Proposed capital rules would unfairly require banks to hold additional reserves for some second mortgages, industry officials charged.

The proposal affects lenders that hold a first and second mortgage on the same property. They would have to hold $8 in capital for every $100 of the second mortgage, or junior lien.

Currently, banks and thrifts examined by the Federal Reserve Board and the Office of Thrift Supervision only hold 4% of a second mortgage as reserves provided they meet "prudent" underwriting standards. Those supervised by other agencies hold 8%. All agencies require lenders to hold 4% of first mortgages in reserves.

"America's Community Bankers sees no reason why first or junior liens should be treated differently if they satisfy equivalent and prudent conditions," Charlotte M. Bahin, regulatory counsel for the trade group, wrote in a comment letter filed with the agencies last month.

Richard M. Whiting, general counsel of the Bankers Roundtable, urged the agencies to adopt the lower capital requirements of the Fed and OTS.

Leon T. Kendall, a Northwestern University professor of finance and real estate, disagreed. He wrote that second mortgages are the "most-risky home loans" and that capital standards should be even stricter.

Nearly 8,000 commercial banks as of September held $81 billion in second mortgages. However, regulators do not track which of these lenders also hold the first mortgage.

The second-mortgage provision was included in a larger proposal standardizing risk-based capital rules for mutual fund investments and some residential property loans. The broader proposal drew wide support, according to comment letters filed in late December.

"There will be uniform capital rules among the banking agencies" if the plan is adopted, wrote Paul A. Smith, senior federal administrative counsel at the American Bankers Association.

"Although some institutions may experience slight increases in capital required as a result of the adoption of the proposal, more appear to have excess capital freed by the changes," Mr. Smith wrote.

Separately, a proposal to change capital rules that govern banks' stock holdings drew mixed reviews. Issued in October, it would let institutions count 45% of pretax unrealized gains from stock investments toward Tier 2 risk-based capital.

Small banks knocked the proposal, which would primarily benefit fewer than two dozen big banks nationwide.

They fear the robust economy may fool some bankers into relying on paper gains to bolster regulatory capital, and that the rest of the industry would have to bail them out if the economy sours.

"Gains should only be reflected in capital when they are realized," wrote Bill Sones, president of the Independent Bankers Association of America. "The strong economic environment has created equity gains that may not continue to exist should the economy weaken, which will eventually occur."

Citicorp and America's Community Bankers supported the proposal because it would make U.S. and international capital standards consistent.

The ABA and Roundtable gave reluctant endorsements. Their letters said that including equity securities in regulatory capital adds to the volatility and complexity of capital accounts. But because regulators already deduct unrealized losses, the groups supported including unrealized gains.

The Roundtable recommended going a step further and counting 100% of unrealized gains as capital.

The banking and thrift agencies will hear from the industry again Feb. 3, when comments are due on a proposal to adopt new capital requirements for recourse agreements. Under the plan, institutions holding the riskiest part of a securitization would face higher capital requirements than those holding less-risky sections.

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