Representative Barney Frank said a broad campaign to water down a proposal to make mortgages safer was undermining the most critical part of last year’s Dodd-Frank financial oversight law.

Both consumer advocates and banking groups have balked at a regulatory proposal that would only allow banks to bundle and fully sell off to investors mortgages that include a 20 percent down payment.

The idea is to have banks retain a portion of loans on their books and to avoid a repeat of the subprime crisis in which they churned out doomed-to-fail mortgages because they could hand off the risk to investors.

"I am troubled now because there is an assault on risk retention," Frank said. "I believe that risk retention is the single most important piece of this bill."

Frank spoke at the National Press Club on the Dodd-Frank law as it nears its one-year anniversary on July 21.

In March, regulators proposed that banks keep 5 percent of loans on their books unless they fit into a "qualified residential mortgage" category. QRMs would have to meet strict underwriting standards and include a 20 percent down payment.

Banks, housing groups and lawmakers from both parties have complained that this exemption is too narrow and will make it difficult for worthy borrowers to get a home loan.

Frank did concede that he believes a 20 percent down payment requirement is too high, although one in the mid- to high-single digits is more acceptable as long as it is accompanied by other creditworthiness measures.

But he hit back at critics who say the risk-retention reform is unduly disruptive to the housing market.

"Yes, it’s disruptive because we had to disrupt a rotten system," Frank said. (Reuters)