Opposition from the Treasury Department could weaken tough loan-to-value limitations due to take effect next year for commercial and residential real estate loans.
Amid the Bush administration's push to reduce bank's regulatory burden. Deputy Treasury Secretary John Robson has blasted a draft of a Federal Reserved Board proposal that would set numerical loan-to-value standards for the first time since 1982.
He said if the draft is adopted, it would curtail economic growth.
Last year's FDIC Improvement Act mandated the creation of real estate lending guidelines. However, it did not instruct the regulators to impose numerical loan-to-value limits.
60% to 95% of Value
The Federal Reserve's draft regulation would limit loans to between 60% and 95% of the value of a real estate project, depending on the collateral. The other agencies have said they will follow the Fed's lead in this area.
"It's a choice between a rigid numerical approach and a more flexible approach," an official at the Treasury Department said. The official added that two of the four banking agencies adopting the rule - the Office of the Comptroller of the Currency and the Office of Thrift Supervision - are part of the Treasury.
Advocates, including former FDIC chairman L. William Seidman, argue that similar standards that were lifted amid early 1980s deregulation could have prevented much of the rampant overbuilding that now burdens the banking system.
The Fed is still fine-tuning the proposal which was approved by its board four weeks ago. The Office of the Comptroller has sent its draft to the Treasury Department for review. And the FDIC has the regulation on its agenda for today's board meeting.
A spokesman for the OCC, which had set an internal target of putting a rule out for comment by the end of last month, said she knew of no evidence "that it is being help up by anything other than slowness."
But one lawyer said a delay already is eating up the time banks will have to file their comments on the rule. Bankers concede the numerical standards may be prudent but want to assure that some leeway is given for stronger borrowers and banks and that the same standards will apply to competitors such as foreign banks.
Mr. Seidman said the rule appeared to be running into a snag due to opposition in the Treasury Department.
"John Robson's job is to see that the banks lend money, and the regulators' job is to see that they lend soundly," he said "Sometimes there is perceived conflict."
Compared with 1982 Rules
The proposed ratios are more restrictive than the earlier set of standards, revoked by regulators in 1982, said Deborah S. Prutzman of the law firm of Paul, Weiss, Rifkind, Wharton & Garrison.
But she added that the draft includes more categories of loans than the earlier regulations and reflects "an effort to be more sophisticated" in analyzing the risks.
For instance, the draft contemplates a maximum loan-to-value ratio for construction loans of 65%, a stricter limit than in the old rules. But, unlike the earlier regulation, the new regulations would allow a ratio as high as 75% if there are "substantial third-party commitments on loan origination."
The proposal would allow a bank to make real estate loans that do not conform to the ratios, provided such loans do not exceed 15% of risk-based capital.
Mr. Seidman said most banks are not making real estate loans now, belying the administration's claims that the rules will hurt the economy. He added that the goal is to be prepared for the future.
"The standards are set up for the day when the punch has started flowing and people start to think that these are the concerns of old-fashioned people," Mr. Seidman said.
Mr. Robson, "does not buy into that," an aide said. "He wants a reasonable and flexible approach."