Roster of Rule Writers in Frank Bill Omits Fed
Kaper, Stacy, American Banker
WASHINGTON -- A bill by House Financial Services Committee Chairman Barney Frank to revamp mortgage standards would leave the Federal Reserve Board off the list of regulators that would write rules to implement it, according to financial services and consumer advocacy representatives given a sneak peek this week.
Mortgage regulations traditionally fall predominantly under the central bank's bailiwick, but observers said its decade-plus deliberation over crafting lending rules covering the entire market might have jeopardized its power.
The bill, which Rep. Frank plans to sponsor along with two North Carolina Democrats, Reps. Brad Miller and Mel Watt, is still a draft and likely to change when the committee considers it. Nevertheless, observers said the plan to leave the Fed out of the rule-writing process seemed like a political statement. Several people wondered if the omission would survive to the bill's enactment.
"This reflects frustration many Democrats have with the way the Fed has used its existing regulatory authority, but ... it's much easier to implement changes with the Fed involved," said Jaret Seiberg, an analyst with Stanford Group. "It's pretty rare to strip an agency of its implementation and oversight authority for a particular regulation, so it seems such a radical change would be difficult to approve and tough to implement."
As problems in the subprime mortgage market unfolded over the last year, lawmakers have singled out the Fed for not putting forth standards for all lenders under the 1994 Home Ownership and Equity Protection Act. The Fed finally announced in July that it would issue such rules this year, but critics have argued that the current problems could have been averted had the Fed exercised its power to create a universal set of mortgage standards.
The legislation, which is expected to be introduced any day and is scheduled for debate in the committee next week, has captivated the attention of the entire mortgage market. It would entail a massive rewrite of the nature of lending with restrictions on the types and ways in which loans are made. It would affect everyone from originators down to securitizers that package loans on the secondary market.
Broadly, the bill would put a larger class of loans under HOEPA's high-cost protections. It would prohibit originators from steering consumers into loans by removing links between loans and compensation, including yield-spread premiums. Penalties for failing to abide by the standard could include three times brokers' fees and regulatory enforcement.
In addition, the bill would require all mortgage originators to be licensed and registered and borrowers to meet an ability-to-pay test. For the secondary market, the bill would create limited liability, which is being referred to as "securitizer liability," since it would end at the securitizer that packaged the loan and not extend to trusts or investors at the end.
For months industry and consumer representatives have participated in several rounds of closed-door briefings with key Financial Services staff members working with only bare-bone summaries of the bill.
On Wednesday, select financial services trade groups and consumer and civil rights organizations were allowed to preview a draft bill. Though both sides continued to praise the open process, they raised a host of concerns and said they would reserve judgment until they could have a copy of the final bill to examine more carefully.
The exclusion of the Fed from the list of rule-writing agencies - the other three federal banking regulators and the Federal Trade Commission would be given that power - was the biggest surprise to observers and brought assorted speculation.
Oliver Ireland, a partner with Morrison & Foerster LLP and a former Fed attorney, said the exclusion may not be purposeful. …