WASHINGTON — Among the recommendations made by the Treasury Department's Blueprint to overhaul financial services regulation, the key change with regard to mortgage products and services would be the creation of a new Mortgage Origination Commission.
This commission would evaluate, rate and report on the "adequacy of each state's system for licensing and regulating participants in the mortgage origination process." Federal legislation must be passed to provide authority for this commission to develop "uniform licensing qualification standards for state mortgage market participant licensing systems," said the Treasury. While the Federal Reserve would continue to write regulations implementing national mortgage lending laws, Treasury would clarify and enhance the enforcement authority over those laws, according to the Blueprint.
Because market participants without any federal oversight, both brokers and some lenders, were responsible for a "substantial portion of the mortgages and more than half the subprime mortgages originated" nationwide, they are subject to "uneven degrees of state level oversight," said Treasury. In some cases, it noted, there was limited or no oversight at all.
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The high levels of defaults and foreclosures in the subprime sector in 2007-2008 highlighted such gaps in oversight. The Blueprint noted that some of these under-regulated brokers and lenders have been cited as the source of abusive subprime loans that are having "adverse and profound consequences for consumers, the mortgage markets and the financial system as a whole."
But the problem didn't reside solely at the state level. Federally insured depository institutions and their affiliates also originated, purchased and distributed "some problematic subprime loans." The Blueprint also refers to a debate over whether the Office of Thrift Supervision, the Fed, the Federal Trade Commission, state regulators or some combination of all four oversees the affiliates of federally insured depository institutions.
Because federal preemption has in effect nullified many state legislatures' attempts to regulate the affiliates of national banks with regard to predatory lending, the Blueprint supports the "enhancement of mortgage lending standards at the federal level and the clarification and strengthening of federal supervisory authorities." The Blueprint does not settle the matter, however, of the various agencies' turf. There are two basic categories: affiliates of depository institutions (banks) within a federal holding company and independent participants. The Blueprint recommends extending the benefits of federal supervision to those affiliates.
State supervisory agencies, along with the appropriate holding company regulator, should examine the holding company affiliates' mortgage origination activities on a regular exam cycle, according to the Blueprint. The Fed is the bank holding company regulator, and the OTS regulates thrift holding companies. For independent participants and mortgage brokers, the states should have clear authority to enforce federal lending standards, said Treasury's Blueprint.
The director of the proposed mortgage oversight commission, who would be independent of the mortgage sector regulators, would be appointed by the president for a four-to-six year term. Its seven member board would be composed of the principals (or their designees) of the Fed, OTS, OCC, FDIC, NCUA and the Conference of State Bank Supervisors. In addition, to developing federal mortgage licensing standards, it would evaluate and periodically audit the adequacy of state systems for supervision and enforcement of those standards. The commission would grade those exams and make them public, offering a strong incentive for states to address weaknesses. The Fed would retain authority to write regulations of the Truth in Lending Act.
Expanding the PWG
The President's Working Group on Financial Markets was formed by President Ronald Reagan's executive order issued in 1988, following the 1987 stock market crash, with a charge to enhance market security and maintain investor confidence. The Working Group consists of the heads of the Treasury, the Securities and Exchange Commission, the Fed and the Commodity Futures Trading Commission.
Since its inception it has morphed into a means of communication among federal agencies, has issued reports, and now may be further modified so that it would suggest policy changes and oversee not just financial markets but the entire financial sector.
To accomplish this broader charge, the Blueprint wants Working Group membership to be expanded to also include the OTS, the FDIC, and the OCC. NCUA is not included but would be consulted, as appropriate, along with other entities such as the Office of Federal Housing Enterprise Oversight, the Federal Housing Finance Board, the Farm Credit Administration and international regulatory bodies.
The Blueprint stated that the revised Working Group would not "alter, limit or in any way change any of the PWG's members or participating agencies' existing statutory roles and responsibilities." That statement appears to be in conflict with the Blueprint's long-term idea of merging the OTS into the OCC while granting greater power to the Fed.
Fed Liquidity
When the Fed opened its discount window to investment banks last month and also bailed out Bear Stearns with a $30 billion loan, it was the first time the Fed had taken such emergency action since the Great Depression.
The Blueprint foresees the possibility of such an emergency bailout happening again to bring overall stability to the markets. The move should be "calibrated and transparent," appropriate conditions should be attached to the loan and information flows must be adequate, said the Blueprint, adding that further expansion of discount window lending should be considered by the President's Working Group.
The opening was an appropriate response, but further use should be contingent upon approval by a sufficient number of members of the Federal Reserve Board and conditional on the existence of "unusual and contingent circumstances." It should never be "relied upon as a general source of liquidity," according to the Blueprint.
Because of its lack of a direct supervisory role over investment banks and concerns over the Fed's balance sheet (it has so far approved $260 billion in short-term loans), the Fed may have "less confidence regarding the financial condition of nondepository institutions." The safety net has been broadened already, so the Blueprint recommends that the Fed have access to exam information and accompany the SEC and the CFTC on such exams.
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