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Democrats on the Senate Banking Committee unveiled legislation Tuesday to rival a plan by the panel's GOP chairman, signaling that the partisan divide over regulatory reform isn't likely to soften ahead of a panel markup later this week.
May 19 -
Sen. Richard Shelby's attempt to reform Dodd-Frank could ease key bank regulations that improve the safety and soundness of big banks. That would be an immense disservice to the American taxpayers who might bear the cost of the changes with future bailouts.
May 15 -
It's a good idea to raise the asset threshold at which financial institutions are automatically designated as systemically important financial institutions. But Sen. Richard Shelby's proposed legislation for regulatory relief does require one crucial change.
May 19
Less than five years after the Dodd-Frank Act was signed into law, legislators on Capitol Hill are threatening to roll back significant portions of critical financial reforms.
The
No one disputes that credit is tight these days. According to the Urban Institute, lenders would have made roughly four million
In fact, today's credit crunch has little to do with overregulation and everything to do with the manner in which the banks made money prior to the crisis compounded by the manner in which they were bailed out.
During the boom years, brokers and lenders were paid handsome up-front fees to originate high-risk,
When this scheme finally imploded, the largest banks were bailed out with a
But the bank subsidies have finally begun to dry up, and the refinancing boom will eventually end. This is putting pressure on lenders to generate profits the old-fashioned way by earning them. So far, lenders have been unwilling to do so.
To the extent these firms are doing mortgage lending at all today, they are largely focused on refinancing mortgages or providing loans to higher-income households with substantial savings and pristine credit. Their tepid efforts have resulted in the lowest homeownership rate in
Now, under pressure to provide broader access to credit, the response by some institutions has been to ask Congress to roll back important consumer protections against the dangerous lending that triggered the financial crisis in the first place.
The legislation introduced by Sen. Richard Shelby packages together a slew of slash-and-burn attacks on Dodd-Frank that could undermine the overall stability of the financial system as well as important mortgage rules.
For example, it undermines Dodd-Frank's ability-to-repay rule, which codifies a basic business axiom that should be common sense but was largely ignored during the run-up to the crisis. Lenders should not make a home loan unless they have reasonably determined that the borrower can afford to pay the entire loan back. Under the Shelby bill, loans held in banks' portfolios don't need to follow that rule- even when they're no longer held on the original lender's balance sheet.
Proponents of this bill argue that because the loans are held on portfolio, lenders have an incentive to ensure that borrowers will succeed. But history has shown otherwise. Some of the most egregious predatory lenders, such as Countrywide Financial and Washington Mutual, kept a considerable number of their risky loans. Enactment of this provision would give lenders legal immunity to issue the sort of risky, high-cost loans that triggered the financial crisis.
In opposing this bill, we do not mean to suggest that current regulations should be set in stone. Changing market conditions, shifting demographics, advancements in technology, and other developments make the need to continuously tweak regulations a necessity.
Lenders, for example, have legitimately complained about a lack of clarity about when they can be required to repurchase loans they sell to Fannie Mae and Freddie Mac or have insured by Federal Housing Administration. And policymakers have yet to revamp the failed pre-crisis model of mortgage servicer compensation.
However, a wholesale rollback of the Dodd-Frank protections would provide lenders with little relief from these real problems. Rather, the proposed bill would once again let lenders make more money and take less risk while unleashing a new round of reckless and predatory lending practices, thereby planting the seeds for the next taxpayer bailout of the financial system.
Jim Carr is a senior fellow at the Center for American Progress and a housing finance, banking,
and urban policy consultant. Julia Gordon is the senior director of housing and consumer finance at
the Center for American Progress. Follow them on Twitter at