January 2016 - Out of the Woods

TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link:

Contents of this Issue


Page 61 of 67

60 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SECONDARY MARKET THE LATEST Fed Tightens Up on 'Too Big to Fail' Newly revised rule will curb emergency lending to flailing financial institutions. O ne of the enduring criti- cisms of the Dodd-Frank Wall Street Reform Act of 2010 is that it codifies "too big to fail" and allows the government to continue to finan - cially rescue firms that are deemed systemically important. The Federal Reserve changed that by approving a final rule that would prevent the government from the same type of emer - gency lending to institutions that are "too big to fail" in which it engaged in 2008, costing taxpayers billions of dollars. "Emergency lending is a critical tool that can be used in times of crisis to help mitigate extraordinary pressures in financial markets that would otherwise have severe adverse consequences for households, businesses, and the U.S. econo - my," Fed Chairman Janet Yellen said. "The Federal Reserve has long had this authority but has used it only sparingly and only in severe financial crises." Dodd-Frank limited the Fed's ability to engage in emergency lending to programs and facili - ties with "broad-based eligibility" as approved by the Secretary of the Department of Treasury. It also prohibits the Fed's ability to lend to insolvent entities. The new final rule contains a number of changes to the original proposed rule, based on comments received. Under the final rule, the term "broad-based" is defined as a program or facility not designed for the purpose of aiding failing firms, and a program or facility in which five entities would be eligible to participate, according to the Fed. The limitations to the term "broad- based" are consistent with Dodd- Frank revisions that state a program should not exist for the purpose of aiding a specific company with avoiding bankruptcy, the Fed said. The final rule provides clarifica - tion to the Fed's implementation of the limitations imposed on emergency lending by Dodd- Frank. Since Dodd-Frank contains a provision that prohibits the Fed's ability to lend to insolvent entities, the final rule broadens the definition of "insolvency." The definition has been expanded to include borrowers who fail to pay undisputed debts as they become due 90 days before borrowing—or borrowers who are determined to be insolvent by the Fed or lending Reserve Bank. According to the Fed's an - nouncement, commenters on the rule prior to its final approval had urged the Fed to expand its definition of insolvency to include companies that had not yet formally declared bankruptcy or entered resolution proceed - ings but are insolvent from an accounting standpoint. The final rule, just as in the proposed rule, includes Dodd- Frank's requirement that all emergency lending programs must be approved by the

Articles in this issue

Archives of this issue

view archives of TheMReport - January 2016 - Out of the Woods