Democrats' New Mortgage Reform Bill Brimming with Consumer Protections.

Written by Posted On Sunday, 28 October 2007 17:00

The long-awaited Democratic solution to the subprime crisis debuted on Capitol Hill last Wednesday to raves and catcalls. But proponents and critics agreed on one thing: If enacted, House Financial Services committee chairman Rep. Barney Frank's bill would transform major portions of the home loan transaction for prime and subprime borrowers alike.

For starters, the "Mortgage Reform and Anti-Predatory Lending Act" would impose a new "federal duty of care" standard on anyone who originates a home loan-whether a broker, retail lender, credit union loan officer or employee of a large mortgage bank. That federal standard would require all originators to be licensed and registered at the state or federal level; to offer applicants only "appropriate" mortgage loans; and to make full disclosures to consumers about all the key features and costs of the loans they obtain.

The bill would also prohibit all fees-including mortgage brokers' bread-and-butter "yield-spread premiums" -- that vary with the terms of a mortgage loan. Such fees typically are paid to brokers by lenders when they deliver loans with interest rates higher than the "par" rate set by the lender. Consumer advocates have long charged that yield-spread premiums give brokers financial incentives to steer applicants to loan packages with higher than necessary rates and total costs.

Violators of the "anti-steering" rule would be subject to stiff fines of up to three times the broker's compensation "plus costs," as well as loss of the originator's license to do business.

Frank's bill would create a new federal minimum standard for all loans: the originator would have to ensure that the applicant has "a reasonable ability to repay" the mortgage, based on income verification, credit history, and initial underwriting to the "fully indexed" rate in the loan contract. Frank said this provision is essential to ward off future waves of foreclosures caused by rate and payment "resets."

"People should not be lent money beyond what they can be expected to pay back," he told reporters.

For all refinancings, the bill would set still another new federal standard: The transaction would need to demonstrably provide a "net tangible benefit" to the applicant. In other words, the refinancing couldn't simply roll over one mortgage on the property and replace it with a larger, higher-payment debtload that the consumer could not afford.

The federal standards in the bill would not pre-empt state laws that establish more stringent standards. The federal rules would be the basic minimums that originators could count on anywhere in the country, said Frank. But if individual states chose to zero in on a particular problem and enact a tougher standard to deal with it, they could do so.

At a hearing last Wednesday, mortgage brokers welcomed the concept of nationwide licensing and registration of all originators-something they've advocated for years as a way to eliminate unethical loan officers from the business. But they strongly opposed Frank's plan to prohibit yield-spread premiums, arguing that it would prevent cash-poor borrowers from financing their closing costs by raising the note rate.

Adding a quarter or three-eights of a point to the rate to pay for closing costs is widely used by borrowers who "choose to realize the savings of keeping their cash and financing their (closing) costs through a higher loan rate," said Marc Savitt, president-elect of the National Association of Mortgage Brokers.

Consumer groups generally applauded the bill, but believe it is not tough enough on Wall Street and mortgage industry investors who create and sell bonds based on mortgage pools. Consumer advocates feel those investors should bear legal liability for predatory or abusive features contained in the loans in their pools. Mortgage banking industry groups, by contrast, warn that bond investors won't put capital into mortgage securities that may open them to costly class action suits.

Frank's bill is expected to pass his committee in the near future and likely will pass the full House. Though Frank's counterpart in the Senate-Banking Committee chairman Chris Dodd (D-Conn.) -- says he is working on mortgage reform legislation, no bill has been introduced to date.

Rate this item
(0 votes)

Realty Times

From buying and selling advice for consumers to money-making tips for Agents, our content, updated daily, has made Realty Times® a must-read, and see, for anyone involved in Real Estate.