House GOP Wants To Repeal Requirement That Banks Hold A Portion Of Their Risky Loans

Republicans have made quite the show of disparaging the Dodd-Frank financial reform law, calling for its repeal, refusing to provide regulators with the funds to implement it, and blocking nominees for key regulatory positions. Rep. Scott Garrett (R-NJ) took the latest step in that campaign yesterday, introducing a bill that would repeal an important Dodd-Frank safeguard for the financial system.

One of the key factors that led to the housing bubble’s boom and bust was the ability of subprime mortgage lenders to make a loan and then turn around and sell the entire loan to Wall Street. As the Center for Public Integrity wrote, “lenders were selling their loans to Wall Street, so they wouldn’t be left holding the deed in the event of a foreclosure. In a financial version of hot potato, they could make bad loans and just pass them along.” This fueled a dramatic decline in lending standards and gave subprime lenders every incentive to push loans onto people, since the lenders could divorce themselves from all the risk associated with a loan that didn’t pan out.

Dodd-Frank requires that lenders retain at least five percent of their loans, so that they have some “skin in the game.” Republicans on the House Financial Services Committee — following Financial Service Committee Spencer Bachus’ (R-AL) call to “serve the banks” — want to the repeal that requirement:

[Garret’s] bill would eliminate a provision of the Dodd-Frank financial reform law that requires financial firms to retain “skin in the game” by holding some of the risk from mortgages they packaged into bonds.

Garrett said he hopes to move his bill through his subcommittee in short order, as the full committee begins to consider other GOP housing bills as they advance to the House floor.

Banks have been quietly trying to nix this portion of the law, after they were unsuccessful in getting it out while Dodd-Frank was being debated. The banking industry said that it was counting on “better outcomes” with Republicans running the House of Representatives. This is just one more way in which that attitude is turning into reality.