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Thorny issues remain as Congress negotiates financial regulatory overhaul

By Brady Dennis and Dina ElBoghdady
Washington Post Staff Writer
Tuesday, June 22, 2010; A12

One evening late last week, as House and Senate negotiators wound down another marathon session hammering out details of a massive financial regulatory overhaul, Sen. Christopher J. Dodd (D-Conn.) uttered what almost everyone else in the room was thinking.

"My own fear is that we've all died and this is our purgatory," the chairman of the Senate banking committee said, sending a ripple of laughter through the weary crowd.

The conference committee proceedings, airing start to finish on C-SPAN, haven't exactly generated the television event of the year.

Lawmakers undoubtedly have resolved some thorny issues, agreeing to place the Federal Reserve under increased scrutiny, moving toward changes in the relationship between the government and credit rating agencies and trying to streamline banking regulation.

But the hardest and most divisive issues remain unresolved -- even as Democrats say they hope to wrap up the proceeding this week and have a final bill headed to the president's desk by July 4.

In coming days, Democratic leaders must reconcile their own differences on critical issues and deal with Republican objections as well.

At the top of that list is a provision by Sen. Blanche Lincoln (D-Ark.) that could force big banks to spin off their lucrative derivative-dealing operations. The measure has attracted opposition from administration officials, lawmakers from both parties and Wall Street. But consumer advocates and some legislators have stood by Lincoln's effort.

Conferees must also decide how to structure the "Volcker Rule," named after former Fed chairman and presidential adviser Paul Volcker, which would ban banks from trading with their own money, a practice known as proprietary trading.

They must finalize the shape of a new consumer watchdog to protect borrowers against lending abuses -- and decide whether groups such as auto dealers should be exempted.

They must work delicately to address a provision by Sen. Susan Collins (R-Maine) that could force banks to raise tens of billions of dollars to replace a less stable form of capital in their reserves. The banking industry and administration officials have raised concerns about the measure. But Democrats are eager to please Collins -- one of only four Republicans to vote for the overhaul bill in the Senate.

For the mortgage industry, one of the most controversial elements of the financial regulations bill is a proposal that would require lenders to retain at least a 5 percent stake in mortgages until the loans are paid off. The House and Senate versions of the bill include differing details on how regulators should implement the risk-retention measure, as it is known.

The Senate bill would mandate that regulators exempt some types of loans from the requirement and offers factors for regulators to consider in determining which loans to exempt. The House bill had no such mandate but would allow regulators to increase or decrease the requirements based on the safety of the loan. The industry has long opposed the concept of risk-retention, but given its inevitable inclusion in the bill, industry officials have pushed aggressively in favor of the more flexible Senate approach.

Dodd and Rep. Barney Frank (D-Mass.), the committee chairman, must align those and myriad other clashing and varied interests as they try to hang onto key votes and drag the far-reaching new financial rules across the finish line.

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