A proposal to relax federal standards in mortgage lending and bank regulation could undo years of work to enhance consumer protections and prevent financial crises. U.S. Senate Banking Committee chairman Richard Shelby (R-AL) proposed legislation that would change criteria used to define big banks, sharply reducing the number of banks that would fall under federal regulation, as well as loosen mortgage lending standards. The proposal will be marked up tomorrow at 9:00 a.m. CT. Woodstock Institute is firmly opposed to these proposed changes.
One of the components of Sen. Shelby’s proposal changes the definition of a systemically important bank from a bank with $50 billion in assets to a bank with $500 billion in assets. A systemically important bank is a financial institution whose failure could create an economic crisis. Increasing the threshold for systemically important banks to $500 billion will decrease the number of banks that fall under stricter federal regulation under the Dodd-Frank Act designed to prevent financial crises. If Sen. Shelby’s proposal is approved, 28 of the 34 largest banks would no longer be subject to enhanced prudential risk protections. Woodstock applauded passage of the Dodd-Frank Act because it helps prevent more bailouts and protects consumers via the Consumer Financial Protection Bureau (CFPB). The CFPB is already under attack in Congress, where some congressmen wish to limit the number of banks it regulates. Sen. Shelby’s proposal continues the assault by attempting to limit authority to reduce systemic risk to our economy.
Another component of the bill loosens the mortgage regulations that CFPB adopted to prevent another housing market crash. Sen. Shelby’s proposal gives banks a “safe harbor” from qualified mortgage rules (QM) as long as the bank assumes the risk of the mortgage loan by keeping the loan in its portfolio rather than selling the loan on the secondary market. The QM rules protect consumers by preventing lenders from making loans that borrowers cannot afford to repay. The Shelby safe harbor proposal would once again leave consumers at risk, even if the lender retains the risk of default.
Consumer advocates from across the country are mobilizing in opposition to Sen. Shelby’s proposal. The National Community Reinvestment Coalition, of which Woodstock Institute is a member, responded to the proposal: “Recently the nation faced one of the greatest economic crises in its history, with costly consequences for communities across the country. The impact of that crisis is still felt in many neighborhoods today. Dodd-Frank was put in place to ensure that Wall Street could not throw the country into the economic abyss again. This proposed rollback of several elements of the Dodd-Frank reforms is simply unconscionable, and would come at the expense of the safety and soundness of the U.S. financial system.”
Woodstock Institute signed on to a letter from Americans for Financial Reform stating that the Shelby proposal “goes far beyond what might be reasonable regulatory relief for small community banks. Instead, it provides regulatory exemptions for some of the largest financial institutions in the country.”
Sen. Shelby’s proposal protects the interests of big banks instead of consumers. Woodstock urges the Senate Banking Committee to reject these safe harbor proposals and to ensure that our financial institutions are adequately regulated and that consumers are protected from irresponsible mortgage lending.