WASHINGTON — Lawmakers returning from Easter recess this week will tackle a host of reforms that could influence the future of banking, including stiffer mortgage laws, broader bankruptcy privileges and reining in "too big to fail" institutions.
The financial services industry remains largely stuck on the defensive, with only one clear legislative target designed to bring some relief: a bill that would reduce a planned premium assessment by at least half by increasing the Federal Deposit Insurance Corp.'s borrowing authority.
The pace of hearings, votes and new legislation aimed at reining in banks or adding further restrictions to those that received government rescue funds is only likely to increase ahead of the next congressional break in five weeks.
"We are fighting battles on many fronts," said Scott Talbott, the head lobbyist for the Financial Services Roundtable. "The frenetic pace will continue. Congress will pick up right where they left off."
A key battleground remains a bill that would let judges cram down debt on primary mortgages in bankruptcy proceedings. Though the bill passed the House last month, it has remained stalled in the Senate, where its chief sponsor, Sen. Richard Durbin, D-Ill., is continuing to negotiate with large banks on a deal.
So far only Citigroup Inc. has agreed to support the bill, cutting a deal in January that would limit it to covering existing mortgages. Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. are said to be in discussions with Sen. Durbin about ways to further limit the bill.
Though no deal had been reached by press time and was unlikely to be reached before lawmakers' return, a number of lenders have been pushing to exclude loans from bankruptcy cramdown if the mortgage was eligible for President Obama's foreclosure plan or the Hope For Homeowners program.
"Bankruptcy should only be used as a last recourse when every other effort to modify a loan has been exhausted," said Scott DeFife, a lobbyist for the Securities Industry and Financial Markets Association.
It remains unclear if the mortgage bankruptcy measure will remain attached to the FDIC legislation, which would more than triple the agency's line of credit with the Treasury Department, to $100 billion, and allow it to borrow as much as $500 billion temporarily.
The bill is crucial for bankers, because FDIC Chairman Sheila Bair has said its passage would result in a massive premium reduction. The agency is planning to charge 20 cents for every $100 of domestic deposits to restore the Deposit Insurance Fund to acceptable levels. "We want to get the higher level of borrowing authority by Memorial recess," before premiums are charged, said Ike Jones, a lobbyist for Independent Community Bankers of America.
The House added the FDIC measure to the mortgage bankruptcy legislation last month in an attempt to persuade the banking lobby to support the bill.
Jaret Seiberg, a policy analyst with SMH Capital Inc.'s Washington Research Group, said the industry is better off cutting a deal now that includes the FDIC measure.
"The top priority for the industry now is to get the increased borrowing authority for the FDIC enacted to reduce the special assessment that hits this fall," he said. "Democratic leadership understands that this bill needs to get done. Everyone understands the potential to use the bill to try to move more controversial items."
On the House side, Financial Services Committee Chairman Barney Frank, D-Mass., is continuing to push a bill that would tighten mortgage lending standards. Representatives from industry groups are expected to testify at a hearing this week. They said they hope the panel would make changes to the bill before it is called up for a vote this month.
The legislation would fundamentally alter the mortgage system by requiring all originators to maintain 5% of the loan's risk when selling it into a securitization. The bill also seeks to return the market to more traditional lending by allowing a limited protection from liability for 30-year fixed-rate loans that meet certain standards.
Bankers say the changes are too sweeping. "We are supportive of the concept of accountability, but we are very concerned about how the mechanics of the 5% concept will work," said Steve O'Connor, the Mortgage Bankers Association's head of federal government affairs. "The notion of any bank having to set aside 5% of capital of some sort … would be devastating to smaller and midsize banks, and it would be a significant problem for larger banks who have large volume."
The industry is also concerned that the safe harbor, which would provide only limited liability protection for certain prime mortgages, restrains loan options too much. "The safe harbor is too narrow," DeFife said.
But Rep. Brad Miller, one of the bill's primary sponsors, said that reform is long overdue, and that the industry is on weak footing to ask for a break, given everything that has happened in the mortgage market.
"It was very much our intention to provide a narrow safe harbor," the North Carolina Democrat said. "The idea that the lending industry did not know what kind of loans were being originated in 2003 and 2004 is just ridiculous."
Miller went on to say that Frank in particular has pushed for some risk retention provision.
"It is his view, and mine as well, that the system of originating a mortgage and then selling it and having no interest in the mortgage after that encouraged very weak or almost nonexistent underwriting," Miller said. "Something like that is a good provision."
Lawmakers are also set to continue efforts to reform the regulatory system. Frank is expected to introduce legislation soon that would give the government resolution powers to unwind systemically important companies. It is unclear how the bill would work, and Frank plans to hold more hearings on the issues before voting on a bill.
In the Senate, the debate has recently focused on giving such power to the FDIC — an idea endorsed by the Treasury Department. But the ABA objected to that idea last week, saying policymakers should create an entity called the Special Resolutions Authority to unwind systemically important institutions.
Whether the group's objections will influence lawmakers is unclear. "We are concerned that it not be seen as simply an extension of FDIC, because the FDIC fund and the brand are supported by the banks for the protection of bank depositors," said Floyd Stoner, the ABA's head lobbyist.
Republicans are also raising questions about that plan and one to give the Federal Reserve Board systemic risk oversight.
Rep. Scott Garrett, the top Republican on the House Financial Services capital markets subcommittee, said defining systemic risk is tough and could create more problems.
"What looks to be cut and dry and black and white and a simple solution to a problem, once you get in to the weeds on it, you realize that, no, there are a lot more issues than we ever thought imaginable," the New Jersey Republican said. "When you are rewriting the rules of the entire game to try and prevent any future fiscal calamity, you realize it's not as easy as you once thought."