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Mulvaney: Elections have consequences at CFPB
01:38 - Source: CNN

Editor’s Note: Jennifer Taub is the author of the financial crisis book “Other People’s Houses” and a professor at Vermont Law School. The opinions expressed in this commentary are her own.

CNN  — 

This month marks the tenth anniversary of the $29 billion US government-backed bailout of Bear Stearns. The collapse of this giant investment bank in March 2008, under the weight of its bad mortgage-linked bets, marked the beginning of the global financial crisis.

Jennifer Taub

To commemorate it, the US Senate plans to deliver a big gift to the banking sector by removing several safeguards for American families put in place after the meltdown.

Tin is the traditional tenth wedding anniversary gift. A bank deregulatory bill on the crisis anniversary is a fitting present from someone with a tin ear.

Senate Majority Leader Mitch McConnell has announced that this week the Senate, rather than respond to the plague of gun violence by considering gun law reforms after the Parkland shooting, will begin debating the rollback of financial reforms.

The bill, S. 2155, would considerably weaken the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law President Barack Obama signed in 2010, which was designed to tame Wall Street, protect consumers and make our financial system less fragile.

Lifting the sensible limits imposed by Dodd-Frank would be a dream come true for the banking sector, but eventually a nightmare for the rest of us. This bill will hurt homeowners and allow giant banks once again to take big risks with taxpayer-backed, FDIC-insured customer deposits.

Who is calling for this bank deregulation? The pressure is not coming from clamoring constituents. Instead, it is the bank lobbyists, outside the public eye, who quietly orchestrated this effort. Acknowledging this provenance, the growing opposition has dubbed S. 2155 “The Bank Lobbyist Act.”

To pass it, McConnell needs 60 votes, so he will require more than just his party’s support. The bill already has 11 Democratic co-sponsors. Unless the public speaks up, he may get those votes.

Here’s why. The bill’s sponsors on both sides of the aisle are counting on our fading memories. They think we have forgotten the terrible years after the toxic-mortgaged-backed meltdown, when many millions of families lost their homes to foreclosure. The bill’s sponsors believe that the pain previously inflicted upon us by the financial sector is buried in the past. They are wagering that we have forgotten both the 1980s Savings and Loan debacle and its repeat performance in the more recent 2008 global financial crisis.

That is a bad bet. We remember.

We remember that banks and borrowers got into trouble with unaffordable mortgages. Yet this bill would essentially encourage banks with up to $10 billion in assets to once again offer predatory mortgage loans to millions of borrowers. This includes making mortgage loans to homeowners based on their ability to pay just an initial “teaser” rate, not the fully-amortized rate. This puts borrowers at risk of losing their homes if they cannot afford the higher long-term payments. It also puts banks at risk when these loans default.

As Boston College law professor Patricia McCoy detailed in the American Banker, Dodd-Frank “required lenders to first determine that loan applicants are able to repay before making them home mortgages. Lenders who fail to make this assessment can be liable to borrowers.” Yet the bill “permits banks with total assets of up to $10 billion … to make unaffordable mortgages, with no liability to borrowers, so long as the banks hold the loans on their books.” She adds that “if the bill becomes law, Congress will excuse over 97% of US banks from having to verify applicants’ income, assets and debts for mortgages they keep on their books.”

We remember that big banks got taxpayer-funded bailouts. That is why Dodd-Frank automatically subjects bank holding companies with more than $50 billion in assets to enhanced supervision by the Federal Reserve. Yet, under the Bank Lobbyist Act, that threshold would be raised to $250 billion. This is too great a risk. As former Fed lawyer Jeremy Kress explained in The Hill, raising the threshold to $250 billion is “effectively deregulating 25 of the 38 biggest banks in the United States, accounting for nearly one-sixth of the assets in the banking sector.” We remember that in 2008, several banks with under $250 billion in assets, including Countrywide, received billions in bailouts during the 2008 crisis. And even before the bailout funding was available, when IndyMac with just $32 billion in assets went bust, it cost the FDIC deposit insurance fund about $9 billion.

We remember that regional and community banks can cause a national meltdown. The bill’s proponents are positioning it as harmless regulatory relief for regional and community banks. But we remember that during the savings and loan crisis during the 1980s, risky practices – including poor real estate loan standards, thin capital, risky assets, and dependence on short-term funding – led to the collapse of hundreds of savings banks. The resulting S&L bailout cost taxpayers hundreds of billions of dollars. As George Washington University law professor Art Wilmarth explained in the American Banker, “Big regional banks and the largest money center banks have held highly correlated risk exposures during every US banking crisis since 1980. Those correlated exposures resulted from very similar business strategies that many large banks pursued during the boom leading up to each crisis.” Yet this new Senate bill would allow regional and community banks to avoid prudential supervision, and also engage in high-risk trading with customer deposits.

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    We remember the bailout oath of “never again.” Upon signing Dodd-Frank, President Obama vowed we would “never again be asked to foot the bill for Wall Street’s mistakes,” but that “for these new rules to be effective, regulators will have to be vigilant.” Yet with President Donald Trump’s appointment of Mick Mulvaney to head the Consumer Financial Protection Bureau, the deliberate gutting of consumer protections began.

    Now with the “Bank Lobbyist Act,” our senators have a choice. Will they pile on with the Trump Team and pummel the already weakened financial reform law into submission? Or will they honor their promises made to the American people and protect us from a future financial meltdown?

    Time will tell. We will remember.