SEC adopts mortgage rule, decries lax lending

U.S. securities regulators adopted a rule on Wednesday designed to avert another financial crisis, but two officials dissented, saying it did not do enough to discourage banks from lending to borrowers with shaky credit and then passing the mortgage risk to investors.

The Securities and Exchange Commission approved the so-called “risk retention” rule by a 3-2 vote, while the U.S. Federal Reserve is expected to approve it later Wednesday.

The rule requires banks to keep at least 5 percent of the risk on their books when they securitize loans. This “skin in the game” is aimed at aligning the bank’s interest with investors that buy the loans.

But two Republican commissioners said they could not support the rule in part because they believe its exemption for low-risk mortgages is too broad and does not sufficiently crack down on lax underwriting standards. They also said the rule perpetuates the dominant role of government-sponsored enterprises like Fannie Mae in the housing market.

“Today could have been the day when the commission and its regulatory partners … stood strong, resisted political and special interest group pressure, and courageously seized this golden opportunity to address the failed federal housing policy that was one of the central causes of the financial crisis,” said Republican SEC Commissioner Daniel Gallagher.

Before the financial crisis, banks pumped up lending volumes, little concerned about the risks since they planned to unload the loans. The system imploded when subprime mortgage borrowers started defaulting.

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