Financial Reform Watch

Published — July 11, 2011 Updated — May 19, 2014 at 12:19 pm ET

Dodd-Frank author is proudest of “skin in the game” requirement for mortgage securitizers

Rep. Barney Frank, D-Mass. Jose Luis Magana/AP file

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A co-author of the Dodd-Frank reform law, Democratic Rep. Barney Frank, defended what he said was the “single most important part of this bill”— requiring mortgage securitizers to retain 5 percent of the risk they create when packaging mortgage for sale.

That provision is under fire from both Wall Street as well as consumer groups because regulators have proposed allowing an exemption from that 5 percent requirement only for mortgages in which borrowers made down payments of at least 20 percent. The Massachusetts Democrat held a news conference today to discuss the law, which will mark its first anniversary on July 21.

Frank acknowledged that the 20 percent down payment may be too high and could be replaced with a lower amount, provided that a borrower must meet other requirements. He dismissed objections from U.S. housing industry officials who say the risk retention requirement — also known among Wall Street banks as “keeping some skin in the game” — is hurting the housing market. “It’s disruptive because we had to disrupt a rotten system,” the lawmaker said.

While House Republican efforts to repeal the Dodd-Frank law have so far proved fruitless, Frank criticized the GOP for trying to undermine his namesake by gutting funding for regulators to carry out tougher rules.“The notion that the … $80 or $90 million can’t be done for the CFTC because of the [federal] deficit … is nonsense,” Frank said, referring to the Commodity Futures Trading Commission’s unsuccessful request for a bigger budget to carry out its new derivatives regulation responsibilities.

Billions at stake for banks – U.S. banks stand to lose billions if the Dodd-Frank reform law is fully implemented and so, in response, are spending equally high amounts lobbying to whittle down the scope of regulations.

The Financial Services Roundtable, for instance, looks to spend $10 million on lobbying in 2011, well above the $7.5 million it spent in 2010, Newsweek reports. The influential American Bankers Associated is expected to top the $7.5 million spent last year, and mega-banks JP Morgan Chase & Co., Wells Fargo & Co., and Citigroup Inc. are also on track to match last year’s lobbying spending.

Banks and other financial institutions have also given huge campaign sums to lawmakers overseeing their industry, making a seat on the Financial Services Committee “downright lucrative,” the news magazine said.

Booming business for lawyers – Washington law firms that specialize in financial services are seeing increased business and signing new clients who need help navigating the new regulatory landscape under Dodd-Frank, the Washington Post reports.

Banks, hedge funds, investment advisers and trade associations have flocked to law firms for expertise and advice on how to shape regulations as they are being formed to carry out the law.

“It’s going to have a long shelf life and will result in existing clients having questions, and new clients that may not have historically been regulated by these agencies coming into the regulatory framework,” said Richard Alexander, a partner at Arnold & Porter.

Weak Q2 Wall St. results – Wall Street banks will likely post weak second-quarter results this week in response to stagnant loan growth and increased regulation, the New York Times reports. Analysts predict Bank of America Corp., Goldman Sachs Group, Inc., JP Morgan Chase & Co., Morgan Stanley, and Citigroup Inc. will, on average, report a 25 percent fall in core trading revenue compared to the first quarter.

The loss comes amid the European debt crisis, the political standoff over the American debt ceiling, and anemic job growth, causing investors to make safer but less lucrative trades.

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