Will Regulators Undermine Dodd-Frank?

Regulators are often accused of “over-regulating” going beyond the statutes that give them their authority.  But sometimes they also “under-regulate” and don’t do as the statute intends.  This is what is happening with the requirement that banks keep a certain percent of mortgages on their books as required by Dodd-Frank.

But it now appears that section will be rendered moot as multiple regulators give in to pressure brought by an odd coalition to classify virtually every mortgage as exempt from the risk retention law.

That coalition includes large parts of the banking industry, which seems to have no desire to stand behind its loans, as well as consumer advocates and the housing industry. The latter groups say they are worried that poorer people will be unable to obtain loans if all loans cannot be securitized.

If banks aren’t required to keep risky loans on their books, they will make more of these risky loans.  Then they will chop these mortgages up and sell them.  If this sounds familiar, it is because it was a leading cause of the Great Recession.

By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.