elizabeth a duke : community banks and mortgage lending speech by ms elizabeth a duke, member of the board of governors of the federal reserve system, at the community bankers symposium, chicago, illinois, 9 november 2012. * * * it is a real pleasure for me to have the opportunity to speak to community bankers at this annual community bankers symposium sponsored jointly by the federal reserve bank of chicago, the office of the comptroller of the currency ( occ ), and the federal deposit insurance corporation ( fdic ). i know that many of you are concerned about the banking agencies ’ recent proposals to revise the capital rules, the so - called basel iii proposals. 1 so i will start my remarks with an update on those proposals. then i will move to a more detailed discussion of some data that i have found interesting as i have been thinking about the effect of regulations as they relate to residential mortgage lending. before i begin, i want to assure you that all of my colleagues on the board of governors, including the chairman, are concerned about the effect of regulation on community bank lending. in fact, we have established a subcommittee of the board, which i chair, to focus on the supervision and regulation of community and small regional banks. in addition, we have established a community depository institution advisory council ( cdiac ) made up of community banks, thrifts, and credit unions to advise the board about issues facing smaller institutions. 2 but i want to also be clear that any opinions i express today are my own and may not reflect those of other members of the board. regulatory capital proposals let me turn now to the capital proposals. as we enter the final deliberative phase of this rulemaking, i want to emphasize that the feedback we have received during the comment period has been extremely valuable and that we will work very hard to address your concerns in the final rules. also, i would like to address the specific concern expressed by some bankers that these rules will be effective january 1, 2013, forcing them to potentially make changes with little preparation. we have received a large number of comments and want to closely consider each issue. therefore, the agencies this morning announced that we do not expect that any of the proposed rules would become effective on january 1, 2013. 3 further, the agencies offered the assurance that institutions will have time for transition once the rules are effective. before the proposals were issued, our staff of economists and analysts conducted research to estimate the potential impact of the proposed rules.

such income reveals that those with such income had a 34 basis point advantage in terms of return on assets, that is, 1. 26 percent compared to 0. 92 percent. the differences in return on equity were similarly significant – 11. 14 percent compared to 8. 61 percent. with net interest margins compressing and regulatory costs increasing, many community banks are struggling right now to generate income. as i said earlier, the addition of mortgage origination capacity and competition would seem likely to reduce rates and ease conditions for call report data, refer to www2. fdic. gov / call _ tfr _ rpts. www. ffiec. gov / nicpubweb / nicweb / nichome. aspx. for fr y - 9c data, refer to bis central bankers ’ speeches for borrowers. and the recent entry of new banks into the market indicates that barriers to entry are not prohibitive. so it seems to me that appropriate policy should encourage community banks to expand their mortgage lending rather than discourage them from doing so. are there any indications that community bank lending poses the same risks as subprime lending that shared many of the same characteristics? i think i have made a reasonable case that community banks are important to the mortgage market and that mortgage lending can be, in turn, an important source of profits for community banks. none of this matters, however, if this lending poses a risk to the health of the institutions or to the consumers who are their customers. community bankers argue that they never engaged in the sort of lending practices that led to the financial crisis. and i think that in most cases, the evidence supports their claims. however, as i mentioned earlier, data from the hmda and call reports indicate that community bank lending does share some characteristics with subprime lending. for example, community banks appear to charge higher rates on their mortgage loans. and the maturity data in the call reports are consistent with variable - rate lending or balloon maturities on community banks ’ mortgage loans. but looking for signs of stress in the performance of the loans reveals a stark difference between mortgage loans held by community banks and subprime loans. over the last several years as mortgage delinquencies reached record levels, the serious delinquency rate of mortgages held by community banks did not go much over 4 percent, far lower than the serious delinquency rates that climbed to almost 22 percent for subprime, fixed - rate loans and more