Members of the House and Senate Banking Committees have proposed joint legislation that seeks to restrict abusive lending practices. The bill sponsored by U.S. Rep. John LaFalce (D., N.Y.) and Senator Paul Sarbanes (D., Md.) is in direct response to an increase in predatory lending tactics.
The "Predatory Lending Consumer Protection Act" aims to close loopholes found in two existing acts, the "Truth in Lending Act" (TILA) and the "Home Owners Equity Protection Act" (HOEPA). The legislation will extend HOEPA protections to high-cost mortgage refinancings, home-equity loans and home-repair loans; expand consumer protections by addressing additional lending abuses; and strengthen enforcement of HOEPA protections by enhancing civil remedies, recission rights and statutory penalties.
The HOEPA had been criticized because of its exceptions, so the new act will expand the definition of "high cost mortgage." Being taken into account are high points and fees, limitations on prepayment penalties, and single premium credit insurance financing prohibitions.
Government-sponsored enterprises such as Fannie Mae and Freddie Mac - who by a congressionally chartered mission cannot purchase such loans - have expressed support for the legislation, even going so far as to formalize their own standards before the legislation was even proposed.
"At Fannie Mae, we applaud the efforts by Senator Sarbanes and Congressman LaFalce to fight the scourge of abusive practices in the mortgage marketplace," said Fannie Mae President Franklin Raines in a prepared statement. "Their leadership on the pro-consumer front will bring important focus on the real solutions needed to stamp out predatory lending."
"It's not about us, the legislation. It's about abusive practices in the mortgage marketplace. And as we all work together, we are in favor of that," added Janice Daue, vice president for public relations at Fannie Mae.
"We applaud Congress for taking an active approach and this is in keeping with the active approach that we have been taking and we look forward to working with the Hill," added Brad German, spokesman for Freddie Mac. "We're on the same page with regards to wanting to choke off opportunities for predatory lending in the subprime segment."
The U.S. Department of Housing and Urban Development, which at the beginning of last week urged Congress to propose some form of legislation to address predatory lending, also was pleased with the bill. "We think that the legislation is an important element in an overall strategy to deal with the issue of predatory lending," said Lee Jones, a spokesman for HUD.
Agencies Take Preliminary Steps
Fannie Mae issued guidelines early last week on steps it will take to guard against the possibility of predatory practices entering the conventional market, and added that the company does not plan on entering the subprime market. "There are predatory lending practices that have been seen in the subprime market, and we wanted to make sure that there was never ever a case of that coming into the conventional market," Daue said.
"As more lenders and Fannie Mae and seller-servicers are lending to more lower-income borrowers and those with blemished credit records, we want to make sure that ... we have the standards in place so that those abuses are not carried on as more lending opportunities are offered to more people with blemished credit records," she added.
Fannie Mae's statement goes on to say that the company will take strong opposition to "steering," in which borrowers are directed toward certain products without being informed of all they are eligible for. It will also prohibit the sale of fees charged in excess of five basis points, allow prepayment penalties only under an agreed-upon contract, full-file credit reporting, and not granting waivers for mortgage insurance premiums, ground rents and escrow deposit accounts.
"This is something that going forward, we want to make sure that our lenders have these practices in place, against steering, against excess fees, against ending commissions of prepayments penalties and single-credit life premiums," Daue added.
Freddie Mac is committed to keeping mortgages affordable. It released guidelines in late March on how the company will combat predatory practices. "I think they're going to send a strong message to the lending community about what kinds of mortgage product and what kind of lending practices we are interested in," said German. "It is our purpose to provide accessible access to affordable mortgage products and to give borrowers choice and to provide some degree of standardization and comfort and efficiency to the market segments that we serve."
Freddie Mac's policies include banning the purchase of mortgages with single-premium credit insurance policies, full-file credit reporting, and reporting monthly borrower mortgage payments.
"I think the steps we're taking are prudent from a business standpoint and obviously necessary from a social standpoint," German said.
HUD, who has formed a task force on the issue and will report its findings in seven weeks, says that even though Fannie Mae and Freddie Mac have taken their own initiatives to combat predatory lending, legislation is still necessary.
"It's a sign of good intentions that Fannie and Freddie want to take voluntary actions," said HUD's Jones. "We think it's very important in terms of clarity in making sure everybody understands what the rules are: that it be put into legislation, as opposed to merely voluntary actions. Because voluntary actions can always be changed."
However, Freddie Mac's German feels the use of the term "voluntary" is incorrect. "We answer to some very important and very strict safety and soundness requirements and so we cannot just arbitrarily buy mortgage product if they're going to conflict with our ability to meet our safety and soundness requirements," he said.
On the Private Front
Perhaps what is needed is just more diligence - and due diligence - when purchasing such high cost loans.
Private-label giant GMAC-Residential Funding Corp. purchases such loans, with fees up to as high as eight basis points, but is extremely careful that the borrower of the loan has been made aware of and signed all disclosures of the product.
"We've not had problems with these loans," said Diane Wold, a managing director with RFC. "We've not had borrower law suits because we have been so diligent. If we find a loan and there's problem, we've got reps and warrants from our sellers. And we'll put a loan back to a seller before we ever put it in a pool."
She added that a fine line exists between high-cost loans and those originated with abusive practices. "If lenders and issuers don't have the appropriate levels of diligence in place to make sure that a borrower has been notified and been given the appropriate disclosure and signed off on it, then there could be a problem," she said.
Wold had no official comment on the LaFalce-Sarbanes legislation because she had not reviewed it by press time.