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House Makes Changes to Reform Bill

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The House approved dozens of changes late Thursday to the financial regulatory reform bill, including measures to enhance the Federal Reserve Board's power to break up large, complex firms and cap a potential debt guarantee program by the Federal Deposit Insurance Corp. (FDIC).

A final vote and consideration of other amendments is expected Friday.

The bulk of the changes to the legislation were tucked into a 249-page manager’s amendment from House Financial Services Committee Chairman Barney Frank that passed 240 to 182.

The House also approved a controversial amendment from Rep. Stephen Lynch, D-Mass., 228 to 202, opposed by big banks that serve as major swaps dealers. It would prohibit them from owning more than a 20% stake in a derivatives clearing house, essentially requiring all the major financial institutions to divest in such swap exchange facilities.

The underlying bill is designed to minimize the threat posed by large, interconnected financial firms.

The base bill would create an interagency systemic risk council that would recommend actions for the Fed to take to prevent systemically significant firms from becoming too risky. It would expand the FDIC’s ability to resolve systemically risky firms and put them into receivership. The legislation would also create a new consumer financial protection agency and regulate derivatives among a slew of other reforms designed to stabilize the system.

The Frank manager’s amendment would make several key changes to the bill.

It would include a change sought by Rep. Brad Miller that would cut in half, to 10%, a haircut the FDIC could impose on secured creditors when resolving systemically significant firms. The provision was also narrowed to focus on short-term lending of 30 days or less and to carve-out federally backed credit including advances from the Federal Home Loan banks, Treasury securities and debt guaranteed by the government-sponsored enterprises.

The amendment also includes a deal on federal preemption brokered by Rep. Melissa Bean, D-Ill., that would let the Office of the Comptroller of the Currency (OCC) preempt state consumer protections that interfere with the business of national banking through a letter or ruling; and let banks go directly to court to do the same.

Building on legislation added at the committee from Rep. Paul Kanjorski, D-Pa. that would let the systemic risk council break up healthy firms that could pose a risk to the system, the manager’s amendment would explicitly give the Fed the same power under the Bank Holding Company Act to prevent mergers, acquisitions or consolidation of non bank financial holding companies. It also adds language to clarify that prudential regulators have broad authority to require tougher standards on firms they regulate that pose a systemic risk.

It would make it harder for large banks to grow by adding thrift mergers and acquisitions to be calculated into a limitation that prevents deals from letting a bank acquire more than 10% of domestic deposits.

The measure would also prevent the Fed from promulgating prudential rules that would supersede any state or federal consumer protection.

The manager’s amendment makes several changes to a provision that would let the FDIC set up a debt guarantee program for solvent firms. It would cap that program at $500 billion and clarify that any special assessment needed to cover losses would only come from institutions that participated in the program. It would also permit the FDIC to require warrants for assistance provided. The manager’s amendment would also empower the FDIC to push a defaulting borrower into receivership or bankruptcy.

Under an agreement Frank reached with House Energy and Commerce Committee Chairman Henry Waxman, the consumer agency would initially be led by an independent powerful director as Frank preferred and then transitioned into a president-appointed commission favored by Waxman.

It would direct the consumer agency to establish a special division to ensure that community banks are not unduly burdened by its regulations; and let the agency charge higher assessments for institutions with poor track records on consumer protection or that pose excessive risk. It would retain the Fed’s consumer advisory council and require it to provide recommendations to the consumer agency.

Under the bill, private student lenders would have to achieve institutional certification before they could offer loans to college students and it would require the Education Department and the consumer agency to study the fairness of such loan terms.

Within 180 days of enactment, bank branches would also need to prominently display overdraft fee rates and terms.

Not every change proposed by Frank passed. A separate amendment that would have let the Commodity Futures

Trading Commission, the Securities and Exchange Commission, and prudential regulators impose margin requirements in swap and security-based swap transactions involving end-users was rejected 280 to 150.

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