Regulatory Reform Reactions: 'Ambitious'Observers Weigh in on Potential Impact of Obama Plan Industry professionals familiar with President Obama's proposed set of regulatory changes say the current structure won't evolve without a vigorous debate, and may be too broad to succeed.
Joseph Lynyak, a lawyer at Venable LLP, who has a regulatory practice defending banks against the federal banking agencies, sees even the wording of the 89-page "Financial Regulatory Reform: A New Foundation" shows that "Already there are going to be some compromises in Congress when it is debated."
"It is too early to say if the Treasury plan goes too far, but the plan is ambitious and wide ranging," says Jeremiah Buckley, co-chair and attorney at BuckleySandler, a financial services law firm and former staff director of the US Senate Banking Committee. "I think that it would be wise for Congress to take it up in manageable pieces, starting with those measures that are most likely to restore confidence in the secondary mortgage market, which needs to get restarted as soon as possible for the good of our economy because there is a limit to the government's ability to be the principal source of mortgage credit for America's home buyers."
There is a real danger that this legislation could create uncertainty for secondary market investors, Buckley says, particularly around the consumer protection obligations of lenders and mortgage investors. If these concerns do emerge in the market, Congress needs to offer assurances that this legislation will not substantially increase the legal risks of mortgage investing. If it does, "mortgage credit will be less available and more expensive...exactly the opposite of the result we should be looking for in financial reform," Buckley says.
Lynyak's insight on the top items for change: "I think the merger of OTS and OCC has the highest chance of getting through. The problems that OTS had with the failure of IndyMac and WaMu, while they are clearly advocates of the thrift charter, I think their political strength/clout is diminished."
Still, there will be strong advocates for keeping the OTS, Buckley predicts, including state-chartered industrial loan companies (ILCs).
The real fight, says Lynyak, will be over the maintenance of federal preemption, and giving states more authority, with the creation of the consumer watchdog agency, the Consumer Financial Protection Agency.
Buckley sees it will take a long time to set up a functioning CFPA and to integrate all the regulatory functions. "I think that, if Congress goes this way, it should avoid creating some vague liability standard for lenders or investors...that is, until there are clear rules, the new agency should not start making law by enforcement actions, as sometimes happens."
Also, Congress should charge this agency with testing what disclosures work to make sure that consumers are ultimately empowered to make their own decisions. "Care must be taken to avoid going overboard in consumer protection, placing responsibility for every mortgage failure on the lender by arguing that the lender has a fiduciary duty to be sure the outcome is right for the borrower," Buckley says. "We have seen evidence of that in some legislative proposals already."
As for the Financial Services Oversight Council, Buckley sees it as a good start, adding the members should include the principle federal bank and secondary market regulators and the head of the newly proposed CFPA. "I would suggest that at least one state bank regulator be added to the Council, maybe someone nominated by the Council of State Bank Supervisors," Buckley says.
The push for international regulatory standards and reducing global systemic risk is also something that the world economy needs, notes Buckley. "The Basel accords demonstrate that coordinating international standards is a long and hard road. Getting domestic regulation right is hard enough, but certainly it is important to keep focusing on cross boarder cooperation and information sharing by financial regulators."