State of the Union: Obama Proposes New "Fee" on Banks to Spur Refis

WASHINGTON — President Obama announced Tuesday night a plan to collect fees from large banks to help fund greater loan refinancings for troubled borrowers.

In his third State of the Union address, Obama also called for an expansion of Department of Justice investigations into misdeeds that led to the mortgage crisis and a new crackdown on financial fraud.

While details of his new proposals were few, and measures focused on the manufacturing sector and income tax reform attracted more attention, the speech still carried potential implications for the financial industry.

Perhaps most significant for banks, following up on a plan last year to spur refinancings for troubled borrowers through Fannie Mae and Freddie Mac, Obama said he would propose legislation to give "every responsible homeowner" the ability to take advantage of low interest rates.

Although details of the new plan — which he said could save a homeowner on average $3,000 a year — were sketchy, Obama said it could be paid for through fees paid by banks. That idea was a strong signal the administration is still considering what essentially amounts to a tax to recoup funds from large financial institutions that received aid during the bailout. While a so-called bank tax has been discussed before in Washington, including in the debate over Dodd-Frank, such fees have not had much bipartisan congressional support.

"A small fee on the largest financial institutions will ensure that" a refinancing plan "won't add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust," Obama said.

In addition to touting the Dodd-Frank Act, and the appointment of Consumer Financial Protection Bureau Director Richard Cordray, Obama also announced the formation of a new Financial Crimes Unit to "crack down on large-scale fraud," and called on lawmakers to enact harsher penalties for financial fraud. He also said he was calling on Attorney General Eric Holder to launch a separate unit of federal and state prosecutors to look deeper into what happened leading up to the 2008 crisis.

"I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis," Obama said. "This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans."

On the new mortgage refinancing plan, Obama spoke of eliminating "red tape" for borrowers looking for help as well as a "runaround from the banks."

"While government can't fix the problem on its own, responsible homeowners shouldn't have to sit and wait for the housing market to hit bottom to get some relief," he said.

"Let's never forget:  Millions of Americans who work hard and play by the rules every day deserve a Government and a financial system that do the same.  It's time to apply the same rules from top to bottom:  No bailouts, no handouts, and no copouts.  An America built to last insists on responsibility from everybody. We've all paid the price for lenders who sold mortgages to people who couldn't afford them, and buyers who knew they couldn't afford them."

While the speech contained ideas that would affect — and likely be of concern to — bankers, it did not include mention of other certain timely issues, including the pending negotiations involving state and federal officials as well as large servicers to complete a settlement for faulty mortgage and foreclosure practices. Some speculation had emerged that an announcement over a deal could have come as early as this week, but a key state official leading the talks, Iowa Attorney General Tom Miller, on Monday largely put that speculation to rest.

Still, Obama touted final or proposed regulations to implement Dodd-Frank, including rules requiring resolution plans — or "living wills" — for systemically important banks, and a pending proposal to institute a ban on proprietary trading. He also made mention of the hiring of Cordray, who was appointed earlier this month without Senate confirmation over strong GOP objections. Cameras spanned to Cordray, who was sitting in the gallery area reserved for special guests.

"The new rules we passed" under Dodd-Frank "restore what should be any financial system's core purpose:  Getting funding to entrepreneurs with the best ideas, and getting loans to responsible families who want to buy a home, start a business, or send a kid to college," Obama said.

"So if you're a big bank or financial institution, you are no longer allowed to make risky bets with your customers' deposits.  You're required to write out a 'living will' that details exactly how you'll pay the bills if you fail — because the rest of us aren't bailing you out ever again.

"And if you're a mortgage lender or a payday lender or a credit card company, the days of signing people up for products they can't afford with confusing forms and deceptive practices are over.  Today, American consumers finally have a watchdog in Richard Cordray with one job: To look out for them."