Senate banking committee passes massive regulatory relief bill

Big implications in legislation for housing and mortgage finance

The Senate Committee on Banking, Housing and Urban Affairs passed “The Financial Regulatory Improvement Act of 2015" on Thursday.

This is a big deal for housing and mortgage finance. Among the most significant proposals in the 216-page draft bill is a requirement raising the SIFI bank threshold from $50 billion to $500 billion, altering the $10 billion threshold, and targeting specific GSE changes. This would, in effect, free smaller lenders from the heavy capital requirements and strict oversight currently enforced against the big banks. It also includes a provision increasing the $50 billion SIFI threshold to $500 billion, while maintaining some degree of FSOC review.

Other proposals in the bill take aim at mortgage finance firms Fannie Mae and Freddie Mac, "systemically important" designations to nonbanks and insurance industry supervision.

Additionally, the bill would require the Federal Housing Finance Agency to withdraw its proposed rule revising Federal Home Loan Bank membership requirements while GAO studies the issue, and grant credit unions parity with community banks in the definition of community financial institutions under the Federal Home Loan Bank Act.

The trades are happy with where things are going.

"I applaud Chairman (U.S. Sen. Richard) Shelby (R-Ala.) and members of the Senate Banking Committee for moving this bill forward, one that goes a long way toward removing many of the barriers and regulatory burdens MBA has identified as impacting the ability of qualified consumers to obtain a mortgage,” said David Stevens, president and CEO of the Mortgage Bankers Association.

“MBA strongly supports many provisions in this legislation. We are encouraged by the stated willingness of senators on both sides of the aisle today that they wish to continue trying to reach consensus on this measure now that it has cleared the Committee. MBA looks forward to working with policymakers and other engaged stakeholders to achieve a bipartisan agreement prior to its floor consideration,” Stevens said.

National Association of Federal Credit Unions President and CEO Dan Berger was likewise laudatory.

“We applaud committee members for moving the bill forward, and we welcome more progress being made on behalf of credit union regulatory relief,” Berger. “This is a positive development and a solid step forward in overcoming the regulatory overburden the credit union industry now faces. However, more needs to be done – and we are working on the development of a bipartisan approach to get the job done.” 

The U.S. Consumer Coalition praised in particular the amendment by Sen. Pat Toomey, R-Penn., that would scale back the Consumer Financial Protection Bureau’s power to probe smaller banks and credit unions, providing much needed regulatory relief to these institutions.

 "The passage of Sen. Toomey’s amendment is a step forward in advancing key reforms at the CFPB, the most unaccountable agency in the federal government and biggest threat to the American consumer. By exempting smaller institutions and credit unions from CFPB’s overzealous regulatory oversight, consumers can enjoy more choice and access,” said USCC senior advisor Brian Wise. 

The bill would revise mortgage rules authorized under the Dodd-Frank Wall Street Reform Act to improve borrowers’ access to credit. The bill would allow for most loans that lenders hold in portfolio to be classified as qualified mortgages for the purpose of determining their compliance with the CFPB's Ability-to-Repay rule. This automatic classification would not apply to negative amortization or interest-only loans, or loans that do not comply with Dodd-Frank’s limits on prepayment penalties.

The draft would also increase the amount of loans that are eligible to be considered QM by excluding from the points and fees calculation any escrow payments the lender charges the borrower for future insurance payments. Under the Ability-to-Repay rule, no mortgage can be considered a QM if the points and fees charged on the loan exceeds 3% of the loan’s principal amount. Many lenders have argued that it is unfair for escrow payments to count toward the cap on a loan’s points and fees, since such payments are collected for the borrower’s benefit. 

Of peak interest to many lenders as the Aug. 1 deadline approaches, the draft legislation modifies Dodd’s Frank’s integrated mortgage disclosure requirements by waiving the requirement that lenders must provide borrowers three days to review amended loan disclosures if the only change made were a reduction in the borrowers’ interest rate.

Shelby’s draft also includes a number of provisions intended to set up the housing finance system for eventual reform. 

Fannie Mae and Freddie Mac would be prohibited from using any revenue they may generate from increasing their guarantee fees for any purpose besides supporting their business functions or carrying out any housing finance reform legislation that Congress may pass in the future. This would appear to prevent both Fannie Mae and Freddie Mac from contributing any revenue they generate from increased guarantee fees to the Housing Trust Fund.

Fannie Mae and Freddie Mac would also be expected to increase the amount of risk sharing they enter into with private investors by 50% each year. 

The bill would also prevent the U.S. Treasury from selling the preferred stock it currently owns in Fannie Mae and Freddie Mac until ordered to do by Congress, asserting that it is Congress’ role to reform the housing finance system. 

3d rendering of a row of luxury townhouses along a street

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