By Lending Central’s US reporter, Sam Garcia www.mortgagedaily.com

Mortgage lenders and financial institutions face the biggest overhaul of financial regulation since the Great Depression. A plan outlined by President Barack Obama calls for the creation of a powerful new regulator to oversee all aspects of mortgage lending, continued lender liability on securitized loans and the elimination of the Office of Thrift Supervision (an agency of the US Treasury Department which is responsible for regulating the savings and loan industry).

President Obama has unveiled a comprehensive plan for regulatory reform, which he describes as a “response to an historic economic crisis”.

Obama said that the unravelling of major financial institutions and a lack of adequate regulatory structures were among the most significant contributors to the economic downturn. He said the current regulatory regime, which is a product of the Great Depression, was overwhelmed by the “speed, scope, and sophistication” of a variety of new and complex financial instruments.

Under the new proposals, the Federal Reserve will be empowered to regulate bank-holding companies and other large firms. These are firms that gamed the regulatory system so that they faced less regulation - though the failure of any one of them threatened the viability of many others.

“We do not have any effective system in place to contain the failure of an AIG (American International Group) and the largest and most interconnected financial firms in our country,” Obama said. “That is why, when this crisis began, crucial decisions about what would happen to some of the world’s biggest companies - companies employing tens of thousands of people and holding trillions of dollars in assets - took place in emergency meetings in the middle of the night”

Under the proposal, these systemic companies would be required to meet stronger capital and liquidity requirements - a move designed to reduce the likelihood of their failures.

In addition, an oversight council of multiple regulators would be established to increase the flow of information between regulators and identify gaps in the regulatory system.

A resolution authority would be created to dissolve failed corporations in an orderly fashion - much like the authority given to the Federal Deposit Insurance Corporation to resolve failed banks.

FDIC Chairman Sheila C. Bair saluted Obama for addressing the issue of “too big to fail”. (A number of mortgage giants such as Fannie Mae and Freddie Mac deemed “too big to {let} fail”, were bailed out by the government.)

Mortgage lenders, originators and brokers are likely to be impacted by the proposed creation of a “powerful agency” to oversee all aspects of lending and other financial activity. Obama acknowledged that some borrowers took out loans they knew they couldn’t afford. He said many were confused by complicated contracts with a “bewildering array of incomprehensible options”.

The new consumer agency will set new rules for mortgage lending, hold mortgage brokers to higher standards and hold nonbank lenders to the same standards as banks with similar services.

The Mortgage Bankers Association’s President and Chief Executive Officer John A. Courson warned Congress not to create conflicting and contradictory regulatory regimes. He said the current patch of state and local laws should be replaced with just one pre-emptive set of mortgage regulations for the entire country

The president’s plan also calls for originators to maintain an interest in loans that are securitized.

“We will require the originator of a loan to retain an economic interest in that loan, so that the lender - and not just the holder of a security, for example - has an interest in ensuring that a loan is paid back,” the president stated.

MBA Chairman David G. Kittle cautioned that making all participants in the origination process maintain a financial interest in loan performance might put certain business models at a competitive disadvantage.

Obama is calling for the dismantling of the Office of Thrift Supervision. The OTS, which was responsible for regulating some of the biggest failed financial institutions in U.S. history, enabled big institutions to “cherry pick” their regulators.

But the American Bankers Association isn’t pleased with the consolidation of regulation.

ABA President and CEO Edward L. Yingling said: “We believe the Administration’s proposal is so vast and controversial that it will be extremely difficult to enact and will produce great uncertainty in the financial markets and among financial regulators while it is pending.

“It needlessly rips apart all the existing regulatory agencies, eliminates charter choices and creates a new agency with powers to mandate loans and services that go well beyond consumer protection.”