GWU Law on Dodd -Frank Five Years After the Crisis
At
October 31st’s George Washington University Law School event entitled, “The Road
Traveled: Assessing Dodd-Frank Five Years After the Crisis,” current and former
regulators, government officials, and industry experts discussed the steps that
have been taken since the Dodd-Frank Act was implemented and where these
reforms will take us in the future.
Keynote
– Gene Ludwig
Eugene
Ludwig, Former U.S. Comptroller of the Currency (OCC) and Founder of Promontory
Financial Group, gave the first keynote address of the event. He stated
that the scale of reforms put in place since the financial crisis has been vast
and that financial institutions have had to adjust to these new regulations
during an uncertain economic period.
Ludwig
said that regulators are “wise to take time and care to get the rules right”
because translating the concepts in the statutes into balanced rules is a very
difficult task. He noted, however, that the longer the process is, the
more uncertainty there is in the marketplace.
Ludwig
stressed that “supervision is vital to financial oversight” as it has the
advantage of being more nimble and flexible than the rulemaking process. He
added that being at ground level can allow supervision to fill the gap created
during the interim period when the rules are still being worked on.
In
closing, Ludwig said that history shows institutional and systemic risks go
“hand in hand” and “we ignore prudential supervision at our own peril.”
Question
and Answer – Gene Ludwig
A
member of the audience asked about shortcomings in supervision and cited the
“London Whale” incident at JPMorgan as an example of “red flags” being raised
but not being taken seriously. Ludwig replied that supervisors can “often be
very savvy about business practices” and need to allow firms to innovate, but
said it would be worthwhile to study the “berth” given to financial
instructions as it may be too wide. He noted that the OCC’s
responsibility is to “foment the banking system on one end and regulate it on
the other.”
When
asked a question if there are still problems with cross-border coordination of
rules with the European Union (EU), Ludwig said that there has been “uneven”
progress, but cited Basel III and the liquidity coverage ratio (LCR) as
examples of good collaboration between the U.S. and the EU.. On the other hand,
he said, the “enthusiasm” for ring-fencing institutions, is not as welcome, but
he said the U.S. is “trying to act collegially” with their foreign
counterparts.
Another
audience member asked if safety and soundness of the banking sector is at risk
when customer protections are tightened. Ludwig replied that customer
protections and safety and soundness “go hand in glove” and said that the U.S.
used to have a “buyer beware” environment but has since turned into a “seller
beware” environment almost to the point of a fiduciary duty.
When
asked if the quality of supervision would increase if the regulatory agencies
were consolidated, Ludwig said he has been advocating for a single regulator
for 30 years as it would “save a lot of wasted motion.”
Panel
1 – Global Systemically Important Banks: Too Big (and International) to
Regulate?
Richard
Osterman, Jr., Acting General Counsel, Federal Deposit Insurance Corporation
(FDIC), stated that Title I and Title II of the Dodd-Frank Act were created to
address gaps in the bankruptcy code if a large systemically important financial
institution (SIFI) were to fail and that they are designed to work in tandem.
Osterman
noted that there is no current international framework in place to resolve
global SIFIs and that there is a need for cooperation and coordination with
international authorities. He noted that the Bank of England and the FDIC have
worked extensively together as they have a “strong mutual interest” to address
potential failures without exposing taxpayers to losses.
Michael
Helfer, Vice Chairman, Citigroup, Inc., stated that Citigroup “disposed of $700
billion in non-core assets” before the Dodd-Frank Act was signed into law, but
that the Act created incentives for financial firms to restructure.
Helfer
said that Titles I and II “were enormous improvements” as it required SIFIs to
look at their structure and ensure that is lends itself to an orderly
resolution, taking into consideration increased capital, levels of liquidity,
and structure of subsidiaries. He also noted that “people who buy long term
debt in banks are keenly aware of the risks associated” with doing so.
Helfer
said that the leverage ratios and stress tests drive firms to reduce the assets
they hold, especially those with high risk weights. He also noted that
Citigroup has “largely eliminated fund activity” that will likely be prohibited
under the yet-to-be-finished Volcker Rule.
Anna
Gelpern, Professor of Law, Georgetown University, said she was “in awe of the
optimism” and persistence of regulators and financial institutions. She said
that the biggest challenge of the resolution process will be “burden sharing”
and noted that governments have “significant authority” to close financial institutions
but it is unclear to what extent that authority will be used.
Paul
Lee, Debevoise & Plimpton LLP, said the heightened level of banking
regulation that exists today, seems to be the new baseline moving forward and
that the charges brought against JPMorgan by the Department of Justice (DoJ)
will be a template for actions against other firms.
He
expressed concern about the implications of charging JPMorgan for the actions
of banks that they acquired during the crisis, because the U.S. government
“actively encouraged” these acquisitions. He said that these charges will raise
questions in the future for firms that may get involved in saving another
failing institution.
Moderator,
Gerard Comizio, Partner Paul Hastings LLP, asked what the challenges are with
international collaboration and cooperation. Osterman replied that
international cooperation is critical and should seek to create regimes that
“mirror each other” as there is a mutual interest in addressing resolution
issues. He added that “trust building is a huge part” of collaboration as
general agreements may not be legally binding.
Comizio
then asked Helfer what Citi’s experience was in creating their “living
will.” Helfer replied that it was a “gigantic undertaking” as the report
contained 3,000 pages of text. He said that overall, the process was “worth it”
as it helps “persuade” regulators and the public that the firm can be resolved
without taxpayer money and adverse systemic consequences.
When
asked how the mergers and acquisitions market was affected by the crisis, Lee
stated that is has become much more difficult for large institutions to make
acquisitions and explained that Comprehensive Capital Analysis and Review
(CCAR) calculations get “screwed up” when a firm carries out an acquisition. He
added that divestures, however, have increased as financial institutions have
spun off their private equity investments.
Keynote
– Thomas Hoenig
Thomas
Hoenig, Vice Chairman, FDIC, stated that all banking activates outside of
commercial banking practices, including securities underwriting and wealth
management operations, should be separated out from the federal “safety
net.” He said that high risk activities “do not function rationally” when
they are supported by a safety net and that a “taxpayer subsidy” to large
financial institutions “extends moral hazard.”
Hoenig
said it was “striking [that] the safety net has not been pared back” because
banks “use it to increase leverage” and said that an increased level of banking
concentration will mean that any one failure of a SIFI will be systemic.
He also stated that the rules and laws in Dodd-Frank are a fixed cost that
encourages the process of consolidation as larger firms can spread the costs.
Pulling
back the safety net for non-commercial banking activities could have several
benefits for regional banks as well as commercial and industrial companies,
Hoenig said. He added that simpler structures of banks should be sought out, as
they would make the resolution process easier and would allow banks to avoid
“diseconomies of scale” that come from being too large to manage.
He
concluded that “the current financial structure remains mostly unchanged since
the crisis,” and that there is “a case to be made” to address this issue “more
directly.”
Question
and Answer – Thomas Hoenig
A
member of the audience asked what the most effective mechanism would be to
remove the safety net. Hoenig replied that he had put a proposal
out on the subject which suggests pushing out broker-dealer activities into
separate firms without access to the safety net to impose more market
discipline.
In
answering a question about the role of supervision in maintaining stability and
monitoring broker-dealer operations, Hoenig stated that there needs to be more
“systemic examination” of the largest firms that looks at both the investment
side and the credit side.
A
member of the audience suggested that the Federal Reserve is “moving away from
transaction testing” towards “policy testing” and asked what the implications
of this might be. Hoenig replied that it is “a real possibility” that
this shift has occurred and noted that the “risk based approach” relied too
heavily on credit ratings.
Keynote
– Gary Gensler
Gary
Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), in his remarks,
stated that the swaps market was at the center of the financial crisis five
years ago, but that after 65 final rules, orders, and guidelines, the “new
marketplace is a reality.” Gensler said the public benefits from having
broad access to markets with improved transparency.
Gensler
noted that federal regulators can now see the details of every swaps trade
conducted “regardless of product or counterparties” and noted that 1.8 million
open transactions are held in swap data repositories (SDRs). He added that in
the past month, new swap execution facilities (SEFs) have increased competition
and now provide “impartial access” to all swap customers.
The
central clearing of derivatives was another new market change, Gensler noted,
saying that 80 percent of new interest rate swaps were brought into central
clearing, up from 21 percent in 2008.
Gensler
concluded that the CFTC is “basically done with rule writing” but that the
successes of the new rules “should not be confused with the agency having
sufficient people and technology to oversee these markets.” He stressed
the need for more funding to hire staff and buy the technology needed to
conduct proper surveillance of the market. He said that the CFTC is “not
looking at the data right now,” referring to the swap transaction data held in
SDRs, and that the agency needs more analysts, lawyers, and enforcement staff
to do the job assigned by the Dodd-Frank Act.
Question
and Answer – Gary Gensler
A
member of the audience noted that European Union Commissioner Michel Barnier
has expressed some concerns with the level of coordination between the EU and
U.S. and asked for Gensler’s view on the situation.
The
Chairman replied that he and Barnier “work very closely” on cross-border
coordination but that Europe has a different culture and political landscape
from the U.S. He noted that the EU “fortunately has passed a very strong
law,” referring to the European Market Infrastructure Regulation (EMIR), and
that they are “far along on many pieces” of these regulations. Gensler
explained, however, that the U.S. has an approach to licensing dealers that
they EU does not, but the two jurisdictions have found a “path forward” that
looks to substituted compliance if a transaction is done with a U.S. dealer at
the entity level.
Responding
directly to the concerns recently raised by Barnier, Gensler said the EU
Commissioner was “speaking to trading platforms” and said the EU is “very
close” to finishing their rules but that they “may not go live for 18-20
months.”
Another
audience member asked if clearing houses are “too big to fail.” Gensler
replied that there is nothing anyone can do to “repeal risk” but that central
clearing houses lower the overall levels of risk and are a better alternative
to keeping the risk inside the banks. He added that clearing houses have to
value their trades every day and collect margin. He also said they can better
monitor risk because they focus on only one business, but Gensler did note that
it is “critical to have better risk management.”
When
asked what the top three priorities will be for the CFTC over the next five years,
Gensler said that the priorities will be: 1) obtaining the proper level of
funding for the agency; 2) replacing LIBOR with an alternative benchmark
interest rate; and 3) evaluating computer systems and algorithms that operate
in the marketplace for potential problems to ensure the resilience of the swaps
market.
Following
up on the technology aspect of his answer, another attendee asked if high
frequency trading (HFT) is a risk for the marketplace and if the CFTC has the
capacity to monitor this risk. Gensler replied that “you cannot turn back” HFT
as 90 percent of market activity is done electronically. He said that HFT can
provide benefits for the market if it allows for better pricing but can also
make the system more fragile, thus requiring strong risk management. He
noted that the CFTC has put out a concept
release to obtain comments on how this issue can be addressed.
Lastly,
an audience member asked how the CFTC will address further innovation of
financial institutions in the way they value risk and if the swaps rules will
be able to apply to future innovative products. Gensler replied that there will
be innovation in the future but that the swaps definition “is so broad in
statute” that new products should be captured within its scope.
Panel
2 – The Future of Housing Finance: Finding a New Direction?
In
the final panel, Peter Carroll, Assistant Director, Office of Mortgage Markets,
Consumer Financial Protection Bureau (CFPB), explained that the “ability to
pay” rule seeks to address consumer capacity and eliminate the “no doc lending”
that occurred in the ramp-up to the crisis by requiring a “good faith
determination” of a borrower’s ability to pay by the lender. This
determination, he added, must include verification of a borrower’s financial
condition, but noted that a customer can still raise a claim against the lender
if they believe a “reasonable determination” was not made.
Carroll
explained that the qualified mortgage (QM) rule provides lenders “additional
guardrails” and protection from the “private right to action” and “gives
clarity on QM requirements” and what it takes to comply with the definition. He
explained that the definition specifies that a borrower’s debt to income ratio
cannot exceed 43 percent, and noted that under this condition, 75 percent of
“recent vintages” in the mortgage market would fall under the QM definition. He
added that if the government sponsored enterprise (GSE) exemption is included;
this figure would increase to 95 percent of the market. He concluded that
“there are good non-QM loans out there.”’
Moderator,
Laurence E. Platt, Partner, K&L Gates LLP, asked the panel if they thought
the QM definition was too broad, too narrow, or at an appropriate level.
Julia
Gordon, Director, Housing Finance and Policy, Center for American Progress,
stated that she is concerned with the way the industry is reacting to the QM
requirements and feared that credit will be restricted for low income families.
Peter
J. Wallison, American Enterprise Institute for Public Policy Research, stated
that the “ability to pay” rule “sounds like an underwriting standard, but in my
view it is not” adding that the “right way to protect home buyers” would be to
require underwriting standards. He also said that the qualified
residential mortgage (QRM) was supposed to be a higher quality loan, but that
the definition has moved to be the same as QM.
Michael
Fratantoni, Vice President, Single-Family Research and Policy Development,
Mortgage Bankers Association, stated that the CFPB struggled with the tensions
surrounding the issue and tried to find middle ground in their QM definition.
He said he thinks the majority of lenders moving forwards will “stay inside”
the definition “to not get hurt.”
Platt
then asked if private investors will be willing to buy loans made outside of
the QM definition.
Tom
Deutsch, Executive Director, American Securitization Forum, stated that there
is a problem with “secondary institutional investors being divorced from the
originators” and lacking complete information on the loans, but said that if
the lenders can “jack up the interest rates” and offer a better price to
investors, they will be willing to buy the loans. He added that investors
will also have to weigh the risk of litigation against their willingness to buy
loans made outside the QM definition.
Platt
then raised the issue of “disparate impact” and fair lending. Carroll stated
that the CFPB along with regulators including the Fed, OCC, and FDIC have put
out a joint
bulletin on fair lending compliance to “assuage concerns” that if lenders
are making QM loans within their business model, they “should be fine.”
Fratantoni
expressed concern that the Department of Housing and Urban Development (HUD)
was not included on the joint bulletin, as they are likely to be the ones to
raise disparate impact cases against lenders.
Platt
moved on to the statutory proposals under consideration in Congress to address
housing finance and the GSEs. He asked what should be done with Fannie Mae and
Freddie Mac. Wallison replied that there is a possibility that the GSEs “will
survive” as they may be considered viable moving forward. He noted that the
parameters of the debate are set by the House legislation which seeks to
eliminate government involvement, and the Senate bill which includes private
first loss capital, coupled with a government backstop. He said that
since the government has been in the housing market for such a long time there
will be difficulties in “melding” the two proposals together.
Deutsch
stated that using 100 percent private capital to fund the housing market will
not be a viable alternate overnight as the GSEs guarantee $5 trillion in
mortgages and the federal government is “dug in” and has “doubled down” on the
housing market. He also noted that there will be political challenges to lowering
conforming loan limits. He concluded that in the near terms there is “no way”
to get the government completely out of the market, but in the long term,
having the government control 90 percent of the market is unsustainable.
Question
and Answer
When
asked by the audience if there will be firms that specialize in non-QM loans,
Platt stated that “it will take time to play out” as the market will be looking
to the ratings agencies and will wait to see if borrowers sue lenders and how
judges respond to cases.
For
more information on this event, please click here.
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At
October 31st’s George Washington University Law School event entitled, “The Road
Traveled: Assessing Dodd-Frank Five Years After the Crisis,” current and former
regulators, government officials, and industry experts discussed the steps that
have been taken since the Dodd-Frank Act was implemented and where these
reforms will take us in the future.
Keynote
– Gene Ludwig
Eugene
Ludwig, Former U.S. Comptroller of the Currency (OCC) and Founder of Promontory
Financial Group, gave the first keynote address of the event. He stated
that the scale of reforms put in place since the financial crisis has been vast
and that financial institutions have had to adjust to these new regulations
during an uncertain economic period.
Ludwig
said that regulators are “wise to take time and care to get the rules right”
because translating the concepts in the statutes into balanced rules is a very
difficult task. He noted, however, that the longer the process is, the
more uncertainty there is in the marketplace.
Ludwig
stressed that “supervision is vital to financial oversight” as it has the
advantage of being more nimble and flexible than the rulemaking process. He
added that being at ground level can allow supervision to fill the gap created
during the interim period when the rules are still being worked on.
In
closing, Ludwig said that history shows institutional and systemic risks go
“hand in hand” and “we ignore prudential supervision at our own peril.”
Question
and Answer – Gene Ludwig
A
member of the audience asked about shortcomings in supervision and cited the
“London Whale” incident at JPMorgan as an example of “red flags” being raised
but not being taken seriously. Ludwig replied that supervisors can “often be
very savvy about business practices” and need to allow firms to innovate, but
said it would be worthwhile to study the “berth” given to financial
instructions as it may be too wide. He noted that the OCC’s
responsibility is to “foment the banking system on one end and regulate it on
the other.”
When
asked a question if there are still problems with cross-border coordination of
rules with the European Union (EU), Ludwig said that there has been “uneven”
progress, but cited Basel III and the liquidity coverage ratio (LCR) as
examples of good collaboration between the U.S. and the EU.. On the other hand,
he said, the “enthusiasm” for ring-fencing institutions, is not as welcome, but
he said the U.S. is “trying to act collegially” with their foreign
counterparts.
Another
audience member asked if safety and soundness of the banking sector is at risk
when customer protections are tightened. Ludwig replied that customer
protections and safety and soundness “go hand in glove” and said that the U.S.
used to have a “buyer beware” environment but has since turned into a “seller
beware” environment almost to the point of a fiduciary duty.
When
asked if the quality of supervision would increase if the regulatory agencies
were consolidated, Ludwig said he has been advocating for a single regulator
for 30 years as it would “save a lot of wasted motion.”
Panel
1 – Global Systemically Important Banks: Too Big (and International) to
Regulate?
Richard
Osterman, Jr., Acting General Counsel, Federal Deposit Insurance Corporation
(FDIC), stated that Title I and Title II of the Dodd-Frank Act were created to
address gaps in the bankruptcy code if a large systemically important financial
institution (SIFI) were to fail and that they are designed to work in tandem.
Osterman
noted that there is no current international framework in place to resolve
global SIFIs and that there is a need for cooperation and coordination with
international authorities. He noted that the Bank of England and the FDIC have
worked extensively together as they have a “strong mutual interest” to address
potential failures without exposing taxpayers to losses.
Michael
Helfer, Vice Chairman, Citigroup, Inc., stated that Citigroup “disposed of $700
billion in non-core assets” before the Dodd-Frank Act was signed into law, but
that the Act created incentives for financial firms to restructure.
Helfer
said that Titles I and II “were enormous improvements” as it required SIFIs to
look at their structure and ensure that is lends itself to an orderly
resolution, taking into consideration increased capital, levels of liquidity,
and structure of subsidiaries. He also noted that “people who buy long term
debt in banks are keenly aware of the risks associated” with doing so.
Helfer
said that the leverage ratios and stress tests drive firms to reduce the assets
they hold, especially those with high risk weights. He also noted that
Citigroup has “largely eliminated fund activity” that will likely be prohibited
under the yet-to-be-finished Volcker Rule.
Anna
Gelpern, Professor of Law, Georgetown University, said she was “in awe of the
optimism” and persistence of regulators and financial institutions. She said
that the biggest challenge of the resolution process will be “burden sharing”
and noted that governments have “significant authority” to close financial institutions
but it is unclear to what extent that authority will be used.
Paul
Lee, Debevoise & Plimpton LLP, said the heightened level of banking
regulation that exists today, seems to be the new baseline moving forward and
that the charges brought against JPMorgan by the Department of Justice (DoJ)
will be a template for actions against other firms.
He
expressed concern about the implications of charging JPMorgan for the actions
of banks that they acquired during the crisis, because the U.S. government
“actively encouraged” these acquisitions. He said that these charges will raise
questions in the future for firms that may get involved in saving another
failing institution.
Moderator,
Gerard Comizio, Partner Paul Hastings LLP, asked what the challenges are with
international collaboration and cooperation. Osterman replied that
international cooperation is critical and should seek to create regimes that
“mirror each other” as there is a mutual interest in addressing resolution
issues. He added that “trust building is a huge part” of collaboration as
general agreements may not be legally binding.
Comizio
then asked Helfer what Citi’s experience was in creating their “living
will.” Helfer replied that it was a “gigantic undertaking” as the report
contained 3,000 pages of text. He said that overall, the process was “worth it”
as it helps “persuade” regulators and the public that the firm can be resolved
without taxpayer money and adverse systemic consequences.
When
asked how the mergers and acquisitions market was affected by the crisis, Lee
stated that is has become much more difficult for large institutions to make
acquisitions and explained that Comprehensive Capital Analysis and Review
(CCAR) calculations get “screwed up” when a firm carries out an acquisition. He
added that divestures, however, have increased as financial institutions have
spun off their private equity investments.
Keynote
– Thomas Hoenig
Thomas
Hoenig, Vice Chairman, FDIC, stated that all banking activates outside of
commercial banking practices, including securities underwriting and wealth
management operations, should be separated out from the federal “safety
net.” He said that high risk activities “do not function rationally” when
they are supported by a safety net and that a “taxpayer subsidy” to large
financial institutions “extends moral hazard.”
Hoenig
said it was “striking [that] the safety net has not been pared back” because
banks “use it to increase leverage” and said that an increased level of banking
concentration will mean that any one failure of a SIFI will be systemic.
He also stated that the rules and laws in Dodd-Frank are a fixed cost that
encourages the process of consolidation as larger firms can spread the costs.
Pulling
back the safety net for non-commercial banking activities could have several
benefits for regional banks as well as commercial and industrial companies,
Hoenig said. He added that simpler structures of banks should be sought out, as
they would make the resolution process easier and would allow banks to avoid
“diseconomies of scale” that come from being too large to manage.
He
concluded that “the current financial structure remains mostly unchanged since
the crisis,” and that there is “a case to be made” to address this issue “more
directly.”
Question
and Answer – Thomas Hoenig
A
member of the audience asked what the most effective mechanism would be to
remove the safety net. Hoenig replied that he had put a proposal
out on the subject which suggests pushing out broker-dealer activities into
separate firms without access to the safety net to impose more market
discipline.
In
answering a question about the role of supervision in maintaining stability and
monitoring broker-dealer operations, Hoenig stated that there needs to be more
“systemic examination” of the largest firms that looks at both the investment
side and the credit side.
A
member of the audience suggested that the Federal Reserve is “moving away from
transaction testing” towards “policy testing” and asked what the implications
of this might be. Hoenig replied that it is “a real possibility” that
this shift has occurred and noted that the “risk based approach” relied too
heavily on credit ratings.
Keynote
– Gary Gensler
Gary
Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), in his remarks,
stated that the swaps market was at the center of the financial crisis five
years ago, but that after 65 final rules, orders, and guidelines, the “new
marketplace is a reality.” Gensler said the public benefits from having
broad access to markets with improved transparency.
Gensler
noted that federal regulators can now see the details of every swaps trade
conducted “regardless of product or counterparties” and noted that 1.8 million
open transactions are held in swap data repositories (SDRs). He added that in
the past month, new swap execution facilities (SEFs) have increased competition
and now provide “impartial access” to all swap customers.
The
central clearing of derivatives was another new market change, Gensler noted,
saying that 80 percent of new interest rate swaps were brought into central
clearing, up from 21 percent in 2008.
Gensler
concluded that the CFTC is “basically done with rule writing” but that the
successes of the new rules “should not be confused with the agency having
sufficient people and technology to oversee these markets.” He stressed
the need for more funding to hire staff and buy the technology needed to
conduct proper surveillance of the market. He said that the CFTC is “not
looking at the data right now,” referring to the swap transaction data held in
SDRs, and that the agency needs more analysts, lawyers, and enforcement staff
to do the job assigned by the Dodd-Frank Act.
Question
and Answer – Gary Gensler
A
member of the audience noted that European Union Commissioner Michel Barnier
has expressed some concerns with the level of coordination between the EU and
U.S. and asked for Gensler’s view on the situation.
The
Chairman replied that he and Barnier “work very closely” on cross-border
coordination but that Europe has a different culture and political landscape
from the U.S. He noted that the EU “fortunately has passed a very strong
law,” referring to the European Market Infrastructure Regulation (EMIR), and
that they are “far along on many pieces” of these regulations. Gensler
explained, however, that the U.S. has an approach to licensing dealers that
they EU does not, but the two jurisdictions have found a “path forward” that
looks to substituted compliance if a transaction is done with a U.S. dealer at
the entity level.
Responding
directly to the concerns recently raised by Barnier, Gensler said the EU
Commissioner was “speaking to trading platforms” and said the EU is “very
close” to finishing their rules but that they “may not go live for 18-20
months.”
Another
audience member asked if clearing houses are “too big to fail.” Gensler
replied that there is nothing anyone can do to “repeal risk” but that central
clearing houses lower the overall levels of risk and are a better alternative
to keeping the risk inside the banks. He added that clearing houses have to
value their trades every day and collect margin. He also said they can better
monitor risk because they focus on only one business, but Gensler did note that
it is “critical to have better risk management.”
When
asked what the top three priorities will be for the CFTC over the next five years,
Gensler said that the priorities will be: 1) obtaining the proper level of
funding for the agency; 2) replacing LIBOR with an alternative benchmark
interest rate; and 3) evaluating computer systems and algorithms that operate
in the marketplace for potential problems to ensure the resilience of the swaps
market.
Following
up on the technology aspect of his answer, another attendee asked if high
frequency trading (HFT) is a risk for the marketplace and if the CFTC has the
capacity to monitor this risk. Gensler replied that “you cannot turn back” HFT
as 90 percent of market activity is done electronically. He said that HFT can
provide benefits for the market if it allows for better pricing but can also
make the system more fragile, thus requiring strong risk management. He
noted that the CFTC has put out a concept
release to obtain comments on how this issue can be addressed.
Lastly,
an audience member asked how the CFTC will address further innovation of
financial institutions in the way they value risk and if the swaps rules will
be able to apply to future innovative products. Gensler replied that there will
be innovation in the future but that the swaps definition “is so broad in
statute” that new products should be captured within its scope.
Panel
2 – The Future of Housing Finance: Finding a New Direction?
In
the final panel, Peter Carroll, Assistant Director, Office of Mortgage Markets,
Consumer Financial Protection Bureau (CFPB), explained that the “ability to
pay” rule seeks to address consumer capacity and eliminate the “no doc lending”
that occurred in the ramp-up to the crisis by requiring a “good faith
determination” of a borrower’s ability to pay by the lender. This
determination, he added, must include verification of a borrower’s financial
condition, but noted that a customer can still raise a claim against the lender
if they believe a “reasonable determination” was not made.
Carroll
explained that the qualified mortgage (QM) rule provides lenders “additional
guardrails” and protection from the “private right to action” and “gives
clarity on QM requirements” and what it takes to comply with the definition. He
explained that the definition specifies that a borrower’s debt to income ratio
cannot exceed 43 percent, and noted that under this condition, 75 percent of
“recent vintages” in the mortgage market would fall under the QM definition. He
added that if the government sponsored enterprise (GSE) exemption is included;
this figure would increase to 95 percent of the market. He concluded that
“there are good non-QM loans out there.”’
Moderator,
Laurence E. Platt, Partner, K&L Gates LLP, asked the panel if they thought
the QM definition was too broad, too narrow, or at an appropriate level.
Julia
Gordon, Director, Housing Finance and Policy, Center for American Progress,
stated that she is concerned with the way the industry is reacting to the QM
requirements and feared that credit will be restricted for low income families.
Peter
J. Wallison, American Enterprise Institute for Public Policy Research, stated
that the “ability to pay” rule “sounds like an underwriting standard, but in my
view it is not” adding that the “right way to protect home buyers” would be to
require underwriting standards. He also said that the qualified
residential mortgage (QRM) was supposed to be a higher quality loan, but that
the definition has moved to be the same as QM.
Michael
Fratantoni, Vice President, Single-Family Research and Policy Development,
Mortgage Bankers Association, stated that the CFPB struggled with the tensions
surrounding the issue and tried to find middle ground in their QM definition.
He said he thinks the majority of lenders moving forwards will “stay inside”
the definition “to not get hurt.”
Platt
then asked if private investors will be willing to buy loans made outside of
the QM definition.
Tom
Deutsch, Executive Director, American Securitization Forum, stated that there
is a problem with “secondary institutional investors being divorced from the
originators” and lacking complete information on the loans, but said that if
the lenders can “jack up the interest rates” and offer a better price to
investors, they will be willing to buy the loans. He added that investors
will also have to weigh the risk of litigation against their willingness to buy
loans made outside the QM definition.
Platt
then raised the issue of “disparate impact” and fair lending. Carroll stated
that the CFPB along with regulators including the Fed, OCC, and FDIC have put
out a joint
bulletin on fair lending compliance to “assuage concerns” that if lenders
are making QM loans within their business model, they “should be fine.”
Fratantoni
expressed concern that the Department of Housing and Urban Development (HUD)
was not included on the joint bulletin, as they are likely to be the ones to
raise disparate impact cases against lenders.
Platt
moved on to the statutory proposals under consideration in Congress to address
housing finance and the GSEs. He asked what should be done with Fannie Mae and
Freddie Mac. Wallison replied that there is a possibility that the GSEs “will
survive” as they may be considered viable moving forward. He noted that the
parameters of the debate are set by the House legislation which seeks to
eliminate government involvement, and the Senate bill which includes private
first loss capital, coupled with a government backstop. He said that
since the government has been in the housing market for such a long time there
will be difficulties in “melding” the two proposals together.
Deutsch
stated that using 100 percent private capital to fund the housing market will
not be a viable alternate overnight as the GSEs guarantee $5 trillion in
mortgages and the federal government is “dug in” and has “doubled down” on the
housing market. He also noted that there will be political challenges to lowering
conforming loan limits. He concluded that in the near terms there is “no way”
to get the government completely out of the market, but in the long term,
having the government control 90 percent of the market is unsustainable.
Question
and Answer
When
asked by the audience if there will be firms that specialize in non-QM loans,
Platt stated that “it will take time to play out” as the market will be looking
to the ratings agencies and will wait to see if borrowers sue lenders and how
judges respond to cases.
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