The regulatory reform conference committee officially kicked off Thursday, and while the final fate of key provisions remains up in the air, it is clear senators have several advantages over their House counterparts.
For one, the committee's process itself favors the Senate, using its version of the legislation as the base text of the final bill — a move that essentially puts that chamber in a defensive, more advantageous, position.
While Banking Committee Chairman Chris Dodd opened the conference by saying he expects many changes will be made, other lawmakers noted that any significant alterations risk losing the support of key Senate Republicans, whose votes are needed to pass any final bill.
"As we move through this process we must keep in mind that, though the Senate bill passed with bipartisan support, it also passed narrowly," Sen. Tim Johnson, D-S.D., said in his opening statement. "The bipartisan nature of our bill must be preserved in order to send legislation to the president's desk."
Observers said there is little room for lawmakers to maneuver.
"There's no question that there is a feeling, especially from Chairman Dodd and his staff, that they can't make too many changes from what passed the Senate because of such a narrow victory there," said Joseph Engelhard, a senior vice president with Capital Alpha Partners LLC. "The way they have this set up, with them starting with the Senate bill as base text, it really puts the Senate in the captain's seat. It's pretty much a negotiation between Dodd and what he can get his colleagues to go along with."
The Senate passed its bill 59 to 39 last month, but it needs at least one more vote to get the 60-vote supermajority necessary to proceed to final passage. Democrats must ensure the continued support of the four GOP members who voted for the bill — Sens. Susan Collins and Olympia Snowe of Maine, Scott Brown of Massachusetts and Charles Grassley of Iowa.
Also key is the support of Senate Agriculture Committee Chairman Blanche Lincoln, who vowed Thursday to continue to fight for her provision, which would force banks to spin off their swaps desks. "Under our current system, there are a handful of big banks that are simply no longer acting like banks," Lincoln said in her opening statement.
"Currently, five of the largest commercial banks account for 97% of the commercial bank notional swap activity. That is a huge concentration of economic power."
She said her amendment, which is fiercely opposed by both the industry and federal regulators, was a critical part of regulatory reform.
"The Senate bill includes a provision, commonly referred to as Section 716, which seeks to address 'too big to fail' by accomplishing two goals," she said. "First, getting banks back to performing the duties they were meant to perform — taking deposits and making loans for mortgages, small businesses and commercial enterprise; and second, separating out the activities that help put these institutions in peril. This provision makes clear that derivatives dealing is not central to the business of banking."
Speaking outside the conference to reporters, Lincoln acknowledged she was facing pressure from other senators to change the provision.
"There are some that may have some concerns," she said.
Still, she won support from House Agriculture Committee Chairman Collin Peterson, who said he was glad the Lincoln provision was in the bill and had unsuccessfully fought for something similar to be part of the House bill.
Speaking after the conference with reporters, Dodd also expressed support for Lincoln's provision but he and House Financial Services Committee Chairman Barney Frank attempted to play down the differences between their positions on the issue.
"We haven't resolved that yet," said Dodd.
Frank said there "is conceptual agreement."
"You have several things," Frank said. "You have tough regulation of derivatives and I prefer much of what the Senate did. You are going to have a tougher version of the Volcker Rule and you will then have something also on derivatives. I don't want to disappoint you guys but I think the differences are less than you think they are."
Frank, meanwhile, said bankers and credit unions are unlikely to succeed in removing an interchange provision from the final bill. Noting it passed the Senate by a wide margin, he said some form of the provision, which would let the Federal Reserve Board regulate interchange fees on debit cards, would survive.
"You have 64 senators voting for that, it's unrealistic to think that it is going to go away," Frank said.
"I agree with the chairman on the interchange piece," he said. "I think modifications will be coming but I think that it's one where there is pretty strong support for that underlying provision."
Despite the fact that the Senate bill will serve as the base text, a new text of the legislation released Thursday revealed that the House had already won some concessions. For example, while the Senate bill would have eliminated the thrift charter, the latest language preserves it.
Asked why he agreed to keep the thrift charter, Dodd told reporters that Frank "made a good case for it."
Frank added that both bills would merge the Office of Thrift Supervision into the Office of the Comptroller of the Currency, and said as a result oversight of thrifts would be strengthened.
"Sen. Dodd is right; the status quo couldn't work," Frank said. "So what we have is a merger into the one strong regulator, which is the biggest single regulatory change needed and a much tougher thrift charter so it will now not be either under-regulated or used as a fig leaf."
Industry representatives, who had been fighting to protect the charter, welcomed the news. "Barney Frank committed from day one he would preserve the thrift charter and he delivered on that," said Diane Casey-Landry, the chief operating officer at the American Bankers Association. "We are grateful he recognized thrifts did not cause the crisis and it should not result in their demise."
The House's language governing mortgage underwriting standards also was incorporated. Under the revised bill, lenders would be required to ensure borrowers have the ability to repay a mortgage loan and that any refinancing provides a "net tangible benefit." The new consumer protection regulator would also have to write anti-steering rules for mortgage originators.
Some of the House bill's mortgage standards were modified. For example, the revised bill broadened a safe harbor for certain mortgages by allowing higher interest rates and raising the points and fees limits to 3% from 2%.
The standards also were modified to give sole authority to set new mortgage underwriting standards to the proposed consumer protection bureau. But the bureau would have to consult with the Department of Housing and Urban Development and other government agencies.
While conferees did not object to the specific changes to the bill, many complained that the legislation had already been altered before the conference even started. While Democrats have pledged an open and transparent process, Republicans called it a sham, and pointed to the new version of the bill as proof.
"We are told this is the Senate version, but there are 300 pages that were not in the Senate version," said Sen. Mike Crapo, R-Idaho. "We are now left to find out what is in the bill that we are considering."
This story has been reprinted with permission from American Banker.
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