Michael Grimm, R-N.C., said the bill would free up community banks from overly restrictive regulations from bank supervisors. He said it should be up to the local banker, not someone from Washington, who determines what loan is most likely to be repaid.

"When the economy is as bad as it is, and even when they are doing it right, a regulator or bureaucrat comes in and comes up with some off-the-wall reasoning it breaks the camel's back," Grimm said.

In a previous hearing, the Federal Deposit Insurance Corp., which has taken more than 350 banks into receivership since 2007, said the bill duplicates what it already does. A loan can already be accounted for as an accrual as long as the borrower stays current for more than six months, but the new bill allows the bank to ignore new financial information about the borrower, according to the FDIC.

These aren't always performing loans for long, either. More than 34% of the 129,000 private workouts completed in the first quarter of 2010 went two months without a payment within the first 12 months, according to recent data from the Office of the Comptroller of the Currency.

The American Bankers Association came out against H.R. 1723 earlier this year. While the trade group said many examiners have become too aggressive since the crisis, the issues go beyond nonaccruals.

"We are concerned about legislating changes in accounting standards, even if they are only intended to be for regulatory use. Banks are issuers of financial statements — upon which our investors rely — as well as heavy users of financial statements of our borrowers. We need to make sure that all parties can rely on the accuracy of financial statements," the ABA said.

Rep. Carolyn Maloney, D-N.Y., said Thursday she didn't support the bill for a variety of reasons, but she did pledge to work with the sponsors to resolve the differences.

"We need to put more flexibility into the system," Maloney said. "I think it's too constricting. You can only look at the last six months."

Rep. Lynn Westmoreland, R-Ga., one of the sponsors, said if a version of the bill is passed, banks might have more room on their balance sheets to help troubled borrowers.

"I think this would be an incentive for banks to enter into more modifications and refinances if it would get these loans off of nonaccrual," Westmoreland said.

Grimm pledged to help work on a new version, as well. It has been one of many attempts by House Republicans to ease regulatory burdens on community banks that bet too heavily on local real estate bubbles around the country. More than 800 financial institutions remain on the FDIC Problem List.

"As we lose these smaller community banks, we're creating systemic risk because the top five, six, seven gobble them up and get bigger and bigger and bigger," Grimm said.

Write to Jon Prior.

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