Barney Frank On Financial Overhaul Bill
ROBERT SIEGEL, host:
Joining us is Chairman Barney Frank of the House Financial Services Committee. Welcome to the program once again.
Representative BARNEY FRANK (Democrat, Massachusetts; Chairman, House Committee on Financial Services): Thank you.
SIEGEL: One root cause of the financial crisis, many say, was that banks made mortgage loans and then sold them to people who then packaged them into securities and sold them to investors. Is it fair to say that this bill reduces a bank's ability to do that, but it doesn't eliminate a bank's ability to do that?
Rep. FRANK: No, we pretty much eliminate the bank's ability to do that in two ways. First of all, we outlaw very specifically the kind of mortgage that should have been given. It will be very rare for someone who cannot afford to make those payments be given a mortgage.
Secondly, and this is something I'm glad you focused on, because I've always felt it was very logical. Thirty years ago, when you borrowed money, you were going to have to pay back the person who lent it to you who was consequently careful about who he or she lent to. We have what we call risk retention.
For now, you will not be able to make those loans and immediately sell them. You'll have to hold the great majority cases five percent. And while that may not seem like a lot to the people, if there were losses, your 5 percent comes off the top. In other words, if you were going to make a 10 percent profit off this, half of it gets cut, and we think that's a significant deterrent.
If it's a very complicated loan that the regulators think is risky, it can go to 10 percent. It can go to zero if you make 30-year fixed rate mortgage loans with a high down payment. It's not a guarantee, but those could make well if you can show the regulators they're safe.
SIEGEL: So you're saying the incentive to the mortgage lender here is to sell what you might call a plain vanilla mortgage - 30-year fixed-rate mortgage.
Rep. FRANK: That's a very good point, Robert. I think it's better to incentivize them, and that's what we do. So - but the answer to the question on the mortgage is, first, it will be illegal to make those loans to people unless there's a very good showing with documentation that you can pay it back.
And secondly, whatever loans you make, you will not be able to dispose all of them unless they are that very small category of plain vanilla, as you talked about. You will be at risk if the loans don't get repaid.
SIEGEL: The bill creates a Consumer Financial Protection Bureau that's housed within the Federal Reserve. But as I understand it, regulators could appeal bureau regulations to the new 10-member Financial Services Oversight Council if they believe that what the Consumer Financial Protection Bureau is proposing would threaten the banking system.
Are you concerned that the interest of consumers might routinely be trumped by the more conventional interest of bank regulators, which is to say the soundness of the banks?
Rep. FRANK: Not routinely. It's indicative of the approach that some take, which is, first, to tell us we'd never get a consumer agency, then when we get most of it, frankly, we'll get some small pieces. I would have preferred not to have that, but we need to get 60 senators. But in the first place, it would take a two-thirds vote of all those regulators, and they cannot simply arbitrarily do it.
We also do not believe that there was any showing that, for instance, preventing banks from retroactively raising your credit card interest in the face of its safety and soundness. So, no, I am not worried that would be of use. I am worried about this: There is a potential for a problem, but I don't think it's very great.
SIEGEL: You've said that if this new bill - if all these new regulations result in lower profits in the financial sector, that shows it's working? That's what you would expect?
Rep. FRANK: Yes, I could have restated that. I could have said it (unintelligible) a little sleepy. I would like there to be more profit from lending but less profit from manipulation.
SIEGEL: But I heard you say this morning that if profits in the financial sector don't decline, then you've wasted a year of your life. You're saying maybe that was sort of...
Rep. FRANK: Yes, right now, I believe that there - well, let me give you one example. We've already been - accomplished this. Banks are making less money on credit cards now because they can't retroactively raise interest rates on people because of a bill we passed. You got citizens who have an error and they have an overdraft and they're going to be hit with big whacks.
Yes, the banks are now making profits in ways that I do not think help the economy and they can hurt average people. I would hope after a while they would shift, and they would get to a better business model in which they were doing more lending.
SIEGEL: And as you've observed, you can shut the door on one method of making money and the banks will find another door. I mean there are unintended consequences in these actions.
Rep. FRANK: Well, that's - that's we were with the credit card agencies. But there'll be a cop always on the beat. So if we put some regulations to protect citizens from abuses in payday loans or overdrafts or credit cards, then that agency will be able to step in and crack down.
SIEGEL: Before I let you go, a word about process. The conference committee did its work live on C-SPAN. That was the standard to which reformers aspire. They hope that the health care would be done live on C-SPAN. Practically speaking, did that make it easier? Did it make it harder? How does it get in the way or assist a conference committee to do its work to have the cameras there?
Rep. FRANK: Well, it made it - it made them physically harder. I mean, I think I'm glad to be doing radio. I'm not going to do too much TV until I get a haircut.
(Soundbite of laughter)
SIEGEL: But do people behave differently because it's being broadcast on...?
Rep. FRANK: No, that's a very good question, Robert. The fact that we did this so publicly, we got an even stronger bill out of the conference committee than I had thought. And I know that the public pressure was one of the reasons. And the public pressure was there because people knew they were being watched on C-SPAN. And the fact that what you see will be preserved forever is a powerful force for the public good in this case.
SIEGEL: Well, Congressman Frank, thank you very much for talking with us.
Rep. FRANK: You're welcome, Robert. Thank you for the chance.
SIEGEL: Barney Frank, a Democrat of Massachusetts, the chairman of the House Financial Services Committee. He was one of the two chairmen who brought the financial regulatory bill through conference committee in the early hours this morning.