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Fed’s Duke Supports Idea of Different Rules for Community Banks

While admitting that creating mortgage lending regulations that prevent abuse without over-burdening community banks is ""challenging,"" ""Federal Reserve"":http://www.federalreserve.gov/default.htm governor ""Elizabeth A. Duke"":http://www.federalreserve.gov/aboutthefed/bios/board/duke.htm suggested Friday that policymakers ""abandon efforts for a one-size-fits-all approach.""

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Speaking before the ""Community Bankers Symposium"":http://www.chicagofed.org/webpages/events/2012/community_bankers_symposium.cfm in Chicago, Duke said the Federal Reserve has received a large volume of comments from community banks expressing concern over the proposed regulatory capital requirements.

Duke first let community bankers know the ""federal regulatory agencies agreed to postpone"":http://www.federalreserve.gov/newsevents/press/bcreg/20121109a.htm the requirements that were set to go into effect at the start of next year.

""It's still far too early in the process to know where we and the other agencies are going to come out on these and other issues,"" Duke stated.

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However, she acknowledged the importance of community banking in the mortgage lending market and stated that if regulations are complicated and expensive enough to deter ""significant numbers"" of community banks from the market, ""it should raise red flags and spur policymakers to reassess.""

With a growing market share, community banks and credit unions originated about 25 percent of mortgage loans in 2011, according to Duke.

While community banks do tend to engage in some practices that ""share[s] some characteristics with subprime lending,"" according to Duke, they do so without apparent negative impacts on the market or their own businesses.

""Community bankers argue that they never engaged in the sort of lending practices that led to the financial crisis,"" Duke stated. ""And I think that in most cases, the evidence supports their claims.""

Fed data shows community banks are largely correct in their assertions. During the financial crisis, serious delinquency rates for fixed-rate, subprime loans neared 22 percent, and serious delinquencies for variable-rate, subprime loans neared 46 percent.

However, community banks did not experience serious delinquency rates of more than about 4 percent.

Despite the fact that community banks do not appear to have contributed much to the financial crisis, they may bear the brunt of the burden as the government attempts to prevent a repeat of the conditions that led to the crisis.

""[M]any community banks simply do not have the resources to appropriately comply with all of the pending regulatory changes pertaining to mortgage lending,"" Duke said. ""Thus, the cost of solving the problem falls disproportionately on them.""

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