Bill Would Tighten Mortgage Standards
Tuesday, October 23, 2007
Barney Frank, chairman of the House Financial Services Committee, yesterday unveiled legislation aimed at curbing abusive lending practices that, he said, have fueled an alarming rise in foreclosures.
The long-expected bill, which was immediately criticized by banking groups, would set standards for "what loans should and should not be made nationally," said Frank, a Massachusetts Democrat, whose committee has jurisdiction over the industry. The group affected most by the bill would be subprime borrowers, who account for most of the foreclosure problems.
The measure would allow some of those borrowers to sue entities that pool loans and sell them as securities to the secondary market. Borrowers could sue to rescind their mortgages and recoup their legal costs if they received a loan that violated the principles outlined in the bill, Frank said.
The legislation would also ban prepayment penalties on most subprime loans. Borrowers struggling to make their payments have often found themselves unable to refinance into better terms because of the large fees that would be imposed if they paid off their original loans early.
Most troublesome for the industry is a provision that would require lenders and mortgage brokers, who act as liaisons between lenders and consumers, to make loans only to borrowers who can be reasonably expected to repay them.
"In one section of the bill, a lender is required to give a customer the best product," said Kurt Pfotenhauer, a senior vice president at the Mortgage Bankers Association. "What is the best product, and is that the same for every one, and how is it going to be determined?"
Pfotenhauer said that if the legislation does not set clear, quantifiable standards that can be applied to every borrower, confusion and litigation will follow.
Even if it does set such a standard, he said, "we still don't think that's good public policy because it limits market innovation."
But the National Association of Mortgage Brokers praised other parts of the bill, including a provision that would set minimum state licensing standards for all bank loan officers and brokers. "These reforms will help modernize the regulatory system and drive bad actors from our industry," George Hanzimanolis, the group's president, said in a statement.
Consumer groups hailed the part of the bill that targets incentive-based pay. Specifically, it would ban what are known as yield spread premiums, additional fees that brokers are paid for placing a loan with a higher rate, said Mike Calhoun, president of the Center for Responsible Lending. "If a borrower qualified for a 6.5 percent rate and the broker put them in a loan for 7 percent, the broker got an additional payment from the lender for doing that."
If that's prohibited, brokers will not be motivated to steer borrowers to more expensive loans, he said.
Hanzimanolis said, though, that the premiums are a "defendable fee" that can keep overall costs down for some borrowers.
Calhoun also said the bill does not go far enough in holding the secondary market liable for loans gone bad. Investors failed to correct abuses and in some cases actively supported them, he said. It's unclear if the provision that allows borrowers to sue is enough to help borrowers who are wronged. "Will it simply become the cost of doing business?" he asked.
A hearing on the legislation is scheduled for Wednesday. Although its chances of eventual passage are unclear, Frank said he believes "something very much like this bill" will be made law.