Basel Rule Will Drive Banks Out of the Servicing Business, Groups Warn

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WASHINGTON — The treatment of mortgage servicing rights under the Basel III capital rule is already impacting banks and will drive many out of the mortgage servicing business, according to three trade groups.

In a letter to federal regulators, the American Bankers Association, Independent Community Bankers of America and Mortgage Bankers Association stressed that Basel III risk-based capital rule is "overly harsh" in terms of the actual risks of owning servicing rights. The three trade associations "believe the Basel III limits on MSRs should not be adopted in the United States."

Regulators finalized the Basel III rule in 2013 and the MSR capital requirements are slated to be phased in over two years starting in January 2015.

"The intent of this letter is to point out that an irrational risk-based capital rule is causing depositories to exit or reduce their positions in a safe and sound asset," the Nov. 12 letter says.

As a result, banks are giving up their mortgage relationships with retail customers, the groups said. They also lose escrow accounts, which makes "servicing a dependable and stable source of deposits for banks," the joint letter says.

The groups noted that capping MSRs at 10% of capital and raising the risk-weighting to 250% from 100% might compel banks to conduct regular sales of MSRs. That is not usually the "best execution," the letter says. "These losses in profitability and MSR value will likely be passed on to consumers in the form of higher interest rates on mortgages."

The trades also suggested changes to make the Basel III capital rule less onerous, such as "raising the 10% cap so that banks can continue to service their retail customer base."

They also suggested changing the risk-weighting for MSRs back to 100%.

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