Treasury Releases Blueprint for New Regulatory Schema

MBA (4/1/2008 ) Sorohan, Mike; Kemp, Carolyn
The Treasury Department yesterday released its Blueprint for an Improved Financial Regulatory Structure, which Secretary Henry Paulson Jr., said would strengthen consumer protections, improve tools for market stability and enhance financial innovation.
The Mortgage Bankers Association offered support for the plan, saying it would stimulate policy discussion at a critical point for the credit markets.

The Blueprint presents a series of short-, intermediate- and long-term recommendations for reform of the U.S. regulatory structure. Paulson said the structure would improve the competitiveness of the U.S. capital markets in the increasingly global marketplace.

“We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions and one that will better protect investors and consumers,” Paulson said yesterday. “The challenge is to evolve to a more flexible, efficient and effective regulatory framework–and that is the purpose of this Blueprint.”

Short-term recommendations include improvements to regulatory coordination and oversight, proposing a new federal commission, the Mortgage Origination Commission, to develop minimum licensing requirement standards for state mortgage market participants. The proposal also recommends modernizing the President’s Working Group on Financial Markets and clarifying the Federal Reserve’s liquidity provisioning.

Intermediate-term recommendations focus on eliminating duplication in the existing regulatory system, such as the Office of Thrift Supervision, creating an optional federal charter for insurance and unifying oversight for futures and securities. Under that provision, the Securities and Exchange Commission would be merged with the Commodity Futures Trading Commission.

Long-term recommendations include creating a new regulatory structure using an objectives-based approach for optimal regulation. The structure would consist of a market stability regulator, a regulator and a business conduct regulator with a focus on consumer protection and give the Federal Reserve greater authority and oversight.

MBA Chairman Kieran Quinn, CMB, said MBA supports the Blueprint in principle. "MBA believes we absolutely must have modern, world-class regulation of our financial system and we appreciate Secretary Paulson's leadership on this issue,” he said. “Today's report will initiate a crucial policy discussion, one which is especially important at this time of turmoil in the credit markets. Treasury's recommendations would have sweeping effects on our financial system and we look forward to a comprehensive review of the report and intend to work with our member companies to establish policy around its recommendations soon."

Quinn said a significant problem for the mortgage industry and its customers is the explosive growth of inconsistent state regulations. “We share Treasury's goal of more effective mortgage originator oversight,” he said. “Specifically, we support more rigorous licensing, nationwide registration for all originators and mortgage broker net worth and bonding requirements. In addition, MBA supports enactment of a uniform national lending standard with clear and objective requirements, in addition to coordinated action by federal agencies with authority over the mortgage market.”

MBA has also called for comprehensive simplification and improvement of disclosures to make the mortgage process more transparent. “This requires reform under the Real Estate Settlement Procedures Act to simplify disclosures to consumers, including disclosures from mortgage brokers about whether they are acting as the borrower's age,” Quinn said. “MBA believes that national reforms along these lines, which would preempt inconsistent state and local laws, would be far better for consumers than inconsistent regulation.

MBA also called on Congress to support modernization of the Federal Housing Administration and of the regulatory oversight of Fannie Mae and Freddie Mac. "We hope that Congress will pass these critically important bills in the coming weeks," Quinn said.

Capitol Hill leaders expressed cautious support for the Blueprint. House Financial Services Committee Chairman Barney Frank, D-Mass., called the plan a “very constructive step forward in this important debate. He recognizes that the far-reaching innovations that have transformed financial activity have outstripped our ability to preserve economic stability and that both our regulatory institutions and the rules they apply must be significantly enhanced.”

Others took a wait-and-see approach, including some within the Bush Administration. Sheila Bair, chair of the Federal Deposit Insurance Corp., issued a carefully worded statement expressing concern with the proposal. Under the plan, the FDIC would lose oversight of state-run chartered banks in favor of the new banking agency.

"The FDIC has been a highly successful model for 75 years," Bair said. "During this time, no one has lost a single penny of insured deposits and public confidence in our banking system has remained high. Any long-term structural changes to the financial regulatory framework must be carefully weighed against the FDIC's strong record and the fact that it serves as a model for developing countries around the world."

Consumer groups also expressed concern, saying that the proposal did little for consumers at the expense of financial institutions and investors.