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Risk Management

Dodd-Frank five years later: Barney Frank’s greatest victory, regret

Barney Frank wishes he never gave in on risk retention.

The concession—that packagers of qualified residential mortgage loans would not be responsible for the first 5 percent of loss on the loan—was, in the retired U.S. congressman’s telling, made to push the Dodd-Frank Act through the U.S. Senate.

But that was in 2010. By 2014, six federal agencies released a securitization rule that changed the Dodd-Frank definition of a qualified residential mortgage from one with a 20 percent down payment to a qualified mortgage as defined by the Consumer Financial Protection Bureau.

“So we created a category of especially good loans that would then not be subject to risk retention,” Frank, a Democrat from Massachusetts, said Nov. 5 at a campus talk for the MIT Center for Finance and Policy. “And then, to my great dismay, the regulatory council got persuaded by a coalition of liberal advocacy groups and the banks that they should let the loophole eat up the rule. So there was now—ironically—no risk retention on residential mortgages. There is risk retention on everything else.”

“I would not have given that up,” he said.

Frank, a co-sponsor of what is officially the Dodd-Frank Wall Street Reform and Consumer Protection Act, retired from Congress in 2013. He was chairman of the House Financial Services Committee from 2007-2011, making him a key figure in constructing the federal government’s recovery from the 2008 financial crisis.

Asked by MIT Sloan finance professor Deborah Lucas to name the Dodd-Frank Act’s greatest success, Frank said that “without question, the star of it is the Consumer Financial Protection Bureau, which has worked very well.”

Frank also said he is happy with the results of the act’s derivative regulation.

“I claim as a trophy the decision by General Electric to go back to its roots,” he said. “In a decision that they attribute very specifically to the legislation and the new rules and the toughness, GE has now divested itself of the financial aspect [by selling most of GE Capital] and has gone back to being a manufacturer of real things.”

In his talk with Lucas and MIT Center for Finance and Policy director Doug Criscitello, Frank said he immersed himself in the world of derivatives and credit default swaps out of necessity. Taking control of the financial services committee, he had hoped to focus on increasing affordable rental units across the country. But the financial crisis got in the way, he said.

“I didn’t come down here [to Washington] to referee fights between rich people,” Frank said. “Let them fight each other. But you have institutional roles … and you cannot escape your responsibility.”

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