Sen. Chris Dodd's long-awaited financial reform draft legislation, released Monday, has drawn immediate attention from the mortgage banking community.
As was widely expected, the bill – which the Senate Banking Committee chairman unveiled after negotiations with Senate Republicans failed to produce a bipartisan proposal – calls for the creation of a consumer protection bureau, alters the purviews of existing regulatory agencies and provides a framework for identifying systemic risk and dismantling large financial institutions.
The bill would put the Federal Reserve in charge of banking companies with more than $50 billion in assets. Smaller, nationally chartered banks would be regulated by the Office of the Comptroller of the Currency, while banks with state charters would be regulated by the Federal Deposit Insurance Corp. The Office of Thrift Supervision would be eliminated under Dodd's legislation, and firms currently regulated by the OTS would be moved under the OCC's supervision.
Dodd's proposal also places within the Federal Reserve a Financial Protection Bureau that would be responsible for writing consumer protection rules for products such as mortgages and credit cards. The bureau, whose director would be appointed by the president and confirmed by the Senate, would have the authority to enforce regulations for banks and credit unions with assets of over $10 billion, all mortgage-related businesses and large non-bank financial companies.
In a statement, National Association of Federal Credit Union (NAFCU) President Fred Becker said the NAFCU continues to oppose any proposals that would subject credit unions to such oversight. Currently, three credit unions – two military and one servicing state employees – have assets greater than $10 billion.
‘NAFCU has long opposed any legislation that would split our industry by asset size," Becker wrote. "We continue to believe that consumer protection for all credit union members – regardless of credit union size -should be the responsibility of the National Credit Union Administration.’
If the Senate insists on dividing oversight based on asset size, the line should be drawn at $50 billion, Becker said.
The Mortgage Bankers Association (MBA), meanwhile, focused its statement on Dodd's risk-retention proposals for mortgage-backed securities (MBS). The legislation would require companies that sell MBS to retain at least 5% of the credit risk, unless the underlying loans meet standards that reduce riskiness.
The MBA, while acknowledging the bill moves away from the "one size fits all" approach to risk retention by recognizing that certain underwriting requirements and loan types are inherently low risk, says more explicit guidance is needed in the form of specific exemptions.
‘Qualified residential loans that exhibit certain characteristics – such as 30-year fixed-rate, fully documented, sufficient down payment – ought to be exempted from any risk retention requirement," MBA Chairman Robert E. Story said. "These types of loans have well known and documented risk profiles easily understood by the investor and should not require that the originator retain a portion of the loan on its books."
Story additionally points out that mortgage originators, when selling a loan into the secondary market, retain representations and warranties governing buyback provisions.
"Requiring originators – especially small, locally-based lenders – to retain a certain percentage of the loan on their books threatens the very business model that offers consumers choice and competition, and thus more affordable loans," Story said.