WASHINGTON — The House passed a mammoth financial reform bill late Wednesday 237 to 192, sending the bill to the Senate, which is not expected to act until later this month.
The bill largely embodies the blueprint for overhauling the financial regulatory framework that was laid out by the Obama administration a year ago.
"It says that if an institution has gotten so indebted that it should not be able to pay its debts, we step in and we put it out of business," said House Financial Services Committee Chairman Barney Frank on the House floor during floor debate. "It is also very clear elsewhere in here that any funds expended will come from the financial institutions, not the taxpayers."
The legislation is meant to give the government tools to head off another financial crisis.
It would create a council of federal regulators led by the Treasury Secretary to monitor the stability of the system as a whole, rather than just focusing on isolated institutions.
The bill would enhance the authority of the Federal Deposit Insurance Corp. to unwind a systemically important institution, a provision designed to repeat a the bailout of American International Group and the bankruptcy of Lehman Brothers.
To limit the Federal Reserve Board's emergency lending powers, the central bank would be forbidden from using its authority to lend to a single institution and any lending program would require the Treasury Secretary's signoff.
Any emergency lending programs would have to be broad-based, ensure that eligible institutions were not insolvent and that the collateral put down to back the loan would prevent risk to the taxpayer.
Under the legislation, the central bank would also be subjected to an audit by the Government Accountability Office that reviewed all of its actions during the crisis and face continuous disclosures of all of its emergency lending, open markets, and discount window lending activity with a time delay.
To shed light on the complicated and multi-trillion dollar derivatives market, it would enhance transparency and strengthen regulation of derivatives contracts.
It would give the Securities and Exchange Commission and the Commodity Futures Trading Commission the authority to regulate over-the-counter derivatives and requires most derivatives to be cleared and exchange-traded.
To address the foreclosure crisis, it would require regulators to set new underwriting standards that ensure borrowers have the ability to repay their mortgages, have a net tangible benefit and are shielded from abusive terms.
It would aim to protect borrowers who were sold unsustainable subprime loans by banning compensation practices that steer borrowers into higher-cost terms such as yield spread premiums and prepayment penalties.
To address securitization, lenders would have to retain 5% of the loans' risk when packaging loans into securities, unless it met standards developed by regulators.
The bill would establish an autonomous consumer financial protection bureau housed within the Federal Reserve Board that would examine and enforce its standards against banks with $10 billion and greater in assets.
"This bill contains the greatest collection of new rights for consumers," Frank said during Rules Committee debate on Wednesday. "We set up an independent consumer bureau. It was housed in the Federal Reserve which resulted from a compromise with the Senate. It will receive its mail at the Federal Reserve but no one at the Federal Reserve System will be able to open it. It is an entirely independent agency."
The bill also includes a standard designed to impede the ability of national banks to preempt state consumer protections.
Republicans repeatedly castigated the bill during debate Wednesday as a job killer, saying it was full of examples of ill-conceived regulations that would enable the continuation of bailouts.
"Instead of adopting common-sense reforms to protect taxpayers and ensure fairness, this 2,000-page bill enshrines us as a bailout nation through its permanent Tarp-like bailout mechanism for big financial institutions," said Rep. Jeb Hensarling, R-Tex. "At a time when unemployment is hovering near 10%, this bill does nothing to create the jobs our economy desperately needs. Instead, it makes credit — especially small-business credit — less available and more expensive by creating a new federal loan czar with the power to ban and ration consumer credit products."
The bill falls far short of an ambitious proposal floated by Senate Banking Committee Chairman Chris Dodd late last year to consolidate all regulatory supervision into one regulatory body and strip the Fed of its banking oversight.
Instead, it would enhance the powers of the Fed to regulate institutions deemed systemically significant, including nonbank financial companies, and simply merge the Office of Thrift Supervision into the Office of the Comptroller of the Currency while preserving the thrift charter.
In a knock to the profitability of banks of all size, the bill would require the Fed to regulate interchange fees on debit cards and ensure that they are "reasonable and proportional."
It gives shareholders the right to cast nonbinding votes on executive pay packages including golden parachutes and allows the SEC to set rules to establish proxy access.
It would require that compensation committees are stacked with independent board members.
The bill would permanently increase deposit insurance coverage to $250,000 and require the FDIC to base premiums on assets instead of domestic deposits, a change that would mean large banks pay higher premiums.
In a provision added late Tuesday, the bill would also require the FDIC to raise the ratio of reserves to insured deposits to 1.35% by 2020, a 20-basis point hike from the current mandatory minimum. But it would also require the agency to assess the difference only on banks with more than $10 billion of assets.
During the final hours of the conference committee's marathon session last week, the bill was also tweaked to let banks continue to use derivatives to hedge their own risks and conduct most traditional derivatives transactions including interest rate and foreign exchange swaps.
But most commodities, agriculture and non-cleared, non-investment grade derivatives activities would have to be conducted within an affiliate.
The conference also put the finishing touches on the Volcker Rule to ban proprietary trading.
The measure would limit bank investment in private equity firms and hedge funds. Under changes made last week, banks would be allowed investment in such companies equal to as much as 3% of the total ownership interests of the fund. However, their collective investments in those firms could not exceed 3% of the bank's Tier 1 capital.
The details of the bill are not expected to change when the legislation proceeds to the Senate, as it represents the terms of a final agreement reached between House and Senate conferees earlier this week. (The House passed a previous version of the bill in December on a vote of 223 to 202).