Three Dodd-Frank rules that will govern how banks shield themselves from capital risks in the future may cause lenders to back-pedal on plans to offer various loan-product types, new research from law firm K&L Gates said.
The long-term effect could be a market where lenders refuse to go beyond the issuance of "plain vanilla residential mortgage loan products," the firm said in a new report. Last week, Amherst Securities Group released a report on the same rules, but maintained a favorable outlook on their impact.
The Federal Reserve in early June set out new capital requirements for banks to ensure they meet international capital standards set up by Basel III for systemically, risky global banks.
Laurence Platt, Stanley Ragalevsky and Sean Mahoney with K&L Gates studied the requirements and declared that under Basel III, "conventional residential mortgage loans with loan-to-value ratios in excess of 80%, regardless of the presence of private mortgage insurance, could trigger material adverse capital requirements if the loans are held for investment and do not comply with certain regulatory underwriting criteria."
K&L Gates attorneys said certain loans could experience additional risk of loss under the Dodd-Frank ability-to-repay rule and under Basel III, making it less likely financial firms will offer those particular products.
"Among the most significant changes in these far-reaching proposals relate to the capital treatment of mortgage loans, mortgage-backed securities and mortgage servicing rights assets held by banks," K&L Gates said. "These rules would vary the amount of capital banks must hold against residential mortgage loans based upon loan-to-value ratios and compliance with regulatory underwriting criteria. They would also impose significant restrictions on the inclusion of mortgage servicing rights in capital."
K&L Gates analysts say the restrictions would effect all Federal Deposit Insurance Corp. banks, bank-holding companies and thrifts.
"The new capital rules are one more step in what appears to be an orchestrated campaign of pushing banks to originate plain vanilla residential mortgage loan products," K&L Gates said. "These rules may also affect non-bank lenders through their effect on the market for mortgage products."