Congress Reaches Consensus on Financial Reform Legislation

House and Senate leaders have reached an agreement on a reconciled version of their respective chambers’ financial reform bills â€" a historic piece of legislation, which was prompted by a national mortgage crisis that pushed the country’s entire financial system to the brink of collapse nearly two years ago.
[IMAGE] The congressional negotiators obtained a consensus on the bill in the early daybreak hours of Friday morning, following a 20-hour marathon session that ran through the night.

The 2,000-plus page legislation will now go to the full House and Senate for endorsement. Lawmakers have pledged to have the final, approved bill on President Obama’s desk by the July 4th holiday.

Treasury Secretary Timothy Geithner says the bill that has emerged is “strong,” and he noted in a statement emailed to the press that conference members’ swift action to reach a compromise before the president travels to Toronto for the G-20 Summit meeting with other world leaders this weekend “has shown that America is ready to lead by example.”

“It [the bill] represents the most sweeping set of financial reforms since those that followed the Great Depression,” Geithner said. “It establishes the greatest consumer financial protections in American history. It prevents financial firms from taking risks that will threaten the economy. And it provides the government with significant new tools to better protect taxpayers from the damage of future financial crises.”

The landmark legislation establishes a new Consumer Financial Protection Bureau, housed within the Federal Reserve, with the authority to regulate mortgages and other consumer-facing products such as credit cards.

Lenders and mortgage financiers who sell mortgages to investors in the secondary market, including Fannie Mae and Freddie Mac, will be required to retain up to 5 percent of the credit risk, unless the loans pass a “qualified mortgage” test.

The Securities and Exchange Commission (SEC) and the Federal Housing Finance Agency (FHFA) are tasked with drafting the underwriting rules that define a “qualified

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mortgage."" In addition to being fully documented, such home loans must meet one simple, straightforward criterion: the lender must ensure the borrower can pay it back.

Qualified mortgages are also limited to 3 percent points and fees and a 2 percent threshold for discount points. Loans with negative amortization, prepayment penalties, or balloon payments are ineligible for the “qualified mortgage” stamp.

Securitizations of mortgages guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA), however, are exempt from the risk retention requirement.

The $600 trillion obscure derivatives market was the focus of much heated debate between conference committee members. Under the approved legislation, banks are required to set up trading of certain derivatives considered to be the riskiest through a separate affiliate entity. However, others such as interest-rate swaps and some credit derivatives can be kept in-house.

Lawmakers also approved the so-called ""Volcker rule,"" named for former Federal Reserve chairman Paul Volcker. It prohibits banks from trading on high-risk deals with their own money, although some investments in areas such as hedge funds and private-equity funds are still permitted.

To cover the cost of some of the new regulatory initiatives, the bill calls for the government to impose a levy on large banks and hedge funds â€" a controversial tax that will yield $19 billion over a five-year period.

The legislation may not represent a complete shake-up of Wall Street, but it sets up a broad framework for more stringent supervision of lenders and the financial sector as a whole, and is much in line with the original intents of the administration.

President Obama told reporters on Friday before boarding Air Force One for Toronto that the compromise bill incorporates ""90 percent of what I proposed when I took up this fight.""

The legislation is expected to pass when put before the full Congress next week, but even the conference committee’s vote showed clear lines of dissension along party lines. Members of the House participating in the reconciliation effort voted 20 to 11 to approve the bill, while the Senate side’s tally was 7 to 5. All opposing votes were from Republicans.

One member of the conference committee, Senator Judd Gregg (R-New Hampshire), said the trait he finds most telling about “this supposedly comprehensive measure” is its failure to address the root causes of the 2008 crisis â€" “shoddy underwriting practices” and a blatant lack of direction regarding Fannie Mae and Freddie Mac.