U.S. President Barack Obama has announced his administration’s anticipated market reforms proposal. The administration's plan, which Obama targets to complete in the 2009 calendar year, would give the Federal Reserve more power to police financial institutions, allow the government to break firms apart, and create a new agency to protect mortgage, credit card and financial products consumers.
The complete plan is outlined in an 85-page white paper, released by the White House and titled "Financial Regulatory Reform: A New Foundation."
“It is time for lenders and banks to finally come clean and disclose these secret payments as mortgage brokers have for 17 years,” said National Association of Mortgage Brokers (NAMB) President Marc Savitt, CRMS. “We thank the Obama Administration for recognizing the need to force lenders and banks to disclose to consumers their hidden fees. This will help consumers compare loan products between banks, lenders and mortgage brokers.”
"We welcome the coming debate over the future regulation of the financial services industry. As the past several years have shown, oversight of financial firms can and should be improved in order to better protect consumers and make sure the troubles in the financial sector are not repeated," said John A. Courson, president and CEO of the Mortgage Bankers Association. "As the discussion around regulatory modernization moves forward, we will work with Congress and the administration to ensure that the new regulatory structure does not create conflicting and contradictory regulatory regimes that further confuse both lenders and borrowers. We want to ensure that the new structure does not stifle innovation or increase costs for consumers. And we will continue to argue for one preemptive set of mortgage regulations throughout the country to replace the current patchwork of state and local laws."
President Obama’s plan will:
► Require that all financial firms that pose a significant risk to the financial system at large are subjected to strong consolidated supervision and regulation.
► Increase market discipline and transparency to make our markets strong enough to withstand system-wide stress and the potential failure of one or more large financial institutions.
► Rebuild trust in our markets by creating the Consumer Financial Protection Agency to focus exclusively on protecting consumers in credit, savings, and payment markets.
► Provide the government with the tools needed to manage financial crises so it is not forced to choose between bailouts and financial collapse.
► Raise international regulatory standards and improve international coordination.
"I commend President Obama for his leadership on financial regulatory reform and his inclusive approach to policy development," said Federal Deposit Insurance Corporation (FDIC) Chairman Sheila C. Bair. "There are key areas of reform within our regulatory structure that should be addressed in any effort to strengthen the oversight of our financial markets, enhance consumer protection and promote market discipline. Of primary importance is addressing too big to fail. Market participants should understand that large institutions can and will fail and that an effective resolution mechanism will be uniformly applied to institutions in a fair, transparent and consistent manner. It is also important that we maintain a focus on assuring strong capital requirements for banks and their holding companies. As the ultimate insurer of over $6 trillion in deposits, the FDIC's emphasis on capital has proven to be a crucial component in monitoring and preventing systemic risks. As we move through the reform effort, it will be important to take the lessons from the current financial crisis and apply them in a constructive and workable way. I would again salute the President for his attention to this issue. I look forward to working with the Administration and Congress as we begin the legislative process."
"The proposal President Obama laid out sets the stage for what will be a historic undertaking--building the foundation for a safer, stronger financial system," said Sen. Christopher Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing and Urban Affairs. "Consumer protection must be at the center of this effort, and I applaud the President for making an independent consumer financial protection agency one of the pillars of his proposal."
The Senate Banking Committee has held 15 hearings on regulatory modernization in 2009 to date, and says it is continuing to examine these reforms alongside the White House.
"This is an enormous undertaking, and I am glad we have President Obama and his team to lead the effort," added Sen. Dodd. "There is still a lot of work ahead of us, but we are headed in the right direction. I look forward to continuing to work with President Obama and my colleagues to enact comprehensive reforms that will restore public confidence in our financial system and put America on the road to recovery."
Not all in Congress, however, were singing the praises of the plan. According to U.S. Rep. Spencer Bachus (R-AL), Ranking Member on the House Committee on Financial Services, Republicans in the House of Representatives offered a comprehensive plan for regulatory reform that protects taxpayers, consumers and investors by making Wall Street responsible for its actions.
"Unfortunately, the Administration's plan continues the cycle of bailouts for 'too big to fail' financial institutions, furthers the government's role in picking winners and losers, complicates rather than streamlines the current regulatory structure, and keeps taxpayers on the hook for losses caused by imprudent risk-taking on Wall Street," said Rep. Bachus. "The Republican plan sends a clear message to Wall Street: No more bailouts. Our new regulatory system must get the government out of picking winners and losers and restore market discipline. We cannot continue to burden future generations of Americans with the costs of mistakes made by a few institutions."
Components of the Republican Financial Services Regulatory Reform Proposal include:
► Fundamental reform of the Federal Reserve. Rather than empowering the Federal Reserve by significantly expanding and concentrating their authority, the Republican plan refocuses the Fed on its core mission of conducting monetary policy by relieving it of current regulatory and supervisory responsibilities and reassigning them to other agencies, and requiring an explicit inflation target. The Republican Plan would impose limitations on the Fed’s use of its authority under section 13(3) of the Federal Reserve Act to respond to "unusual and exigent" circumstances by subjecting actions under 13(3) to Treasury approval and giving Congress the ability to disapprove, placing 13(3) transactions on Treasury's balance sheet, and eliminating the use of this authority on behalf of specific institutions.
► Market stability and capital adequacy board. Under the Republican plan, this Board will not have independent enforcement or supervisory authority over individual firms but would be tasked with monitoring the interactions of various sectors of the financial system, and identifying risks that could endanger the stability and soundness of the system.
► Enhanced bankruptcy. Republicans call for the resolution of insolvent non-bank institutions—no matter how large or systemically important—by creating a new chapter of the bankruptcy code to make it more efficient and better suited for resolving large non-bank financial institutions.
► Regulatory restructuring. The plan combines the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) into one agency and shifts the supervisory functions of the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) to that agency, including the responsibility for overseeing bank and financial holding companies.
► Government-sponsored enterprise (GSE) reform. The Republican plan would phase out taxpayer subsidies of Fannie Mae and Freddie Mac over a number of years and end the current model of privatized profits and socialized losses. It sunsets the current GSE conservatorship by a date certain, placing Fannie and Freddie in receivership if they are not financially viable at that time.
► Credit rating agency reform. The Republican plan changes the definition of the Nationally Recognized Statistical Ratings Organization to "Nationally Registered Statistical Rating Organizations" and removes all references to ratings throughout federal law and regulation, so that the rating agencies will no longer operate as a government-sanctioned oligopoly.
► Protecting consumers through improved disclosure and complaint resolution procedures. The Republican plan expands the mission of the Financial Literacy and Education Commission to include consumer protection and disclosure issues by giving it the authority to direct regulated entities to disclose relevant policies, procedures, guidelines, standards and regulatory filings on their Web sites.
► Strengthening anti-fraud enforcement. The plan increases both civil and criminal money penalties in government enforcement actions, maximizes restitution for victims of fraud, improves surveillance of bad actors who prey on consumers, and allows regulators to share information with foreign regulators and law enforcement agencies engaged in the investigation and prosecution of violations of financial laws without waiving privileges.
NAMB sees specific practical flaws with requiring regulations connecting broker compensation with longer term performance of the underlying loans. Mortgage brokers earn their compensation when they find their customer a loan and follow the transaction to close. Lenders create mortgage products, determine the type of risk they are looking for and pricing of that risk. The White House proposal shifts the risks of their underwriting failures to the mortgage broker without an increase in compensation for that shift. As stated in the White Paper, ‘the financial crisis was triggered by a breakdown in credit underwriting standards in subprime and other residential mortgage markets.’
NAMB has long advocated for consumer protection through transparency and simplification in the mortgage industry. The CFPA would level the playing field for all loan originators and prevent entities from falling through the cracks between jurisdiction and enforcement of numerous regulatory agencies. NAMB welcomes transparency. Although NAMB agrees with the intent of the CFPA to simplify the mortgage process; NAMB would caution such a regulator from potentially causing unintended harm to the consumer. Proposals to standardize mortgage products could have serious consequences for consumers shopping to find the most suitable and cost effective loan. NAMB would welcome the opportunity to participate in the clarification of “plain vanilla” products to ensure consumers have affordable options for obtaining homeownership in the future.
“The new agency should also be required to test any new disclosure forms to help consumers understand the mortgage product they are being offered without harming competition between market players,” added Savitt.
“The President is right that reform of our failed regulatory structure is needed," said Rep. Scott Garrett (R-NJ), a contributor to the Republican Financial Services Regulatory Reform Proposal. "However it is hard to see how creating more regulators will solve the fundamental problem of a broken regulatory system. The President's plan fails to address the fundamental cause of the problem: lack of due diligence on behalf of financial institutions, their creditors, and the regulators who failed to foresee the housing crisis that is the root of our current economic difficulties."
For more information, visit www.financialstability.gov.