Financial Reform Watch

After wrapping up another eventful voting week that involved the consideration of nearly 15 amendments to the Restoring American Financial Stability Act of 2010 (S.3217), the Senate – and perhaps the Congress – now appears headed towards the finish line on financial regulatory reform.

Despite the numerous votes, Senate Banking Committee Chairman Christopher Dodd’s (D-CT) overhaul legislation escaped relatively unscathed from problematic amendments that could have disrupted future conference negotiations with the House, as a flurry of proposals – including those related to credit rating agencies, Fannie Mae and Freddie Mac, community banks, oversight of the Federal Reserve’s monetary policy, underwriting standards, the newly-created consumer financial protection bureau (CFPB) and interchange fees – all were brought up for consideration (see below for additional details on amendments). When the chamber returns to action next week, Senate Majority Leader Harry Reid (D-NV) is expected to set up a vote that will occur on Wednesday to invoke cloture – or limit further debate to 30 hours – which if approved, would likely lead to the bill’s final passage later in the week. Some sources around Capitol Hill are even predicting that after the Senate completes its work, House Financial Services Chairman Barney Frank (D-MA) and fellow Democrats will push for House passage of the Senate bill, precluding the need for a formal conference and ultimately shortening the timeline for the President’s signature.

But predictions aside, Dodd must still contend with the burgeoning frustration of his Democratic colleagues in the Senate, who expressed dismay this week that only 31 amendments out of the over 300 introduced have been formally debated on the floor thus far. In addition, particular contention still lingers with respect to the legislation’s provisions regulating derivatives transactions, specifically the scope of the bill’s "commercial end-user" exemption and its prohibition on commercial banks and bank holding companies from directly engaging in derivatives transactions. The Senate rejected, 39-59, a Republican derivatives proposal offered by Senators Saxby Chambliss (GA), Richard Shelby (AL), Judd Gregg (NH) that sought to limit the types of swaps transactions that would face clearing requirements by exempting “bona-fide hedging swap transactions.”
 

Next week, Chairman Dodd is expected to offer a manager’s amendment that modifies the derivatives section of the bill in order to make it more palatable to Democrats and moderate Republicans. In addition, beginning on Monday, senators are slated to consider another series of amendments, including a proposal offered by Sen. Sam Brownback (R-KA) that would exempt auto dealerships from the new CFPBs regulatory scope, a proposal that has drawn opposition from the White House.

Below is a summary of the major amendments to S.3217 that were considered this week in the Senate:

Credit Rating Agencies
The nation’s leading credit rating agencies took a major blow on Thursday when the Senate passed two amendments seeking to eliminate potential conflicts of interest between credit rating agencies and securities issuers. By a vote of 64-34, the Senate approved an amendment introduced by Sen. Al Franken (D-MN) that targets the so-called practice of “rating shopping,” in which a securities issuer pursues the most favorable ratings. According to Franken, in order to level the competition for smaller rating agencies and expose potential discrepancies between competing agencies, the amendment calls for the creation of an SEC-regulated clearinghouse that would assign a rating agency for newly-created securities. In addition, the Senate approved an amendment offered by Sen. George Lemieux (R-FL) that would remove any language within the bill that may be conceived as either endorsing or providing legal protection to a select group of rating agencies.

GSE Reform
In a GOP effort to put Senate Democrats on the defensive over the Dodd bill’s omission of reforms to the nation’s controversial Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, Sen. John McCain (R-AZ) offered a proposal that would establish a timeline for winding down the government’s support of Fannie and Freddie and ultimately lead to their dissolution. Although the McCain amendment was rejected by a vote of 43-56, Chairman Dodd (D-CT) was forced to offer an amendment requiring the Treasury Department to issue recommendations for Fannie and Freddie, along with broader housing finance reforms by January 31, 2011. The Dodd amendment passed by a vote of 63-36.

Fed Audits
The Federal Reserve won a major victory this week when the Senate unanimously adopted a scaled-back version of an amendment offered by Sen. Bernie Sanders (I-VT) that would have originally allowed the Government Accountability Office (GAO) to conduct independent audits of the Fed’s monetary policy decisions, reversing a long-standing prohibition on outside probes that both the White House and the Fed argued would erode the central bank’s independence and international credibility. Instead, the modified Sanders amendment would strictly require GAO audits of the Fed’s emergency lending programs instituted since 2007, and would mandate the public disclosure of details related to such programs, including the terms of repayment to borrowers and the “specific rationale” for each program’s creation.

Banking Regulation
The Fed earned a second major victory when the Senate approved, 91-8, an amendment offered by Sen. Kay Bailey Hutchison (R-TX) that preserves the Fed’s prudential regulatory authority over state member banks. The original Dodd language aimed to narrow the Fed’s focus to that of monetary policy and the regulation of the nation’s largest financial institutions, by transferring the regulation of banks with less than $50 billion or more in assets to the Federal Deposit Insurance Corporation (FDIC).

Other Amendments
• The Senate approved, 64-33, an amendment offered by Sen. Richard Durbin (D-IL) that seeks to limit the interchange fees paid by retailers for the acceptance of debit card payments. The Fed would be charged with ensuring that such interchange fees are “reasonable and proportional” to the costs incurred.
• The Senate passed a proposal from Sen. Jeff Merkley, 63-36, that imposes more stringent income documentation standards for potential homebuyers by requiring lenders to ensure a borrowers ability to repay through income and assets other than the home’s value.
• The Senate rejected, 40-55, an amendment offered by Sen. John Thune (R-SD) that would have placed a sunset on the newly created Consumer Financial Protection Bureau (CFPB) after four years.