Politics & MoneyMortgage

Senate Bank Chair weighs sweeping GSE, mortgage lending overhaul

Reform package could free smaller lenders, boost common securitization

The chairman of the Senate Banking Committee is drafting sweeping regulatory relief legislation that could be the biggest overhaul to the Dodd-Frank Wall Street Reform Act since it was passed, and may include provisions raising the SIFI bank threshold from $50 billion to $500 billion, altering the $10 billion threshold, and targeting specific GSE changes.

Sen. Richard Shelby’s, R-Ala., bill would free smaller lenders from the heavy capital requirements and strict oversight currently enforced against the big banks.

The bill includes a provision that would increase the Dodd-Frank Act’s $10 billion lender-size threshold to $50 billion. The dollar size on the threshold is based on assets held by the financial institution. 

A client note from Compass Point Research & Trading says the shift in the $10 billion threshold would ease compliance burdens, such as supervision from the Consumer Financial Protection Bureau and the Durbin Amendment and likely result in increased M&A.

“While Sen. Shelby’s package may include a provision altering the $10 billion threshold, our view remains that Congress is unlikely to alter the Dodd-Frank Act’s $10B threshold as it is interwoven into the law’s fabric and Democrats appear committed to protecting CFPB supervision authority,” Compass Point said in the note.

The Senate regulatory relief package may also include a number of GSE proposals, analysts say.

“Given the inherently complicated nature of GSE reform, our sense is that if Senator Shelby’s package does include GSE measures it will likely focus on peripheral issues such as CEO compensation at the GSEs, efforts to expand the Common Securitization Platform’s reach, and Sen. Corker’s ‘Jumpstart GSE Reform’ amendment,” Compass Point says.

Of these proposals, analysts say, the “Jumpstart GSE Reform” amendment is the most notable as it would explicitly prohibit the U.S. Treasury Department from selling, transferring, relinquishing, divesting, or in any way disposing of its senior preferred stock holdings in the GSEs.

Passage of the Corker amendment would be viewed as a negative event for current GSE shareholders as it would foreclose on an administrative path for action and leave the issue squarely in the hands of Congress where it would surely languish until 2017 at the earliest.

Last month in a Senate committee hearing on mortgage lending, Shelby expressed his criticism of how Dodd-Frank has impacted mortgage lending.

“Five years after a sweeping new regulatory framework altered the mortgage market in unprecedented ways, it is time to re-examine its effectiveness and consequences. Dodd-Frank’s stated intent is to protect consumers, but some of the regulations promulgated in response to the law have gone so far that they may actually prevent qualified consumers from owning a home,” Shelby said. “And, borrowers who are able to qualify for mortgages today may face an increased cost of credit due to these rules.

“While record-low mortgage rates in recent years may have balanced out an increased cost of mortgage credit due to new regulatory requirements, this trend will not continue indefinitely.  When interest rates rise, I believe that the impact of these new rules and regulations on homeownership will be clear,” Shelby said.

Compass Point also says that Shelby’s package will possibly include a provision increasing the $50 billion SIFI threshold to $500 billion while maintaining some degree of FSOC review.

“While we await the details, our initial read of this news is mixed. On the one hand, we believe that the use of a hybrid quantitative/qualitative approach for the SIFI bank threshold is the best mechanism for securing bipartisan support. On the other hand, we continue to believe that setting the quantitative threshold at $500 billion is politically unpalatable and instead view $250 billion as more realistic,” they say.

The Senate Banking Committee is scheduled to mark-up the regulatory relief bill on May 14.

Compass Point suggests three possible outcomes.

  • Aggressive Mark-Up. Sen. Shelby could hold a mark-up on May 14 with a more aggressive package that raises the SIFI threshold to $500B and the $10B threshold to $50B. In our view, holding a mark-up on the aggressive package would likely result in committee passage without the support of moderate Democrats which would make floor passage far more difficult. At that point, Sen. Shelby would likely rely on the appropriations process as an avenue of passage for selected elements of the broader regulatory relief package.
  • Moderate Mark-Up. Sen. Shelby could hold a mark-up on May 14 with a softened version of the reported bill that would set the SIFI bank threshold at $250 billion and drop the $10 billion threshold change. In our view, holding a mark-up on a softened regulatory relief package would be a positive for the broader effort as doing so would likely gain the support of a number of moderate Democrats and thereby keep hope alive for floor passage.
  • Mark-Up Delay. Sen. Shelby could delay the mark-up in order to negotiate with Democrats in the hopes of crafting a more bipartisan package. While a mark-up delay would likely be framed as a positive development given the prospects for more negotiations, we would view it as a negative given the remaining concerns and calendar constraints.

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