Frank warns of ‘revolt’ against Dodd-Frank lending regulations

By Theo Emery, Globe Staff

WASHINGTON – US Representative Barney Frank, one of the authors of a sweeping financial overhaul bill, warned banking executives this morning that mortgage lenders must bear some of the financial risk for extending loans to home buyers.

Speaking to the Mortgage Regulatory Forum in Washington, Frank said that there a “revolt” under way against regulations intended to keep lenders from making risky loans to borrowers. Those regulations keep some of the financial risk for mortgages with the lenders who grant them, without which lenders will return to giving loans to those who can’t afford them, he said.

“I am disappointed at this revolt against risk retention that was so clearly at the center of this,” the Newton Democrat said. “All the other problems we had … they all centered on the system for selling to other people loans that shouldn’t have been made in the first place.”

Frank received a polite reception from his Washington audience, which also included regulators and public policy experts, but his pointed words aimed at industry executives before him was a clear rebuke to banks seeking to prevent or roll back the regulatory measures passed in the bill bearing his name.

Frank headed the House Financial Services Committee up until last year, when Republicans took control of the chamber. Now in the minority status, Frank has been sidelined as a major mover on the issue, but continues to advocate for keeping stricter regulations in place.

Before passage of the Dodd-Frank Act in 2010, lenders could loan to risky borrowers, then bundle up all of that risk and sell it as securities, essentially shifting all the risk for dicey mortgages to others. When borrowers began to default, the entire system collapsed.

The Dodd-Frank law requires lenders to maintain 5 percent of a residential mortgage’s credit risk, though certain high-quality loans are exempted. Federal regulators are considering a rule that would further define the terms of those exemptions; some critics of the 5 percent requirement want to widen the exemptions.

Since the passage of the bill, mortgage lenders and some in Congress have pushed back against efforts keep lenders on the hook for loans. There’s also pressure from consumer groups that seek to broaden homeownership for the poor; they say that higher hurdles for borrowers would prevent low- and middle-income people from buying homes.

Frank said the problem underlying the recent financial meltdown was that people were getting loans that couldn’t afford them. That was true before the meltdown, and it remains true today – and regulators alone can’t make sure that every mortgage is sound.

“It’s simply not possible with any conceivable number of regulators to monitor every loan. If the people making the loans do not have an incentive not to lend to people who can’t repay, there is no way we will prevent those kinds of loans from being made,” he said.