December 14th, 2009 10:18 AM by Lehel S.
The House of Representatives approved sweeping new legislation Friday to reform the nation’s financial regulatory system. The Wall Street Reform and Consumer Protection Act (H.R. 4173), passed the chamber by a narrow margin, 223 to 202. The legislation creates a single agency to oversee mortgages, outlaws predatory lending, puts the idea of “too big to fail” to rest, and ends taxpayer bailouts. One thing it doesn’t do – allow bankruptcy judges to restructure mortgages.
Lawmakers voted 241 to 188 not to include the bankruptcy cramdown amendment proposed by Rep. John Conyers (D-Michigan) in the overall reform package. All but four of the Republicans who voted opposed the amendment, pulling with them 71 Democrats to defeat the measure, according to Bloomberg News. As recently as March, the House approved an identical cramdown measure, but it fell flat when it hit the Senate.
Lenders and other members of the mortgage banking community have expressed strong opposition of bankruptcy cramdowns, arguing that it would lead to a swell of bankruptcy filings and abuses of the judicial system, ultimately sabotaging the recovery of the nation’s already fragile housing markets and tightening credit further.
The Mortgage Bankers Association (MBA) said in a statement that the industry was “gratified that the House saw fit to vote down the bankruptcy cramdown amendment that would have further increased costs for borrowers.”
While cramdowns were scrapped from the regulatory overhaul package, the House’s financial reforms do address a number of issues that have been blamed for the nation’s economic meltdown. The Wall Street Reform and Consumer Protection Act:
- Outlaws Predatory Mortgage Lending Practices: Incorporates the mortgage reform and anti-predatory lending bill the House passed earlier this year. The legislation outlaws many of the industry practices that marked the subprime lending boom, and it would ensure that mortgage lenders make loans that benefit the consumer. It establishes a simple standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.
– Increases Consumer Protections: Creates the Consumer Financial Protection Agency (CFPA), a new, independent federal agency dedicated to protecting Americans from unfair and abusive financial products and services, with oversight of mortgages, credit cards, and other consumer-facing borrowing instruments.
- Creates a Financial Stability Council: Creates a council of regulators that will identify financial firms that are so large, interconnected, or risky that their collapse would put the entire financial system at risk. These systemically risky firms will be subject to increased oversight, standards, and regulation.
- Ends Taxpayer Bailouts and “Too Big to Fail”: Establishes an orderly process for shutting down large, failing financial institutions like AIG or Lehman Brothers in a way that ends bailouts, protects taxpayers, and prevents contagion to the rest of the financial system.
- Reins in Executive Compensation: Gives shareholders a “say on pay” – an advisory vote on pay practices including executive compensation and golden parachutes. It also enables regulators to ban inappropriate or risky compensation practices, and it requires financial firms to disclose incentive-based compensation structures.
- Safeguards Investors: Strengthens the Security and Exchange Commission’s (SEC) powers so that the agency can better protect investors and regulate the nation’s securities markets. The bill orders a study of the entire securities industry in order to identify needed reforms and force the SEC and other entities to further improve investor protection from such schemes as the Madoff and Stanford Financial frauds.
- Regulates Derivatives: Institutes regulations, for the first time, over the $600 billion over-the-counter (OTC) derivatives marketplace. Under the bill, all standardized swap transactions between dealers and “major swap participants” would have to be cleared and traded on an exchange or electronic platform.
- Requires Registration of Hedge Funds: Requires almost all advisers to private pools of capital to register with the SEC, and they will be subject to systemic risk regulation by the newly created financial stability regulator. Lawmakers say this measure closes a regulatory hole that has allowed hedge funds and their advisors to escape any and all regulation.
House Speaker Nancy Pelosi said at a press conference following the bill’s passage, “We are sending a clear message to Wall Street: the party is over. Never again will reckless behavior on the part of the few threaten fiscal stability of our people.”
Reports say the Senate’s debate over financial reform is likely to carry over into next year.