The Consumer Bankers Association (CBA) published a
whitepaper examining various aspects of the federal banking regulators’
proposed Basel III capital risk management rules, describing how some of the
proposed changes could be harmful to institutions and consumers.
The whitepaper highlights multiple regulatory changes within
the proposal that would make it more expensive for banks to lend to retail
consumers, therefore potentially benefitting non-bank lenders that are not
subject to the same stringent capital standards. The report includes historical
data describing periods in which regulated banking entities had difficulty
competing with non-banks and the impact on consumers.
“Mortgage servicing provides a good example of how this
shift to non-bank financial institutions plays out across retail products,” the
report stated. “Mortgage servicing is the business of collecting mortgage
payments, escrowing tax and insurance, maintaining accurate books and records,
and working with homeowners who have fallen behind on their mortgage payments,
and if necessary, taking foreclosure actions. When the regulatory agencies
significantly increased the capital charge associated with this service, the
relative amount of servicing conducted by banks dropped precipitously.”
CBA’s findings also point to possible negative lifelong effects
on consumers’ financial health, resulting from the new capital standards, disproportionately
impacting low-and moderate-income consumers, disabled consumers and Black and
Hispanic populations. For example, some regulatory changes would make it
more difficult for banks to extend credit cards to consumers, particularly those
with rolling debt balances.
“Comparing credit cards and non-bank Buy Now, Pay Later
products provides a useful example of the types of consumer protections that
consumers may forgo when they opt for a non-bank financial product,” the report
states. “In 2022, the CFPB (Consumer Financial Protection Bureau) published a
report based on data from five non-bank Buy Now, Pay Later providers showing
their rapid growth, but also highlighting a number of the risks they pose to
consumers. The CFPB found that the five firms originated 180 million total
loans totaling $24 billion in 2021 – a near tenfold increase in just two years.”
Recent research by the Federal Reserve Bank of Boston indicated
that access to credit cards is a key factor enabling some college students to
stay in school. However, this impact is limited to students working part time
to pay for tuition or who rely on need-based financial aid. Similarly, the
Federal Reserve Board reported that Black credit cardholders are nearly twice
as likely to carry a balance on their credit cards as white cardholders. The
same Federal Reserve Board study found that 57 percent of disabled cardholders said
they carried a rolling balance, as opposed to 46 percent of non-disabled
cardholders.
Additionally, the report points to research conducted by the
CFPB, which found that 45 percent of consumers in low-income neighborhoods
lacked credit scores, compared to just 9 percent in upper-income neighborhoods,
citing data collected via the Home Mortgage Disclosure Act (HMDA).
“The proposal asserts that regulators ‘are supportive of
homeownership and do not intend the proposal to diminish home affordability or
homeownership opportunities, including for low- and medium-income home buyers
or other historically underserved markets,’” the report states. “Yet, the proposal’s
increased risk weights will increase costs to consumers that need to borrow to
purchase their homes. Further, the proposal creates a number of other important
changes to how other mortgage-related commitments and pertinent hedging
activities are treated that will disproportionately impact low- and
moderate-income borrowers.
“To begin with, the proposal would materially increase the
capital charge for low down payment mortgages that are protected by mortgage
insurance. In some cases, the increase could be as much as 80 percent, due to
the proposal’s 20 percent risk weight add-on to internationally agreed-upon
standards. As a result, consumers who are not able to afford significant cash
down payments of 20 percent, including many first-time homebuyers, and who need
mortgages with greater than 80 percent loan-to-value ratios will find reduced
availability of mortgages and higher costs for the mortgages that are
available.”
Banks could also run into issues with Community Reinvestment
Act (CRA) compliance as a result of the proposed changes as well.
“By limiting the ability for banks to provide low down
payment mortgages, the 20 percent risk weight add-on would also make it more
challenging for banks to fulfill their obligations under the Community
Reinvestment Act,” the report argues. “The Community Reinvestment Act was
amended just three months after the release of the proposal, specifically for
the purpose of encouraging ‘banks to expand access to credit, investment, and
banking services in low- and moderate-income communities.’”
By impacting consumer financial health, CBA argues the
proposal could reinforce stubbornly pervasive headwinds in consumers’ broader
lives and points to recent congressional testimony explaining that the proposals’
impact on consumer credit visibility and credit scores could even have
detrimental effects on consumers’ lives outside of banking, including renting a
home, getting a job or, in some cases, receiving medical services.
Federal Reserve Chair Jerome Powell indicated the Basel III
Endgame proposal will likely undergo “material and broad changes” during his recent
testimony before the Senate Banking Committee.
The full whitepaper can be found on CBA’s website here.