http://www.marketwatch.com/story/house-begins-to-vote-on-sweeping-bank-reform-2009-12-11 House approves sweeping, post-crisis bank reform Lawmakers impose a Fed audit in two years, make it easier to sue credit raters By Ronald D. Orol, MarketWatch WASHINGTON (MarketWatch) -- House lawmakers on Friday approved the most significant increase in the regulation of U.S. banks and other corporations since the Great Depression, placing new restrictions on the activities of the nation's biggest banks, reining the power of the Federal Reserve and providing more help for troubled homeowners. The mammoth legislative package -- which passed 223-202 with no Republican voting in favor of the bill -- includes new fees, leverage limits and other restrictions on 'too-big-to-fail' institutions, legislation to audit the Federal Reserve's balance sheet within two years, a provision giving shareholders a say on the pay of top executives and new investor protection regulations. Bank reform legislation has been introduced in the Senate but is only expected to be approved next year. "This legislation makes it very unlikely that we'll see a repeat of the level of problems we saw last year," said House Financial Services Committee Chairman Barney Frank, D-Mass., one of the bill's key authors, in an interview with reporters. News Hub: Goldman to Forgo Top Exec Cash Bonuses The top 30 executives at Goldman Sachs will go without cash bonuses for 2009. WSJ's Susanne Craig and MarketWatch's Alistair Barr explains these efforts to address compensation criticism and the potential impact, in the News Hub. Lawmakers narrowly defeated a bipartisan effort to destroy a proposed Consumer Financial Protection Agency and replace it with a weaker council, and backed the creation of the new consumer agency that would supervise and regulate mortgage and credit card products. Rep. Steny Hoyer, D-M.D., the Democrat Majority Leader, spoke in defense of the creation of the consumer agency, arguing without it, bank regulators that failed to identify problem mortgages in the build up to the financial crisis, would stay in control of consumer protection. "A major failure of the previous administration was regulatory neglect," Hoyer said. The package includes supervision of trillions of dollars in complex derivatives products and new power to file suits against credit raters that have been blamed for overly rosy debt ratings as well as new capital levels for big banks. The package also requires big banks to pay into a $150 billion fund that would be used to dismantle a "too-big-to-fail" bank whose collapse would unsettle the markets. Help for homeowners Responding to concerns from the Congressional Black Caucus, lawmakers approved using $3 billion of bank bailout funds to give out fixed-rate, low-interest loans to unemployed people facing foreclosure. The amount of assistance for any homeowner is prohibited from exceeding $50,000. But a contentious measure allowing bankruptcy judges the authority to modify mortgages to help troubled homeowners avoid foreclosure was narrowly rejected, 188-241, with many Democrats joining Republicans in opposing it. The measure would have allowed bankruptcy courts to extend repayment periods, reduce interest rates and fees and adjust the principal balance of mortgages so homeowners can avoid foreclosures. However, bank groups lobbied heavily against the measure. Frank noted that the Independent Community Bankers of America, a powerful lobby group of smaller community banks said they would oppose the broad bank reform bill if cram-down was included. "Allowing bankruptcy courts to cram-down principles will only lead to higher interest rates," said Rep. Lamar Smith, R-Texas. "Why should those who have done nothing wrong need to pay that price?" However, Rep. Jim Marshall, D-Ga., spoke in defense of the measure. "To those who say it is unfair, we can say we are helping the price of homes stay strong and limits foreclosures," he said. Bigger fees, more rules Dozens of other measures were approved, including one that grants te Federal Deposit Insurance Corp. the authority to make assessments on large banks and other big institutions to cover shortfalls from TARP within five years, according to a measure that was approved. "Instead, large financial institutions that caused the credit crisis will be required to make taxpayers whole," said Rep. Gary Peters, D-Mich., the measure's sponsor. A provision exempting operating company end users from stringent derivatives regulations was approved. A measure that would make sure hedge funds were not exempted from new derivatives restrictions was not approved. Lawmakers rejected an effort to void a provision giving small public corporations relief from an audit requirement that dates from the post-Enron Sarbanes-Oxley Act. Based on the provision, small public corporations with less than $75 million in stock market capitalization will not be required to have outside audits of their internal controls. Over 100 Democrats voted in support of granting small businesses the relief. GOP lawmakers also failed to pass a measure that would have forced a $700 billion Troubled Asset Relief Program to be shut down at the end of the year. Treasury Secretary Timothy Geithner earlier this week extended the program until October. A Senate bill introduced in November has many similar provisions to the House bill, including a measure seeking to limit the fallout if a bank deemed to be "too-big-to-fail" collapses and one that would set up a consumer-protection agency. However, unlike the House, Dodd's bill it would set up a consolidated bank regulator made up of all bank regulators. See story on Senate bank legislation Major changes to House bill A large package of adjustments to the base bill was approved, including compromise language based, in part, on a controversial measure introduced by Rep. Melissa Bean, D-Ill, seeking to give federal regulators greater power over states when imposing consumer-protection restrictions. The language allows the proposed federal consumer protection agency, which will be charged with regulating mortgage and credit card products, to preempt state consumer financial laws on a case-by-case basis. However, it also allows states to formally petition the CFPA to improve consumer protection standards if a majority of states pass resolutions in their legislators seeking to have the CFPA write a rule. Credit rating agencies also were targeted by lawmakers. A variation of a measure introduced by Rep. Brad Sherman, D-Calif., which would alter the Securities and Exchange Act of 1934 to make it easier for investors to file lawsuits against credit rating agencies, was also included in an amendment approved Thursday night. The measure would lower the liability standard for credit rating agencies from "knowingly or recklessly," to "gross negligence." However, based on the measure, a plaintiff investor has the burden to prove that the rating agency acted in gross negligence, Sherman said in an interview. Fed audit in two years A series of measures introduced by Rep. Michael Burgess, R-Texas, were also approved by the House, including a provision that would require the Government Accountability Office to conduct an audit of the Federal Reserve's monetary policy as well as how much the central bank has lent and will lend to specific banks within two years of when the legislation was approved. The House Financial Services Committee in November approved a Fed audit bill introduced by Rep. Ron Paul, R-Texas., but set no deadline for when the GAO must act. Lawmakers also made adjustments to a bank examination measure. Banks with $10 million or less in assets would have their main, so-called "prudential" regulator, such as the Comptroller of the Currency, handle consumer protection exams. Every U.S. bank already is examined by their prudential regulator for safety and soundness concerns such as whether they have sufficient capital on hand. However, for the larger financial institutions, lawmakers agreed to a provision giving the CFPA the discretion to decide whether it needed to have an examiner directly assigned to banks in addition to their prudential examination team.