Senate Adds Mortgage Underwriting Standards to Dodd Bill, Keeps Risk Retention

The US Senate added several amendments today to S 3217, the Restoring American Financial Stability Act sponsored by Sen. Chris Dodd (D-CT), that will require minimum mortgage underwriting standards and uphold the Federal Reserve‘s supervision of certain small banks. Senators passed by a 63-36 vote an amendment sponsored by Sen. Jeff Merkley (D-OR) that requires lenders to maintain certain underwriting standards and verify mortgage borrowers’ ability to repay based on income and assets other than the home’s value. It also bans mortgage lenders and originators from accepting payments based on the interest rate or other terms of the loans, according to a statement from Merkley’s office. Senators agreed 90-9 on an amendment co-sponsored by Sens Kay Bailey Hutchison (R-TX) and Amy Klobuchar (D-MN) that maintains the Fed’s role as the supervisor of bank holding companies and State member banks. The amendment ensures the ability of state-chartered banks and bank holding companies with less than $50bn in to choose Federal Reserve supervision, according to a statement from Hutchison’s office. Senators also agreed, by voice vote, an amendment by Sen. Olympia Snowe (R-ME) to exempt small businesses from the Consumer Financial Protection Agency (CFPA) set up in the Dodd bill. Under the Snowe amendment, firms that fall under the Small Business Administration (SBA) classification system — as well as new firms that “reasonably” expect to fall under the SBA classification — would be exempt from CFPA oversight so long as the small business extends credit for the sale of non-financial goods and does not securitize its debt. Senators rejected an amendment by Sen. Bob Corker (R-TN) that would have required a 5% minimum down payment by borrowers and additional credit enhancement for mortgages taken out at more than 80% loan-to-value, in lieu of credit risk retention. Still pending votes are the Dodd-Lincoln amendment — which would bring the over-the-counter (OTC) derivatives market under greater transparency — and the Sen. Mary Landrieu (D-LA) amendment on credit risk retention exemption. The Landrieu amendment would exempt mortgages with certain underwriting standards — including high down payments and credit scores — from falling under risk retention requirements. “What Senator Landrieu is saying is we’re not going back when we make zero-down, interest-only, reverse amortization loans anymore, but we are going to make the good old days loan, where there is a down payment, where there’s skin in the game, where there’s an income-to-debt ratio and where the borrower is qualified to borrow the money that they’re borrowing,” said Sen. Johnny Isakson (R-GA), on the Senate floor today. Isakson added: “The only risk retention that will be required is when somebody is making a bad loan which means people will stop making bad loans which means this bill and this amendment will address the measure that led to the failure in the housing market.” Senators on Tuesday shot down an amendment by Sen. John McCain (R-AZ) that would have set up a period of time for the government-sponsored entities (GSEs) Fannie Mae (FNM) and Freddie Mac (FRE) to exit conservatorship and wind down their businesses. Instead, the Senate adopted through a 63-36 vote an amendment by Dodd that requires the Treasury Department to conduct a study on ending the conservatorship of Fannie and Freddie, and reforming the housing finance system. Write to Diana Golobay.