Four years after the Dodd-Frank financial reform law passed Congress, most of its big regulatory provisions have been written. But that doesn’t mean the lobbying and politicking over the legislation are over.
The financial industry is still chafing over several important rules and is looking for changes. Republicans, over whose objections the law was passed, also resent many of its provisions and have sought to undo them legislatively. Meanwhile, Wall Street critics are still worried that the law hasn’t done enough to reduce the risk of another Lehman Brothers or AIG failing and threatening the broader economy or requiring another taxpayer-funded bailout.
Mortgage regulations
The Consumer Financial Protection Bureau finalized its mortgage rules in January. Intended to prevent some of the abusive loans that trapped borrowers in homes they couldn’t afford during the most recent housing bubble, the set of rules specifies certain terms of contracts and mandates that mortgage payments can’t exceed 43 percent of borrowers’ monthly income. Loans that meet the specifications are protected from consumer lawsuits.
Banks and lenders have blamed the rules for crimping lending. “Dodd-Frank regulations on mortgages played no small part in the fact that the mortgage markets remain somewhat repressed,” said Wayne Abernathy, executive vice president of financial institutions policy and regulatory affairs at the American Bankers Association.
Abernathy said the Consumer Financial Protection Bureau, the agency created by Dodd-Frank that issued the mortgage regulation, will likely have to make “tweaks” to the rules. House Republicans passed a bill in June to overhaul the rules’ limits on mortgage fees.
“It’s something there’s going to be continued discussion about, because it’s not just the industry complaining,” said Mark Calabria, director of financial regulation studies at the libertarian Cato Institute. “If you’re a marginal borrower at all, it’s still hard to get credit,” Calabria said, noting housing advocates’ concerns about the qualified mortgage rule.
Banks’ living wills
Dodd-Frank mandates that companies identified as too big to fail without dragging down the financial system write their own “living wills” — instructions for how they will safely liquidate and pay off their creditors in case of a panic.
In August, the Federal Reserve and Federal Deposit Insurance Corp. surprised 11 big banks, including Goldman Sachs, Citigroup and JPMorgan, by telling them that their living wills weren’t credible.
The process is one that banks are watching carefully. They expected the living will submission process to be flexible, given that it’s new for both the industry and for regulators. But they’re also aware that Dodd-Frank ultimately gives regulators the power to break up banks if they fail to submit credible resolution plans for two years.
“Our members are working very hard with regulators to make sure that subsequent changes and modifications meet regulators’ specifications and requirements. It is and will continue to be a top priority,” said John Dearie, executive vice president at the Financial Services Forum. Banks want the regulators to give them leeway in formulating the plans.
The super regulator
Banks, insurance companies and asset management firms all are worried about the Financial Stability Oversight Council.
Dodd-Frank created the council, composed of the heads of the Treasury, the Federal Reserve, the FDIC and other agencies, as a super regulator to identify risks to the financial system, wherever they may come from. The idea was to have a group able to find the next AIG — the giant insurer that threatened to drag down Wall Street when it failed in 2008 — before it is too late. It has the power to name any company officially too big to fail and to regulate it as if it were a big bank.
But with the council looking at companies such as life insurer MetLife and asset managers like BlackRock and Fidelity Investments over the past year, some worry that it is focusing too much on companies that are not threats to the system.
“Maybe the systemic risk comes from activities, not institutions,” said Abernathy, noting that the 2008 recession was brought on by risky mortgage lending, not by any one firm. “The risk was the activity, not the institutions,” he said, noting that the council may be moving in a “more fruitful” direction by slowing down its investigation of asset management firms recently.
Nevertheless, the council has been targeted for undoing by congressional Republicans. In a July staff report, Democrats on the House Financial Services Committee charged that their GOP counterparts’ efforts to “undermine the work and structure” of the council was part of its larger “aggressive, unrelenting campaign to repeal, weaken or otherwise pressure regulators to significantly alter provisions in nearly all titles” of Dodd-Frank.
