FACTBOX-5 financial reforms missing from US Congress bills

January 6, 2010

    Jan 6 (Reuters) – The U.S. Senate will resume debate this
month on financial regulatory reform, but a handful of changes
some see as crucial are not on the table.
    Below is a summary of five proposals excluded from a bill
approved last month by the House of Representatives, and from a
draft bill being debated in the Senate Banking Committee.
    In a proposal backed by homeowner activists and many
Democrats, bankruptcy law would be rewritten to allow judges to
change the terms of mortgages for distressed borrowers in
bankruptcy court. Known as mortgage “cramdown,” the idea is
opposed by the banking industry, which won a victory last month
when an amendment that would have added “cramdown” to the
House’s financial regulation reform bill was defeated.
    The House had approved a “cramdown” measure in March over
the objections of Republicans, but it died in the Senate.
    Under present law, bankruptcy courts may reduce many forms
of debt for struggling borrowers — including for a boat, car,
vacation home or family farm — but not a primary residence.
    Cramdown would help stem the home foreclosure wave
continuing across the United States, its advocates say. But
opponents say it would raise costs for everyone and divert
capital from the mortgage debt market.
    Tighter regulation of credit rating agencies — such as
Moody’s Corp <MCO.N>, Standard & Poor’s <MHP.N> and Fitch
Ratings <LBCP.PA> — is proposed by both the House bill
approved last month and the bill under debate in the Senate.
    But neither calls for basic change in the so-called “issuer
pays” business model that critics say presents credit rating
agencies with a glaring conflict of interest.
    Most of the agencies’ revenue comes from the issuers of
bonds and other debt instruments that the agencies evaluate and
issue ratings on. Critics say that can mean that ratings are
colored by the agencies’ need to win and keep business.
    Congressional aides said lawmakers could not find a way to
change that business model without destroying the industry.
    Rating agencies were widely blamed for failing to spot
problems in the subprime mortgage market and other areas ahead
of the 2008 global financial crisis.
    The Securities and Exchange Commission and the Commodity
Futures Trading Commission regulate financial markets so
inextricably linked that critics for decades have said the two
agencies should be one.
    A year ago, when the Obama administration took over and the
financial crisis was in full swing, a CFTC-SEC merger looked
like a possibility. But as the House of Representatives began
hammering out a politically realistic set of post-crisis
financial reforms, the merger slipped from view.
    Neither agency wanted it since it would threaten jobs and
turf. Financial services industry lobbyists were divided, with
some favoring a merger and others against it. Some policymakers
saw virtue in preserving competition between the agencies.
    In the end, legislators said, in a perfect world, the two
agencies would be combined, but that just isn’t Washington.
    The two giants of U.S. mortgage finance — Fannie Mae
<FNM.N> and Freddie Mac <FRE.N> — need a major overhaul. That
much both political parties in Congress can agree on.
    But the consensus pretty much ends there.
    The Obama administration has said it will sketch out a
reform plan for the two agencies in February.
    So contentious is the struggle over fixing Fannie and
Freddie that Democrats opted to shelve it for now, excluding
the issue from financial regulation reform bills in the House
and Senate. They pledged to deal with it later.
    Fannie and Freddie together own or guarantee half of all
U.S. mortgages. Both were seized by the U.S. government and put
into conservatorship in September 2008 at the outset of a
financial crisis that rocked capital markets worldwide.
    Several congressional Democrats have introduced a bill to
cap credit card interest rates, but the measure is not included
in either of the main House or Senate packages.
    Another bill offered in the Senate last year would cap
rates at 36 percent for all consumer credit — mortgages,
payday loans, car title loans — not just credit cards. It is
not included in the two main legislative packages either.
    Some states have usury laws. Both the main House and Senate
reform packages have provisions saying how often and how far
federal regulators may preempt, or block, state consumer
protection laws, which can affect state usury statutes.
    * Global financial regulation overhaul seen in 2010,
double-click on [ID:nN0570162]
    * U.S. Senate panel nears agreement on role of Fed,
double-click on [ID:nN0536508]
    * US Senator Dodd wades into financial reform fight,
double-click on [ID:nN0547658]
    * FACTBOX-Major U.S. financial regulation reform proposals,
double-click on [ID:nN21200792]
    * FACTBOX-20 ways US House, Senate financial reforms
differ, double-click on [ID:nN29194836]
    * FACTBOX-Key players in reshaping U.S. financial
regulation, double-click on [ID:nN29198438]
 (Reporting by Kevin Drawbaugh; Editing by Andrew Hay)
 ((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202
488 3459 (fax)))

Wednesday, 06 January 2010 05:00:15RTRS [nN30220023] {C}ENDS

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