Congressman Barney Frank today issued the following statement in response to recent inaccurate claims by Mitt Romney about the Wall Street Reform and Consumer Protection Act. During the Presidential debate on Wednesday, Romney asserted that the financial reform law "designates a number of banks as too big to fail, and they're effectively guaranteed by the federal government." Romney also claimed that "banks are reluctant to make loans" because of a provision of the law which calls for a rule on minimum standards for mortgages.
Frank shows that both claims are completely false.
I understand the dilemma Mitt Romney faces in trying to reconcile his opposition to the Wall Street Reform and Consumer Protection Act with the fact that the law is understandably very popular with the American public. Mr. Romney has asserted his opposition to the law in order to win the Republican nomination in a primary contest of extreme conservatism. But in trying to find ways to justify his call for repeal of the law, he totally misrepresented the two provisions he described.
The law effectively prohibits the kind of irresponsible mortgages that precipitated the financial crisis. The general principle is clear -- home mortgage loans should not be made to people who are not going to pay them back. To reinforce this point, the law establishes the concept of Qualified Mortgages and provides that if a home mortgage fails to satisfy these minimum conditions, it cannot be presumed to meet that overarching "ability to repay" requirement. It does not spell this out in detail in the text of the bill because this is a concept that should be subject to real world experience. But exactly what specific terms should be included is a matter to be determined after getting input from all segments of the public -- buyers, sellers, realtors, lenders, builders, etc. And it is important that as we go forward, we are able to alter these terms as conditions in the economy change, and as we gain experience with their operation. It is possible that the first level over time may turn out to be either tougher or more lenient than is appropriate, especially given changing conditions.
But Mitt Romney's assertion that because this rule has not yet been promulgated lenders are not now making mortgage loans makes literally no sense whatsoever. The rule is currently going through a very open process of comment and debate. But the law is very clear: the Qualified Mortgage test has no legal effect until the rule is promulgated. It will not be retroactive. That is, loans made now -- and until the rule is promulgated -- will be valid loans to the extent that they are valid under existing law. The fact that a loan made today may not meet the Qualified Mortgage test will have no impact on its enforceability. Obviously, this does not mean that any loan made today should be considered appropriate or sustainable; it means only that whatever the current law is regarding loans will govern loans made until the Qualified Mortgage definition takes effect. There is no basis for the assertion that the future promulgation of a test that has no retroactivity is in any way retarding current lending.
Mitt Romney also gets the issue of Orderly Liquidation Authority completely wrong. I do not know where he came up with a figure of five banks as subject to the special rules that apply to financial institutions that are so large that they could threaten the stability of our economy. The law sets forward criteria for designating such institutions. The number of institutions which may be covered is far more than five, and these large institutions are not located just in New York. But more importantly, the law does exactly the opposite of what Mr. Romney says. The term "Too Big To Fail" applies to the situation that existed before the law passed. It was during the Bush administration that the Federal Reserve provided funds to A.I.G. when it could not meet its obligations, and kept A.I.G. from failing. The Wall Street Reform and Consumer Protection Act literally makes it impossible to provide such assistance going forward.
First, the law removes the authority under which the Federal Reserve advanced money to a single firm like A.I.G. so it could pay its debts and stay in business. In addition, the law says that no aid can be extended to deal with the consequences of a failure of any large financial institution until the institution is put out of business. That is, there are death panels in the legislation we adopted during the past Congress, but they apply to large financial institutions, not older people. If the Secretary of the Treasury were to advance aid to such an institution and allow it to stay in business, he or she would be violating federal law.
In addition, the designation of financial institutions as "systemically important" subjects them to higher capital requirements and tougher supervision. It then says that if despite this such an institution cannot meet its obligations and the magnitude of those obligations is threatening to the economy -- as Bush administration leaders believed was the case with A.I.G. -- then the institution must be liquidated (under Orderly Liquidation Authority) and the financial regulators may decide to spend money to deal with those obligations. But the law is clear -- any money expended in the course of liquidating such an institution will be recovered first from the failed institution's assets, and if those are insufficient, then from the financial industry via an assessment on financial institutions with $50 billion in assets or more. That is, unlike the response by the Bush administration in 2008, no funds from the Treasury can be expended in this process without an automatic 100% recovery.
If being designated as "systemically important"-- being subject to tougher supervision, higher capital requirements, and a requirement that liquidation precede any federal assistance in dealing with obligations -- was as desirable as Mitt Romney proposed, then presumably institutions would welcome it. In fact, the institutions subject to this rule are among those heavily financing Mr. Romney's campaign. That would appear to be an odd reaction to his promise to abolish something that he believes is of great benefit to them. Even more striking is the fact that while some institutions are automatically covered by the definition in the law, there is discretion on the part of the Financial Stability Oversight Council as to others. Every regulator we have asked reports that no institution about which such discretion exists has sought to be included, and in fact, most of the institutions in this category have lobbied hard not to be covered. That is, they understand, as Mitt Romney does not, that these are restrictions on them and not benefits.