WASHINGTON — A day after the House passed sweeping mortgage reform legislation with significant bipartisan support, Senate Banking Committee Chairman Chris Dodd said Congress may not need to act.
On a conference call with reporters Friday, Sen. Dodd said rules due to be proposed next month by the Federal Reserve Board to curb abusive lending practices may be sufficient.
"Nothing would please me more than for the Fed to come out with a very strong set of regulations that deal exactly with the problems we're talking about, that put a stop to these predatory lending practices that [are] going on there," he said. "If they do that, there's no necessity for a bill here. So I'm anxious to hear what they have to say."
Still, Sen. Dodd said he planned to at least introduce his bill so that observers have an idea of what he would do if the Fed proposal is not strong enough.
"I've decided to go forward and announce a bill here on the first of December so people have some idea where we're headed," he said.
Sen. Dodd has gone back and forth all year on whether mortgage reform legislation is needed. In hearings this spring, he blamed the Fed for its failure to write rules under the Home Ownership and Equity Protection Act that would curb unfair and deceptive mortgage lending, and he urged the regulator to write a proposal. At the time, he refused to commit himself to offering a bill, saying Fed action might be enough. Fed Chairman Ben Bernanke promised in July that the Fed would write rules.
But by September, Sen. Dodd no longer appeared certain that rules would be sufficient. On Sept. 5, he unveiled an outline of a mortgage reform bill supported by consumer groups that would tighten underwriting standards and take other steps. Though he vowed to pass the bill quickly, he never introduced it.
Even after Thursday's House passage of a bill drafted by House Financial Services Committee Chairman Barney Frank, on a 291-to-127 vote, Sen. Dodd appeared to be planning a push for legislation. In a press release late that night he pledged once again to move a bill.
"Legislation must meet two requirements: First, it must establish strong standards against abusive practices such as prepayment penalties, steering, and other problems," he said in a press release. "Second, it must provide for strong enforcement to ensure that those standards are met. My bill, which I will introduce soon, will meet both requirements and help protect homeowners from predatory lending."
By Friday, Sen. Dodd had shifted again, saying the Fed proposal might be enough. But no matter what the Fed proposes, some analysts said, political pressure will continue to grow on Sen. Dodd to move legislation.
"I have real doubts as to whether any regulatory reaction will be enough to satisfy Capitol Hill," said Jaret Seiberg, an analyst at Stanford Group. "It's one thing for a lawmaker to say that the regulators can take care of the problem; it's a much bigger leap for them to conclude... that regulators actually have solved the problem."
Rep. Brad Miller, D-N.C., one of the chief sponsors of the House bill, said that he too would like to see the Fed put forth comprehensive regulations that rein in abusive practices, but still thinks legislation is called for to properly fix problems in the market. He added he expects foreclosure numbers to continue to climb next year that will demand congressional intervention.
"We are only beginning to see the problem," he said in an interview. "The worse the problem gets, the greater the pressure will be on Congress to do something and I think it's going to get much worse."
Sen. Dodd was more adamant Friday that legislation is needed to determine ownership of industrial loan companies, and several sources said a draft bill is expected early this week. After committee staff briefed industry members Friday, details emerged about a measure that would bar ILC ownership to commercial firms and be significantly more restrictive than House ILC legislation passed in May.
A tougher Dodd bill would contradict the conventional wisdom up to this point that the Senate needed a less stringent bill in order to satisfy opponents like Utah Sen. Robert Bennett, the No. 2 Republican on the Senate Banking Committee.
But though the House bill, sponsored by Rep. Frank, D-Mass., would bar companies making at least 15% of their annual revenue on commercial activities from getting an ILC charter, the bill being drafted by Sen. Dodd would go further, several sources said.
It would more rigidly define whether a company is commercial or financial — using the strict standard of the 1999 Gramm-Leach-Bliley Act — and give the Fed a role in determining whether a company qualifies for an ILC under the definition.
"There's a strong interest in going back to the Gramm-Leach-Bliley definition of financial. … Gramm-Leach-Bliley was strictly: if you're financial, you're financial. If you're not financial, you're not financial," said Steve Verdier, a lobbyist for the Independent Community Bankers of America. "The Fed would have a strong role if they go in that direction. The Fed always would have a strong role because they do define what is financial."
Sources, many of whom spoke on condition of anonymity, noted other likely differences between the House version and Sen. Dodd's bill, including changes in grandfathering provisions for existing ILCs and an exemption to let automakers still own ILCs.
Under the House bill, ILCs owned by a commercial company before October 2003 would be grandfathered, but those bought or sold between then and 2007 could operate but not expand their activities. Sources said Sen. Dodd's bill will probably take a new approach to grandfathering.
An exemption for commercial companies that produce durable goods — such as auto manufacturers — has been widely expected after the motor vehicle lobby pushed for such an exception in the House bill. Rep. Frank — though not including the exemption in his version — has shown support for such a provision in the final bill.
Observers said what kind of test to use to designate a company financial or commercial has been a key sticking point as the Senate Banking Committee's staff has tried to produce a legislative approach in recent weeks. Lawmakers are trying to enact a bill before the Federal Deposit Insurance Corp. moratorium on commercial ILC applications expires Jan. 31.
Though a stricter bill would probably please community bankers and others opposed to retailers' using an ILC charter to offer banking services, it would also surely draw serious objections from ILC advocates, including Sen. Bennett. The Utah Republican, who pulls heavy influence on the committee and whose home state has a thriving ILC sector, has held talks with Rep. Frank on a compromise.
Sen. Dodd said Friday that he still believes a deal could be reached to win bipartisan support for his approach. We "are getting close to working [out] something that I'm hopeful Sen. Bennett and those that support ILCs" will support, he said in the conference call. "We're not there yet... but we're getting closer."
