WASHINGTON – Treasury Secretary-designate Steven Mnuchin struck a pro-banking industry tone during testimony on Capitol Hill Thursday while tangling with lawmakers over foreclosures, offshore accounts and other issues.
Democrats and consumer advocates have attacked Mnuchin following his nomination mostly over his time running OneWest, the Southern California bank that emerged from the remains of IndyMac and garnered a reputation for its ample foreclosures.
While that criticism continued to dog Mnuchin at the sometimes tense confirmation hearing before the Senate Finance Committee, his appearance also allowed him to elaborate on his financial services policy positions, including support for small and regional banks, seeking a "bipartisan fix" for housing finance, and making changes to the Dodd-Frank Act.
"My biggest concern is…regulation is killing community banks," said Mnuchin. "We are losing the ability for small- and medium-sized banks to make good loans to small- and medium-sized business in the community where they understand those credit risks better than anybody else."
Here are four takeaways from the hearing:
The incoming administration is weighing specific Dodd-Frank changes
Although Mnuchin's responses to senators' questions were careful not to divulge too much of his policy views, he expressed support for changes to Dodd-Frank that align with positions taken by GOP leaders and the industry.
When asked his position about the Consumer Financial Protection Bureau, the agency created by Dodd-Frank that faces significant uncertainty once President-elect Trump takes office, Mnuchin supported giving Congress greater say about the bureau's finances. The CFPB is currently a bureau of the Federal Reserve, but many Republicans want to subject it to appropriations.
"The biggest issue I have with the CFPB is I don't think they should be funded out of the Federal Reserve. I think they should be funded from the appropriations process," he said.
But he also seemed to endorse certain other Dodd-Frank measures. "I do support the Volcker Rule," Mnuchin said of the law's ban on banks engaging in proprietary trading.
"The concept of proprietary trading does not belong in banks with [Federal Deposit Insurance Corp.] insurance" said Mnuchin.
However, he sounded open to changes in how the rule is implemented, citing a Fed study indicating that the rule is hurting market liquidity.
Mnuchin also appeared somewhat open to considering changes to Title II, the Dodd-Frank provision authorizing the FDIC to manage resolutions of failing behemoth firms.
Echoing criticism by Republicans that the resolution regime allows continuing government support for companies, Mnuchin said, "I share certain concerns on Title II." He noted that "if we have proper regulation" for complex financial firms, "a lot of the need for Title II goes away."
Some policymakers have called for a reform of the bankruptcy code as an alternative to Title II for handling the failures of large firms.
"I'm not suggesting we remove Title II tomorrow without having the appropriate bankruptcy solution," Mnuchin said.
Community and regional bank issues could get newfound focus
Many of Mnuchin's comments will likely please community and regional-sized banks that feel threatened by the current regulatory burden.
At one point, speaking of his time at OneWest, Mnuchin said, "I think of myself as a regional banker."
Mnuchin also took a position on Glass-Steagall that is similar to one at times supported by community banks.
The GOP's convention platform had backed returning to a Glass-Steagall Act structure, even though such a reform is more commonly supported by liberals. President-elect Trump and his transition team have not elaborated on that platform position and it was said to have ruffled some feathers within the GOP.
Mnuchin's response tried to strike a middle ground by saying that a modernized version of the law was worth considering, though he did not elaborate much further.
"I don't support going back to Glass-Steagall as is. What we've talked about with the president-elect is perhaps we need a 21st-century Glass-Steagall," he said.
"Separating out banks and investment banks right now under Glass-Steagall would have very big implications to the liquidity and the capital markets and banks being able to perform necessary lending," he added.
As Treasury secretary, Mnuchin would also chair the Financial Stability Oversight Council, which is responsible for identifying emerging financial risks while also working as a collaborative body between regulators. Mnuchin said he would utilize that power to reduce regulatory overlap "so we don't end up in a world where we only have four big banks in this country."
No 'recap and release' for GSEs
Mnuchin also sought to clarify earlier remarks that had caused confusion about the incoming administration's housing finance agenda.
In December, Mnuchin said during a television interview that, "We gotta get [Fannie Mae] and [Freddie Mac] out of government ownership." The comments were seen by some as supporting the so-called "recap and release" idea, which would essentially preserve the government-sponsored enterprises in the future.
But in his confirmation hearing, Mnuchin said he was "never [supportive] of recap and release," suggesting that his earlier comments were misread.
"What I've committed to is that I will work with both the Democrats and Republicans. We need housing reform, so we shouldn't just leave Fannie and Freddie as-is for the next four or eight years under government control without a fix," Mnuchin said.
Mnuchin referred to himself as an "expert" on Fannie and Freddie, but he was careful not to back a specific reform approach.
"I believe we can find a bipartisan fix for these, so on the one hand we don't end up with a giant bailout, [and] on the other hand we don't run the risk of completely eliminating housing finance," he said.
He noted that "for very long periods of time, I think, Fannie and Freddie have been well-run without creating risks to the government."
"I believe that these are very important entities for creating necessary liquidity for housing finance," Mnuchin said.
Foreclosure concerns still vex nominee
While Mnuchin appeared to emerge from the hearing largely unscathed, Democrats as expected kept up their criticism of OneWest's foreclosure activity under his watch during the five-hour-plus hearing. Indeed, OneWest's track record on foreclosures was the elephant in the room. The criticism was only bolstered by reports that Mnuchin had to revise financial disclosures to add mention of previously unreported assets as well as offshore accounts.
But Mnuchin took objection to the characterization of OneWest as a "foreclosure machine."
"Nothing could be further from the truth," he said.
Mnuchin said oftentimes his hands were tied when it came to foreclosing on a borrower or offering a mortgage modification. He said OneWest opted into an Obama administration mortgage modification program known as the Home Affordable Modification Program where it was required to do an economic test to determine whether foreclosing or providing a mortgage modification would result in a higher return.
"To the extent that the net present value was higher on foreclosing, we unfortunately had to follow the HAMP rules or we would have been severely penalized," said Mnuchin.
John Heltman contributed to this article.