Mortgage Bill Language Undermines Protections, Critics Say

By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, March 4, 2009

A quiet effort to pass legislation increasing protections for mortgage borrowers has provoked opposition from banking trade groups and members of Congress, who say the bill will have unintended consequences and that the idea deserves public debate.

The debate over the language is shaping up as an early skirmish in a long, loud battle to overhaul the nation's financial regulations. Democrats are determined to significantly expand the scope of financial regulations, close loopholes and increase enforcement powers.

Sen. Byron L. Dorgan (D-N.D.) placed language in an unrelated House appropriations bill that strengthens enforcement of the Truth in Lending Act, which dictates what information lenders must disclose to borrowers. The language, which passed the House without discussion last week, authorizes the Federal Trade Commission to tighten the rules that apply to nonbank mortgage lenders, and creates a wider range of penalties for violations.

Consumer advocates have long sought legislation that would require the FTC to crack down on nonbank lenders for deceptive sales practices, such as advertising that credit problems will not affect the terms of a loan.

But banking trade groups say the language, as written, also would give state attorneys general the power to take enforcement actions against banks chartered by the federal government. National banks enjoy substantial protection from state enforcement, which allows them to operate under a single set of federal rules. Trade groups warn that the legislation, intentionally or otherwise, could undermine that long-standing protection.

The quiet insertion of the language has also aroused the ire of Sen. Christopher J. Dodd (D-Conn.), chairman of the Banking Committee, who said in a letter last week that it was not approved by his committee and that Congress should not increase state powers over national banks without proper deliberation. Dodd and other leading Democrats said the issue should be considered as part of a broader overhaul of financial regulations.

Sen. Michael D. Crapo (R-Idaho) yesterday introduced an amendment to strike the language from the final bill.

Dorgan said in an interview yesterday that opponents had misunderstood the language, and that it would apply solely to nonbank mortgage lenders. Dorgan said he had offered to hold a colloquy with Dodd, a formal conversation on the Senate floor, to clarify his intent. Federal courts consider the intentions of lawmakers in ruling on its application, and such a formal statement would create a clear point of reference.

Dorgan said he proposed the language as part of an FTC reauthorization bill last year, which did not become law. He said it is past time to begin increasing regulation.

"It seems to me that on the heels of what has happened in recent years it is important to proceed," Dorgan said.

There is a practical issue in Dorgan's favor. Senate leaders, who want to pass the broader bill quickly, are reluctant to allow changes that would require the House to vote again on a revised bill. One industry lobbyist said the opposition was "fighting an uphill battle."

The FTC has general authority to act against companies that engage in deceptive practices, but the agency took few actions against mortgage lenders in recent years. In part, the agency was hamstrung by a lack of standards for mortgage lenders and a law that made it difficult to enact new standards. The FTC also did not have the power to impose civil penalties, limiting its focus to the most serious violations.

Last year, the Federal Reserve announced detailed truth-in-lending standards for all lenders, including banks overseen by other regulators and non-banks overseen by the FTC. But the FTC still lacked the authority to impose civil penalties.

Dorgan's language would allow the FTC to impose restrictions on non-banks beyond those imposed by the Fed on all lenders. It also would allow state attorneys general to pursue civil actions against companies that violated those restrictions.

"There have been practices out there that have been way beyond the norm that need to be reined in," Dorgan said. "This would give the FTC the ability to do that."

In addition to the concerns raised by banks, there is also basic opposition to any increase in the FTC's powers. Critics including business trade groups want to maintain a single standard, and they say the FTC's existing powers are sufficient.

A group including banking and business trade associations wrote to Senate leaders this week that the bill "is likely to lead to costly and unnecessary litigation at a time when businesses across the country are facing a very difficult economic environment."

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