Politics & Government

Treasury backs new federal rules for home loans

WASHINGTON — Treasury Secretary Henry Paulson on Monday unveiled the most sweeping proposal to revamp the nation's financial regulatory system since the Great Depression. How much of it is enacted, however, will depend greatly on the political will of the next administration and the next Congress.

"These long-term ideas require thoughtful discussion and will not be resolved this month or even this year," Paulson acknowledged in a speech detailing his Blueprint for Regulatory Reform.

The proposals would broadly expand the powers of the Federal Reserve, merge the regulation of stock and commodities markets, fold savings and loan institutions under the umbrella of bank regulation and even allow insurance companies to opt out of state regulation in favor of a newly created federal insurance regulator.

For consumers, Paulson's plan would create a new super-regulator whose powers would cut across various financial services with overarching responsibility for protecting investors and consumers.

The plan also would create a new federal entity to oversee the mortgage origination process so that lending standards never again would erode to the point where they sink the national housing market. That proposal has bipartisan support and could win early approval.

However, very little in the plan can be set in motion by executive order or under existing regulatory authority, so it'll be up to the next president and Congress to determine how to proceed.

Leading Democrats who now control Congress didn't rush to embrace the Paulson plan.

"I would call this the wild pitch. It's not even close to the strike zone," said Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, which would oversee many of the proposals.

Senate Majority Leader Harry Reid, D-Nev., said he was surprised by the new report, even though it's been known in financial circles for some time that the Bush administration was preparing a blueprint for modernizing the regulation of financial markets.

"They've been working on this a year? Why haven't they told us?" asked Reid, who with Dodd fielded questions on a conference call.

Some lawmakers questioned the timing of the proposed overhaul, coming out the day that Congress returned from Easter recess to tackle plans to provide loan guarantees for distressed mortgages once they're modified by lenders.

Paulson has favored a voluntary approach by lenders to rework troubled home loans, but Dodd and other Democrats think that lenders aren't moving fast enough.

On the campaign trail Monday, the two Democratic presidential candidates said Paulson's effort failed to address current problems, while presumptive Republican nominee John McCain welcomed it as a starting point for a national discussion.

The Paulson plan offers three time frames for regulatory changes: short-term proposals that could be enacted before the next president takes office in January, intermediate-term plans that could take two to eight years for congressional approval and long-range goals that serve mainly as discussion points.

The biggest change would be authorizing the Federal Reserve to become a super-cop, with supervisory powers over any aspect of financial markets that presents danger to the financial system.

A Fed spokesman, speaking on the condition of anonymity, called Paulson's plan "an important first step in the complex task of modernizing our financial and regulatory architecture. We look forward to working with the Congress and others to help develop a policy framework that will enhance financial and economic stability."

It isn't clear how much Fed staff would have to increase for the agency to be effective at its expanded responsibilities.

"If you only address issues at a higher level of engagement, you may not have the institutional strength that comes from getting into the details," said Vince Reinhart, who was a Fed division director from 2001 to 2007. "The Fed is `special forces' that get helicoptered in when things get really serious. . . . The mission is very big because any entity could potentially have `consequences for financial stability.' "

The most immediate thing that Paulson thinks can and should be done this year is creating a Mortgage Origination Commission to provide much-needed federal oversight for the home loan origination process.

"Simply put, that process is broken," Paulson said.

This new commission, which appears to have support from top Democrats, would be composed of a representative from each federal agency with some jurisdiction over banking, and a representative from the association of state banking supervisors. Federal entities with some degree of oversight on mortgage lending include the Federal Reserve, Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration.

The president would appoint a director of this Mortgage Origination Commission. It would design professional standards for licensing mortgage brokers and others who originate home loans. The group would establish educational requirements and provide a registry for complaints and/or disciplinary action against individual mortgage brokers.

"This proposal addresses how the registry requirement would be enforced, and establishes an office to oversee individual and state compliance with its rules. We support this aspect of the recommendations," said George Hanzimanolis, the president of the National Association of Mortgage Brokers.

Mortgage brokers originated about two-thirds of adjustable-rate sub-prime mortgages, those issued to borrowers with weak credit. They were spottily regulated on the state level and not at all on the federal; most toxic loans that brokers originated were issued by nonbank lenders who also were regulated only on the state level.

The Paulson plan wouldn't place nonbank lenders under federal regulation, but its tougher rules hypothetically would rein in bad behavior by them.

Another area of interest to consumers in the plan is its call to allow national insurance companies to opt out of state regulation if they're willing to be regulated by a federal insurance regulator, which doesn't now exist. The Treasury argues that 50 separate state regulatory schemes put insurers at a disadvantage in a global economy.

A top Treasury official, briefing on the condition of anonymity, said that insurers could count on regulation that was as robust as any that currently exists on the state level, if not more so.

However, Sen. Dodd of Connecticut, where many top insurers are based, suggested that there may be a more middle-ground approach. He thought that federal regulation of life insurance could be a good idea.

"That's a matter we are already talking about here" in the Senate, he said.

But, Dodd added, states probably would do a better job regulating the property and casualty insurers, who underwrite policies for protection against losses from hurricanes, earthquakes, tornadoes and other disasters.

States such as California, Florida, Mississippi and others prone to natural disasters doubt that the federal government can do a better job.

"I don't know how you would print my comment and get away with it," Mike Chaney, Mississippi's insurance commissioner, said in an interview. "The feds can't even run the postal system. I don't know how they would run an insurance industry. They can't even run a flood (insurance) program."

The insurance industry applauded Paulson's call for an Office of National Insurance.

"Insurance and reinsurance is clearly a global business, and it is indisputable that U.S. companies are disadvantaged by 50 state regulatory regimes," Franklin Nutter, the president of the Reinsurance Association of America, said in a statement.

The American Bankers Association criticized what it viewed as weakening state-chartered banking.

"We are disappointed that in several important respects the proposed blueprint comes up short. In particularly, dismantling the thrift charter and crippling state banking charters will weaken banking in America," the group's president, Edward Yingling, said in a statement.


Paulson's speech.

Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure.

Administration fact sheet on the blueprint.

Mixed results for Paulson's homeowner rescue plan.

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