Senate Paves the Way for Financial Regulatory Reform

The Senate is making the way for sweeping financial regulatory reform this week. Two separate committees approved reform legislation that now heads to a full Senate vote, but critics are pushing for exemptions to certain risk retention requirements. The Senate Banking Committee and Senate Agricultural Committee approved financial reform bills that would establish a consumer financial protection agency, impose risk retention requirements on financial institutions that sell mortgage products, and bring greater transparency to the derivatives market. The Senate Agriculture Committee passed the The Wall Street Transparency and Accountability Act of 2010, introduced by its chairman, Sen. Blanche Casey (D-AR), that will mandate clearing and trading requirements and real-time reporting of derivatives trades. “My legislation is real reform that will provide 100% transparency to an unregulated $600trn market, close all loopholes, prevent future bailouts, and keep jobs on Main Street,” Lincoln said in a statement Tuesday. The Lincoln bill also prohibits the Federal Reserve and Federal Deposit Insurance Corp. (FDIC) from providing bailout funds to financial firms that engage in “risky derivatives deals,” according to a statement. “Under chairman Lincoln’s strong leadership, the Senate Agriculture Committee voted out a bipartisan bill that will bring derivatives trading out of the dark, provide strong oversight of market participants, and combat fraud, abuse and manipulation,” said US Treasury Department secretary Timothy Geithner in a statement today. The other bill passed this week, the Restoring American Financial Stability Act, or S 3127, was introduced by Senate Banking Committee chairman Chris Dodd (D-CT). Dodd’s bill establishes a consumer financial protection agency, as well as a requirement that lenders retain a portion of every mortgage sold or securitized, as a method to encourage the creation of sustainable and affordable financial products. The mortgage finance industry continues to speak out against the risk retention requirements in the bill, which critics say could make securitization too costly to attempt. The Mortgage Bankers Association joined a handful of other trade groups in sending a joint letter to the Senate today calling for certain exemptions to the risk retention requirement. “[T]he bill’s current requirement of a default level of five percent risk retention would negatively impact the cost and availability of mortgage credit for all borrowers,” the letter reads, in part. “Specifically, the legislation should include a category for carefully defined, documented and underwritten residential mortgage loans that would be definitively exempt from the statutory risk retention requirements,” the MBA wrote, along with the other trade groups. “This approach provides an incentive for lenders to adopt the highest level of prudential lending standards.” Sen. Johnny Isakson (R-GA) is joining the call for some form of risk retention exemption for lenders that originate and securitize qualified, full-documentation mortgages. In a speech delivered Tuesday on the Senate floor, he said “the unintended consequence of shared risk on a qualified, well-underwritten loan is a higher interest rate for the consumer and less attraction of capital for individuals who form those loans to fund the housing purchases.” According to a spokesperson with his office, Isakson is considering introducing an amendment that will provide for this exemption, but will wait to see the final draft of reform legislation before making a decision. Write to Diana Golobay.

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