WASHINGTON — One year after passage of the landmark bill bearing his name, Rep. Barney Frank said critics of some of the law's key provisions — now being implemented by regulators — are simply misguided.
Frank specifically targeted groups trying to ease requirements in the Dodd-Frank Act that lenders hold on to some credit risk, saying that backtracking now would overlook the effects that zero skin-in-the-game had in the crisis. While he favored a broader exemption from risk-retention proposed by regulators in March, he warned against turning the exception into the rule.
"This assault on risk retention is a terrible idea," Frank said in remarks at the National Press Club. Responding to claims the rules would disrupt the mortgage market, he said, "Yes, it's disruptive, because we had to disrupt a rotten system."
The Massachusetts Democrat also called out critics of the implementation of a new regulatory regime for systemically-important firms, and rebuked Republican efforts to hold up agency nominations and strip funding for enforcing the new law.
But much of the news conference focused on risk retention. The law requires institutions to keep 5% of the credit risk of securitized mortgages, but allows regulators to exempt "qualified residential mortgages." The agencies have taken heat for their QRM definition in the March proposal, which would limit it to loans with a 20% down payment and low debt-to-income. Critics say that could create a new "gold standard" for loans that would be out of reach for lower-income borrowers.
Frank said it was the risk-retention rule — not the exception to that rule — that should be the model. Still, he agreed the pending regulatory proposal was too restrictive, suggesting a more appropriate down payment requirement would be 4 or 5%. If banks and housing groups, which have shied from any down payment standard at all, still protest, Frank said eliminating the exemption altogether may be better than an overly broad one.
"Loans made without risk retention should be an exception and not the rule," Frank said. "And if people are convinced that you can't have a bifurcated market, I am for doing away with the exception, not the rule.
"Look, I understand, if it's 4%, some people won't be able to buy houses," he continued. "I'd like to help people with their income, [but] not pretend they have income they don't have."
Frank also expressed frustration with the slow pace of nominations from the Obama Administration for certain key regulatory posts, but placed the lion's share of the blame on the failure of Senate Republicans to confirm qualified nominees. He also accused congressional Republicans of using the federal budget deficit as a pretext for refusing to adequately fund the Securities and Exchange Commission and the Commodity Futures Trading Commission, the two agencies charged by the law with regulating the vast derivatives market.
"We're talking about maybe $200 million within the context of the wars in Iraq and Afghanistan," said Frank, the ranking member of the House Financial Services Committee. "It's not a huge amount of money."
Frank's overall assessment of the law one year later was positive. He noted that the United States has largely been ahead of other countries in establishing regulations for financial markets, including the new system mandated by Dodd-Frank to put large financial firms that fail into receivership.
"We are the first nation to say, 'Hey, if you get in trouble, you're dead, and then we will worry about your mess,'" he said. "We think that model is an attractive one."
He rejected claims by critics that the new authority for the Federal Deposit Insurance Corp. to seize failing firms would still produce bailouts. A recent FDIC rulemaking states the agency can claw back the compensation of an executive at a failed firm.
"That institution is dissolved. Its shareholders are wiped out. Its executives are fired. And in fact, as the FDIC just made clear, they might well have to pay back some of their last two years of salary," he said.
"We made it illegal to spend money, public money, to take care of a financial institution. We can spend money to pay off some of its debts, if that's necessary, to be recovered from other financial institutions."
Under Dodd-Frank, regulators will require certain systemically risky firms to receive both heightened supervision and to craft pre-drawn resolution plans to help guide the FDIC in a failure scenario. Critics have said being part of that class could give a large firm an advantage over smaller competitors if the market perceives them as "too big to fail."
Frank said the evidence points to the opposite conclusion, since firms that may be placed in that category — and face stricter oversight as a result — have "vehemently asked not to be."
"This is the gift that people keep on refusing," he said.
