Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, is facing a fight with corporate executives who have donated millions of dollars to his presidential campaign. 
Dodd is under growing pressure from Sens. Barack Obama (D-Ill.) and Hillary Rodham Clinton (D-N.Y.), his rivals for the Democratic presidential nomination, as well as Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to write strict legislation regulating mortgage lenders at a time when nearly 2 million Americans face foreclosure on their homes.
Many economic experts blame lenders who made loans to borrowers with poor credit ratings who failed to understand that interest payments would balloon or that house prices might stall, leaving them with properties worth less than their debt.
Obama, Clinton, Frank and Sen. Charles Schumer (D-N.Y.) have called for stricter regulation of lenders who specialize in sub-prime loans to buyers who had difficulty obtaining loans at regular interest rates.
Dodd has kept quiet for much of this year on the need to pass legislation regulating mortgage lenders, an industry that has fiercely opposed past efforts by Congress to manage its business, say consumer advocates.
Dodd has been in a difficult position. He has raised millions of dollars for his presidential campaign from bankers deeply involved in the sub-prime market.
“He seemed more cautious about introducing legislation,” said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America, in reference to Dodd.
“He kept his powder dry on the need for new consumer-protection legislation until very recently,” Fishbein said.
Eleven of the 20 biggest contributors to Dodd’s presidential campaign are companies with significant financial interest in sub-prime lending and would likely fight efforts by Congress to regulate that market.
Employees at Citigroup gave Dodd’s campaign $147,000 through the first six months of the year, according to the Center for Responsive Politics, a nonpartisan group tracking presidential fundraising. Citigroup, which, according to the Center, is the second largest contributor to Dodd’s campaign, recently bought affiliates of Ameriquest Mortgage Company, a lender that consumer advocates have called one of most irresponsible contributors to the sub-prime crisis.
“Citigroup is in the process of buying the worst lender we have left: Ameriquest,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “Citigroup is buying what there is left of Ameriquest, its servicing platform. Those are the people who collect the payments from homeowners and who turn around and foreclose on you.”
Rheingold said Citigroup’s investment bank transformed many of the sub-prime loans into securities that were then bought by investors, creating the market incentive for lenders to pump out as many sub-prime loans as possible.
Dodd’s fourth-biggest contributor, the Royal Bank of Scotland, whose employees gave Dodd’s campaign $122,000 during the first half of 2007, also has a major interest in sub-prime lending. It owns Greenwich Capital Markets Inc., a prominent player in the sub-prime market.
“Greenwich has been involved at a number of levels in sub-prime lending, from extending warehouse lines of credit to buying and securitizing loans through their own shelf registrations with the SEC [Securities and Exchange Commission] for a number of [loan] originators,” said Kevin Byers, a forensic certified public accountant who specializes in transactional analysis of mortgage and real estate issues.
Bear Stearns, Dodd’s fifth-largest contributor, owns two large hedge funds in the Cayman Islands that filed for bankruptcy because of the sub-prime market meltdown. Bear Stearns employees gave Dodd’s campaign $120,000.
Goldman Sachs, American International Group, Merrill Lynch, Morgan Stanley, JP Morgan Chase & Co, UBS Americas and Bank of America are other companies that the Center for Responsive Politics has identified as Dodd’s biggest contributors and that have had big stakes in the sub-prime market.
Employees from those companies have given Dodd’s campaign $510,000 this year. He raised $2.2 million from securities and investment firms for his presidential campaign, far more than from any other industry. He has raised $750,000 from hedge funds, many of which have made a big business of selling sub-prime mortgage-backed securities.
Byers said even though sub-prime lending doesn’t seem profitable now, the market will change and many of the banks that have given to Dodd will have a stake in what Congress does.
“Any increased regulation would have a material impact or potential material impact on their sub-prime mortgage business,” he said.
Dodd broke his silence on the need for new legislation regulating lenders when Congress returned from its August recess. He unveiled a list of proposals that consumer advocates applauded.
“My bill will end prepayment penalties — which only exist in the sub-prime market, and which penalize homeowners for trying to do the right thing by refinancing their mortgage,” said Dodd in a Sept. 5 press release. “It will prohibit brokers and lenders from ‘steering’ homebuyers to a more costly loan. And it will make brokers responsible to the people who pay them and ban them from acting as free agents who play lenders and borrowers off against each other.”
Dodd’s announcement came a month after Clinton, his rival in the presidential race, announced in Derry, N.H., a plan to address mortgage-lending abuses.
Clinton proposed requiring mortgage brokers to disclose that their compensation rises with mortgage rates and fees; requiring federal registration for mortgage brokers; eliminating prepayment penalties on mortgage products; and requiring lenders to include the cost of taxes and insurance in the assessment of high-risk mortgages.
For his part, Obama has pushed legislation curbing lending practices since the 109th Congress. He reintroduced his Stop Fraud Act in April. The bill authorizes stiff penalties for mortgage fraud and guarantees aggrieved borrowers the right to sue creditors, a harrowing prospect for the mortgage industry and the investment firms that fund it.
One Senate Republican aide observed that Clinton and Obama threatened to upstage Dodd on the hottest political issue of the year under his jurisdiction as Senate Banking Committee chairman. Consumer advocates noted that Schumer, a member of the Senate Democratic leadership and a senior member of the Banking Committee, also introduced legislation offering strict rules for lending.
Frank outlined strict regulations for mortgage lenders soon after he took over as chairman of the Financial Services panel. In the last Congress, Frank also co-sponsored legislation with North Carolina Reps. Brad Miller (D) and Mel Watt (D) that consumer advocates described as tough rules for sub-prime lenders.
“He’s come around to where he needs to be,” said Fishbein, of the Consumer Federation of America, in reference to Dodd’s recent call for legislation to reform lending practices. “Frank has been more outspoken going back into the last Congress.”
Fishbein said the verdict on whether Dodd is a strong defender of consumer interests will come in the months ahead.
“The proof will be in the pudding,” said Fishbein. “If he introduces a strong consumer-protection measure and moves on it, he will decide the cause of consumers is paramount.” |
