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The risk retention requirement was supposed to ensure lenders had "skin in the game" when making mortgages. Instead, regulators appear to have abandoned that concept by crafting an exception so large that most single-family mortgages will be exempted.
September 3 -
Retired Congressman Barney Frank, one of the architects of the Dodd-Frank financial reform law, called Friday for both stringent standards and lenient enforcement around the law's much-watched Volcker rule.
November 22
BOSTON One of the principal authors of the Dodd-Frank Act said Monday that he was "troubled" by regulators' decision to essentially strip out a risk retention requirement for lenders that securitize mortgages to sell in the secondary market.
Barney Frank, the former House Financial Services Committee Chairman, told a regulatory conference that he was disappointed the banking agencies chose to dial down a measure that would have forced lenders to hold 5% of the risk of mortgages they sell into the secondary market.
Frank had pushed heavily for the risk retention provision to become part of the 2010 regulatory reform law, saying lenders needed "skin in the game." But regulators initially proposed tough standards for a carve-out from the provision, but significantly weakened the plan in September. Their recent proposal would define so-called qualified residential mortgages as any loan that meets basic ability-to-repay standards, essentially covering the vast majority of the mortgage market.
"To get the [Dodd-Frank] bill through, we had to weaken somewhat the requirement for risk retention and we had to adopt a section to allow super safe mortgages to be exempt from risk retention," Frank said at a conference here celebrating the 150th anniversary of the Office of the Comptroller of the Currency. "And to my dismay, the regulators at one point, and still pending, were proposing in effect to have the exception eat up the rule . . . that troubled me. If we can get some risk retention in there, I think we could build in systemic preventions."
Chris Dodd, the former chairman of the Senate Banking Committee, also spoke on the panel. Both Dodd and Frank largely agreed that passing Dodd-Frank was the right thing to do at the right time, despite some disagreements with certain parts of the law. However, both acknowledged the law is likely to need some adjustments.
"Barney and I didn't write something that's biblical. . . . Time will require us to go back and review. And obviously, the regulatory process and implementation is taking an awful long time to go forward," said Dodd, when asked whether the financial system is at greater risk because of heavy asset concentrations at big banks and the government's diminished flexibility for bailouts.
"But my hope is as people go forward, that we get intelligent people stepping up and offer intelligent ideas in how to get this working better. And that's what this process of reviews and so forth require," Dodd said.
Another key topic at the OCC's conference was the recent stress tests released by the Federal Reserve Board last week that showed five banks, including Citigroup, had their capital plans denied.
The former chairman of Citi, John Reed, said during the conference that while he no longer had internal insight into the company, he believed its sheer complexity of being in both the capital markets and traditional banking "makes for a very difficult management structure."
"They seemingly, in the minds of the Fed, were unable to create whatever the Fed was looking for. And when you're talking about an institution that is as large in size, diverse in activities and has gone through a certain amount of managerial turmoil, you can well imagine that it was very difficult for them to respond to the request that they got," Reed said.
In a brief interview with reporters, Comptroller Thomas Curry said he would not talk about specific banks with regard to the stress tests but emphasized supervisors were focusing on the qualitative , not just quantitative, aspects of the tests.
"The more important thing in some respects are the qualitative aspects," Curry said in a sit-down with reporters. "And that's something that we've traditionally focused on and are increasingly focused on given their importance."
Curry added that the agency's initiative to steer away from "regulatory capture" by pulling out some examiners who reside at large banks is more about redistributing resources than removing all of them from a bank or ending the program entirely.
"The program is good, but what's the right number is really the issue, and how do we preserve the other themes," Curry said. "The real purpose there is to make sure people have a broader outlook and that we take advantage of, horizontally, some of the experience of large banks. It's really: how do we leverage the knowledge that we do have and not get stale as well?"
