Main Provisions of Obama Reform Plan for Financial Regulation

June 17, 2009

President Barack Obama plans on Wednesday to unveil his proposal to overhaul U.S. financial regulatory system.

Here are the main provisions as outlined by administration officials and as detailed in a document obtained by Reuters.

  • ELIMINATE THRIFT CHARTER, CREATE NATIONAL BANK SUPERVISOR
    Bank regulation would be streamlined with a new National Bank Supervisor assuming the functions of both the Office of Thrift Supervision and the Office of the Comptroller of the Currency. The plan would eliminate the charter for thrifts that underlies that U.S. savings and loan industry.

    Securitization originators, sponsors or brokers would have to keep at least 5 percent of the performance risk in them. Loan originators would be barred from transferring that risk.

    Legal documentation for transactions would be more standardized to improve valuations. The SEC and the Financial Industry Regulatory Authority would expand the TRACE electronic trade reporting database now used for corporate bonds to include asset-backed securities.

    Compensation of securitization brokers, originators, underwriters, sponsors and others would link to long-term performance and the interests of borrowers and investors.

    Generally Accepted Accounting Principles would be changed to eliminate immediate recognition of “gain on sale” by originators in a securitization, requiring instead that originators reflect income over the life of the assets.

    Fees and commissions received by loan brokers and loan officers would spread out over time and decline if a loan runs into trouble due to poor underwriting.

    Sponsors of securitizations would have to stand behind securitized products sold to investors with warranties.

    The agency would have the authority to require loan originators to retain 5 percent of credit risk. It would define standards for “plain vanilla” products such as mortgages with straightforward terms; restrict or ban prepayment penalties; and ensure that banks, nonbanks, and independent mortgage brokers follow the same rules.

    It would also enforce the Community Reinvestment Act, which encourages banks to make loans in disadvantaged communities.

    It would establish a council made up of heads of the SEC, Federal Trade Commission, the Department of Justice and the Consumer Financial Protection Agency and other agencies to help address gaps in consumer and investor protection.

    “All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse,” according to a statement from Treasury Secretary Timothy Geithner and White House Economic Adviser Lawrence Summers.

    Draft legislation for this “resolution authority” has already been proposed by the administration, giving the Federal Deposit Insurance Corp this new duty.

    But the SEC could initiate wind-down authority when the largest subsidiary of a failing firm is a broker dealer or securities firm. Treasury should have authority to appoint the SEC as conservator or receiver when the largest subsidiary of a failing firm is a broker dealer or securities firm.

    CFTC and SEC should make recommendations to Congress for changes to statutes and rules to align regulation of futures and securities.

    SEC should establish fiduciary duty for broker dealers who offer investment advice and align regulation of investment advisers and broker dealers.

    SEC should gain authority to establish a fund to pay whistleblowers.

    (Reporting by Kevin Drawbaugh, Karey Wutkowski, Rachelle Younglai, and Tim Ahmann; Editing by Gary Hill)

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