Senate Passes Reg Reform: CFPA a Go, No GSE Reforms

The Senate late Thursday passed a landmark financial regulatory reform bill that will increase regulation and oversight of the residential mortgage industry and overhaul the way Wall Street conducts business. The legislation, the most sweeping since the Great Depression, requires issuers of mortgage-backed securities to pool the safest "qualified" mortgages (as determined by regulators) to escape a 5% risk retention requirement. The bill, crafted by Sen. Chris Dodd, D-Conn., creates a new consumer protection agency with rulemaking and enforcement authority to stop abusive mortgage lending practices. However, the legislation, for now, punts on the issue of reforming Fannie Mae and Freddie Mac. "For the first time ever, we will have a Consumer Financial Protection Bureau to watch out for the average citizen in our country when they are abused by the financial marketplace that takes advantage of them on home mortgages and credit cards," Dodd said. The legislation directs federal regulators to establish minimum standards for verifying a borrower's ability to repay a loan and places certain restrictions on loan officer and mortgage broker compensation. The bill (S. 3217) also instructs the Securities and Exchange Commission to create a regulatory body that selects the credit rating agency for initial ratings on MBS. The Senate passed the Dodd bill by a 59-39 vote around 8:30 Thursday evening. The House of Representatives passed similar reform legislation in December but many differences remain between the two bills. House and Senate banking committee leaders will meet in conference to iron out final legislation. The talks are expected to take several weeks and will not be completed until the end of June.