WASHINGTON — There are several financial services issues facing Congress when it returns this month, including credit cards, government-sponsored enterprise regulation, and industrial loan company ownership.
But all of them are expected to take a back seat to the overarching concern among lawmakers: the subprime mortgage crisis. They are still struggling to find ways to avert foreclosures, rein in underwriting practices, and contain any resulting economic problems.
"The issue that is still going to be the big one is the subprime issue," Rep. Judy Biggert of Illinois, the lead Republican on the House Financial Services financial institutions subcommittee, said in a recent interview.
The crisis encompasses at least three major pieces of legislation — lending reform, a drive to let judges modify mortgages in bankruptcy proceedings, and modernization of the Federal Housing Administration — and several smaller items.
Those bills are all likely to gain momentum this year as foreclosure rates — and fears of a recession — continue to rise, analysts said.
"Housing, housing, and more housing — politically, that is going to be one of the top issues for voters, and we are in an election year," said Jaret Seiberg, an analyst with Stanford Group.
Much of the immediate attention will be focused on the Senate, where Banking Committee Chairman Chris Dodd introduced a bill last month that would tighten underwriting standards and put securitizers on the hook for packaging questionable loans.
For the next month, at least, observers expect Sen. Dodd, who is pursuing a long-shot presidential bid and has moved temporarily to Iowa ahead of the caucuses there, to stay focused on his campaign. But barring a dramatic turn of events or a sudden upswing in the polls, the Connecticut Democrat is expected to be out of the race after the first few primaries.
Speculation on where he will focus his attention is rampant, but Sen. Dodd has made it clear he intends to pursue mortgage reform. Within hours after the Federal Reserve Board proposed rules under the Home Ownership and Equity Protection Act to curb abusive lending, he called the plan a "significant step backward" and said his legislation must be enacted soon.
The bill is more stringent than a House version passed in November and could face a rockier road in the Senate among Republicans. For subprime or nontraditional loans, the bill would ban yield-spread premiums, prepayment penalties, and debt-to-income ratios above 45%.
The legislation effectively would nudge a wider swath of loans out of the market by expanding the definition of "high-cost" loans (which are treated as taboo and rarely made). It also would impose suitability standards throughout the mortgage chain, stall the foreclosure process, and allow states to enforce stricter standards.
Already the bill has won the support of several Democrats, including Sen. Charles Schumer, the chairman of the Joint Economic Committee.
"Mortgage brokers should all have some degree of regulation and responsibility," the New York Democrat said in a recent speech. "I put in legislation four months ago that did this … and Senator Dodd just introduced legislation that is pretty close to mine. I've co-sponsored it, and hopefully we'll pass that legislation early next year."
Financial services lobbyists said they foresee themselves largely playing defense on the issue.
"We have a number of concerns," said Steve O'Connor, the Mortgage Bankers Association's head of government affairs. "First and foremost is that the fact that the bill does not create a uniform national standard. It's not preemptive. … We also want a workable standard."
The Dodd bill also includes broad assignee liability for the trust that holds the note. That provision has prompted many in the industry — and even some lawmakers — to conclude the bill would damage the secondary market.
"It's awful," said Rep. Tom Price, R-Ga., who opposed the narrower mortgage reform bill in the House. "We suffered through that in Georgia. It literally shut down the secondary market, and we rapidly corrected it, thank goodness, but I don't know how one would correct it at the federal level. It doesn't make any sense to transfer the liability."
Even though conventional wisdom says Sen. Dodd would have to scale his bill down to get it through the Senate, one thing that is clear: Consumer advocates are expecting him to stick to his guns and fight for strong reform.
"This is a legacy issue," said Mike Calhoun, the president of the Center for Responsible Lending, one of the lead consumer groups driving mortgage reform legislation. "This is the biggest financial crisis in a generation, and to be chairman of the committee of jurisdiction and not do everything you could to take action would be surprising, so we expect him to be very fully engaged on the issue."
It is not clear whether Sen. Dodd has the support of all the Democrats on his committee. In an e-mail to American Banker, Sen. Tim Johnson of South Dakota, one of four Banking Committee Democrats who have not signed up to co-sponsor the bill, said he hoped to work with Sen. Dodd on the subprime mortgage crisis, "acting where appropriate being mindful of the impact on the availability of credit."
Republicans clearly are counting on the Bush administration to stop aggressive legislation if it does pass. "I don't think you could get anything out of the Senate that would remarkably restrict the marketplace in the next six to eight months that would be signed by the president," Rep. Price said.
But mortgage reform is not the financial services industry's largest concern. Lawmakers have begun to press for bankruptcy legislation that would let judges modify the terms of a primary mortgage and cram down debt during bankruptcy proceedings. Industry representatives argue that the bill would create instability in the market and drive up loan costs.
When consumer and attorney advocacy groups began talking up the idea in the spring, industry representatives largely brushed it off as a nonstarter, but with lawmakers feeling increased pressure to diminish foreclosures, the legislation has gained traction.
The House Judiciary Committee approved a bill Dec. 12 that would let bankruptcy judges modify subprime and nontraditional mortgages made from Jan. 1, 2000, through the bill's enactment date with a sunset in seven years. Senate Majority Whip Richard Durbin, D-Ill., is pursuing his own somewhat broader bill and trying to reach a deal with Sen. Arlen Specter of Pennsylvania, the Senate Judiciary Committee's lead Republican.
Industry lobbyists fear that if a Treasury Department-backed plan to freeze the interest rates on certain subprime loans does not prevent widespread foreclosures, the bankruptcy bills will gain momentum.
"We have a window of opportunity to show that the industry efforts can bear fruit before people begin to make the judgment as to whether something else needs to be done," said Scott DeFife, a lobbyist for the Securities Industry and Financial Markets Association. "I will continue to argue the premise that bankruptcy is a viable solution to help people who can be helped outside of bankruptcy to avoid foreclosure, but to the extent that the advocacy groups have no other plan, we're going to continue to hear about it unless progress can be made."
One bill likely to be enacted soon is FHA reform. The House and Senate have passed bills that would let the program insure more borrowers with weak credit, but it is unclear how the notable differences in bills would be hashed out. The House bill would go much further than the Senate by allowing higher loan limits, lower down payments, and risk-based premiums, and it would create an affordable housing trust fund.
The affordable housing trust fund is strongly supported by House Financial Services Committee Chairman Barney Frank, but opposed by Republicans.
Other items are also on tap. Even though mortgage reform has cleared the House, lawmakers there say they still have plenty of work to do. Reps. Paul Kanjorski, D-Pa., who chairs the House Financial Services capital markets subcommittee, and Carolyn Maloney, D-N.Y., who chairs the financial institutions panel, said they are using the congressional recess to drum up foreclosure prevention proposals.
Rep. Kanjorski said former Fed Chairman Alan Greenspan's recent call for the government to hand out cash to troubled borrowers, coupled with the sudden $500 billion infusion of credit from the European Central Bank into the U.S. system, are bellwethers that should not be ignored.
"That should ring a bell of caution for us. Something must be up that we are not fully familiar with at this point or is anticipatory," the legislator said. "I get a little shiver up my spine to tell you the truth that we may not be seeing the true nature of the credit crunch and its impact on our economy, and particularly of the longer ramifications."
The House needs to put a contingency plan in place quickly, so it does not get caught flat-footed in the face of looming financial disaster, he said. "We should start preparing for federal action now. … It would be a mistake for us to do nothing and wait 'til things occur."
Rep. Kanjorski said he intends to seek out the experts for guidance when Congress resumes. "As soon as we get back we should really call Greenspan and some of these people and start asking them the hard questions. … 'Did you feel something out there that you haven't previously felt, and if so, what was it, and what can we do about it?' "
The Financial Services Committee will continue to investigate the credit rating agencies' role in the subprime debacle and decide whether reform is necessary to prevent future rating inflation, he said. He also hopes to institute a recycling program so that foreclosed properties can be turned over as rentals for displaced families.
Rep. Maloney said that she plans to use the break to see what financial services leaders and community groups are doing in New York to head off foreclosures, and that she wants to develop incentives for employers to help. "We could look at employers and see if they could help people stay in their homes, giving them some incentives to be part of the process."
In addition, the committee will continue its oversight of regulators and the institutions they charter, she said. A hearing in the works would focus on the role of complex instruments like structured investment vehicles and collateralized debt obligations whose valuations are hard to track and were pumped up by subprime loans.
"One of the things that everybody is going to be watching is the subprime crisis and spillover from that to the equity markets and to credit markets," she said. "We'll be having some oversight and hearings on SIVs and CDOs."
Sen. Schumer, who sits on the Senate Banking, Judiciary and Finance committees, is lobbying for a seven-point plan to address the crisis, including bankruptcy reform and loosening the restrictions on mortgage revenue bonds to help subprime borrowers refinance into cheaper loans.
Lawmakers and observers said areas other than mortgage reform also are liable to get attention.
Rep. Frank has said card legislation is on his panel's agenda, and Rep. Maloney began circulating a discussion draft Dec. 19 that would ban a host of common practices, including some risk-based repricing constructs and a slew of other fee- and rate-increasing systems. She said she plans to introduce the bill shortly after Congress resumes, and she hinted her goal is to achieve the support of the committee's top Republican. "We are working with Spencer Bachus," Rep. Maloney said. "I always try to work in a bipartisan way."
Sources said Sen. Dodd, who has offered several card bills in the past, is likely to introduce another one. However, any card reform, is likely to have a difficult time getting past Sen. Johnson and another committee member, Sen. Tom Carper, D-Del., because of bank ties to their states.
Rep. Maloney also said she is aiming to move a bill that would rein in bank overdraft protection programs. She plans to hold a hearing on the Basel II capital accord — the first since the Democrats regained control of Congress. Regulators are scheduled to start phasing in implementation of the accord April 1.
Her other goals include pressing ahead on legislation that would let money-services businesses self-certify their anti-laundering procedures, as well as putting pressure on the Senate to take up a House bill that would exempt banks from having to report currency transaction reports on seasoned business customers.
The Senate Banking Committee is expected to try to move forward on bills to reform GSE regulation and ban commercial ownership of ILCs. Other less-pressing issues are also on the back burner. Sen. Johnson said he plans to keep pushing for an optional federal insurance charter, and a spokeswoman for Sen. Mike Crapo said the Idaho Republican is dedicated to regulatory relief.
