The Bush administration has put forward a sweeping plan for reorganizing the regulation of the financial system that would include national licensing standards for mortgage brokers and the elimination of federally chartered thrifts.

Many of the major aspects of the plan unveiled today by Treasury Secretary Henry Paulson would require congressional approval, and are not likely to be achieved during President Bush’s final year in office, Paulson acknowledged.

The plan addresses "complex, long-term issues," Paulson said, that "require thoughtful discussion and will not be resolved this month or even this year."

In a statement, Rep. Barney Frank, D-Mass., called the plan a "contribution to a profound national discussion that cannot be concluded in the months before the election." But Frank said Paulson had performed an "important service" by "rejecting the argument for the status quo."

The current regulatory system is so complex it can invite "regulatory arbitrage," Paulson said, with companies choosing their business models based on regulatory structure or the regulator itself.

The plan envisions just three federal regulators: the Federal Reserve, which would be granted expanded powers to serve as a "market stability" regulator; a single "prudential financial regulator" of banks instead of the five agencies in place today; and a "conduct of business regulator" similar to the Securities and Exchange Commission to oversee financial firms.

The Federal Reserve’s limited role of bank holding-company supervision would be expanded to make the Fed "the market stability regulator," Paulson said, evaluating capital, liquidity and margin practices across the financial system with the "authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability."

The Fed would collect information from commercial banks, investment banks, insurance companies, hedge funds and commodity pool operators, with a focus on whether a firm’s or industry’s practices threaten overall financial stability, rather than the financial health of individual companies.

All five federal bank regulators would be replaced by a single regulator — the "prudential financial regulator" — similar to the Office of the Comptroller of the Currency, which would be tasked with ensuring the safety and soundness of federally chartered banks.

The most controversial aspect of that plan may be a proposal to eliminate the federal thrift charter and close the Office of Thrift Supervision. Federally chartered thrifts are "no longer necessary to ensure sufficient residential mortgage loans" for U.S. consumers, Paulson said — a claim disputed by the American Bankers Association.

"We are no more ready to abandon the thrift charter than we are to abandon the American family dream of living in a house that you own," said ABA President Edward Yingling in a statement. With more people looking for traditional mortgages — "the bread and butter" of the thrift industry, Yingling said, "we must not deemphasize home ownership."

Established by Congress in 1933, the federal thrift charter was originally created to create a conduit for money deposited in savings accounts to be loaned to home buyers. But according to the Treasury Department’s 212-page "Blueprint" for modernizing financial regulation, the thrift industry’s share of the residential mortgage market declined from 50 percent in 1980 to 10 percent in 2005.

Thrifts have lost market share to commercial banks and government-chartered mortgage financers Fannie Mae and Freddie Mac, as well as private-label issuers of mortgage-backed securities, the report said. Commercial banks surpassed thrifts in total dollar volume of residential mortgage assets in 1993, and held more than twice the volume of home loans at the end of 2006 ($2.1 trillion, compared with $870 billion for thrifts).

Paulson said the blueprint’s authors "recognize that these ideas will generate some controversy and healthy debate," and that revocation of the federal thrift charter is a long-term goal.

One of the blueprint’s short-term recommendations — national licensing standards for mortgage originators — is similar to proposals put forward by congressional lawmakers and was welcomed by the ABA and other industry groups, including the National Association of Mortgage Brokers.

"Although we are still analyzing the plan, the … recommendation in this area appears to compliment efforts by the House and the Senate to create a federal clearinghouse or registry for all loan originators," said NAMB President George Hanzimanolis in a statement.

NAMB supports the licensing guidelines proposed in HR 3915, passed by the House of Representatives last fall (see Inman News story).

HR 3915 would require all mortgage originators to be licensed at either the state or federal level, but does would not create uniform national lending standards advocated by industry groups like the Mortgage Bankers Association.

"One of the most significant problems for the mortgage industry and its customers is the explosive growth of inconsistent state regulations," MBA Chairman Kieran Quinn said in a statement.

Paulson said the regulators who put together the Treasury Department’s report considered federal preemption of state enforcement. But, acknowledging the potential for controversy, Paulson said the group "concluded in this case it was best to focus on the immediately achievable."

The blueprint recommends allowing states to continue enforcing their own separate regulations of mortgage origination practices, while creating a new federal-level commission, the Mortgage Origination Commission.

The commission would evaluate, rate, and report on the adequacy of each state’s system for licensing and regulating mortgage originators, and develop uniform standards for state licensing. The report recommended that the Federal Reserve continue to write regulations implementing national mortgage lending laws such as the Truth in Lending Act.

The National Community Reinvestment Coalition said the commission would provide "little immediate assistance to victims of predatory lending and the millions of homeowners currently facing or already in foreclosure."

The NCRC said that while the Federal Reserve’s proposes strengthening Home Ownership and Equity Protection Act (HOEPA) rules (see story), national predatory lending legislation is needed to eliminate abusive lending practices.

"As long as short-term bank profitability is the sole or principal measure of safety and soundness, crises like the one we face today could again occur," NCRC President John Taylor said in testimony before Frank’s Financial Services Committee last month.

Paulson warned that whatever plans are eventually approved by Congress "should not be decided in the midst of stressful situations" or "add greater burden to a market already under strain."


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