Three Things Frank Would Change in Dodd-Frank

If former lawmaker Barney Frank could go back in time and redo his response to the 2008 financial meltdown, he would start by closing a loophole that allows mortgage lenders to continue at least one dangerous practice from the pre-crisis era.

“They had found a way to make money by shifting responsibility to other people,” Frank said Wednesday at the 2019 Fishlinger Family Lecture, organized by the University of Maryland’s Center for the Study of Business Ethics, Regulation and Crime. “They would make loans and then sell the right to collect on the loans to somebody else, and then not care. So their incentive was on the quantity of loans and not the quality of loans.”

Frank and former Sen. Chris Dodd, D-Conn., saw through the scheme and pushed for reform. “What we came up with was the notion that anybody who made loans or incurred debt had to retain some responsibility financially in case the debts weren’t repaid,” Frank said. “They had to keep skin in the game.”

The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, which covers everything from predatory lending to excessive executive compensation, started with mandatory risk retention on all residential mortgage loans. Under the bill’s original language, banks would have to keep at least 5 percent of their loans on their own balance sheets.

“We were going to have two types of home mortgages,” Frank said. “The kind you couldn’t make at all because they were so outrageous, and the kind you could make but you had to retain part of the loss retention.”

At least one senator had a different idea. Working with the real estate lobby, he proposed a third category: Loans so good that banks didn’t need a loss retention. Frank opposed the compromise but relented to reach the 60-vote threshold needed for Senate approval.

When regulators finalized the Dodd-Frank rules, they eliminated most risk retention requirements on securitized residential mortgages — good bets  issued to homeowners with healthy income, credit history and ability to make large down payments.

“The exception ate up the rule,” Frank said. “Most home mortgages are not subject to that risk retention. And that was the major cause of the problem in the first place.” 

Frank listed two other tweaks he would make to the bill.

He would outlaw the ability of financial institutions to require that their customers sign on to arbitration in cases of dispute. “We had it in the House bill,” Frank said. “We lost it in the Senate.”

Finally, he would raise the delineation between large and small banks, set at $50 billion in assets. “That was probably too low,” Frank said.

Overall, he said he is happy with the way the regulation has played out in the 10 years since President Barack Obama signed it. “Other than those changes, I would leave it pretty much as is,” he said.

The discussion, moderated by New York Times journalist and opinion columnist Thomas B. Edsall, was co-sponsored by Maryland’s Robert H. Smith School of Business and College of Behavioral & Social Sciences.

C-BERC includes faculty from both units. The center links business with criminology in an effort to scientifically confront, assess, evaluate and develop best practices in areas such as consumer protection. Financial support for the lecture series comes from Matt Fishlinger ’07, Bill Fishlinger ’71 and their families.

Read more from Frank’s presentation in Maryland Today (photo by Stephanie S. Cordle, Maryland Today).