The notice of proposed rulemaking (NPR) by the three federal bank regulators—the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency—has significant implications for the future of mortgage lending to low- and middle-income (LMI), Black, and Hispanic borrowers and communities by large banks with assets above $100 billion.

The proposal, among other provisions, would significantly increase capital charges for loans with high loan-to-value (LTV) ratios and at an excess to global capital standards set by the Basel III requirements and what is needed to maintain the safety and soundness of the financial system. The changes—contrary to ongoing federal efforts to advance equity in the mortgage market, such as strengthening the Community Reinvestment Act—would disproportionately disincentivize lending to LMI, Black, and Hispanic borrowers and communities.

Key Takeaways

• The NPR proposes a risk weight 20 percentage points more than what is obligated by Basel III for all LTV categories, which would subject banks to higher capital requirements than currently mandated for owner-occupied loans with LTV ratios greater than 80 percent.

• The proposed capital requirements are higher than what the expected losses for the 2020–21 bank portfolio composition would obligate, even if the current portfolio were to undergo the same high stress levels of the Great Recession. Further, these calculations do not fully account for improvements in loan quality since 2008.

• The proposed disincentives to high-LTV lending would disproportionately disadvantage LMI, Black, and Hispanic borrowers, who compose greater shares of borrowers with loans with LTV ratios above 80 percent compared with all bank loans.