One of the key co-authors of the Dodd-Frank Act said Monday that he was "troubled" by regulators' decision to essentially strip out a risk-retention requirement for lenders that securitize mortgages to sell in the secondary market.
Barney Frank, the former House Financial Services Committee chairman, told a regulatory conference that he was disappointed the banking agencies chose to dial down a measure that would have forced lenders to hold 5% of the risk of mortgages they sell into the secondary market.
Frank had pushed heavily for the risk retention provision to become part of the 2010 regulatory reform law, saying lenders needed "skin in the game." But regulators initially proposed tough standards for a carve-out from the provision, but significantly weakened the plan in September. Their recent proposal would define so-called "qualified residential mortgages" as any loan that meets basic ability-to-repay standards, essentially covering the vast majority of the mortgage market.
"To get the [Dodd-Frank] bill through, we had to weaken somewhat the requirement for risk retention and we had to adopt a section to allow super safe mortgages to be exempt from risk retention," said Frank at a conference in Boston celebrating the 150th anniversary of the Office of the Comptroller of the Currency. "And to my dismay, the regulators at one point, and still pending, were proposing in effect to have the exception eat up the rule...that troubled me. If we can get some risk retention in there, I think we could build in systemic preventions."