A federal bill that cracks down on predatory lending and enforces new liabilities on investors that securitize home loans, has been met with mixed reaction from industry insiders.
"The Mortgage Reform and Anti-Predatory Lending Act of 2007", sponsored by Reps. Brad Miller (D-N.C.), Mel Watt (D-N.C.) and Barney Frank (D-MA), will create a federal duty of care, prohibit steering and call for the licensing of mortgage originators, including brokers and bank loan officers. The bill will also set a minimum standard for all mortgages, requiring that borrowers have a reasonable ability to repay as well as expand and enhance protection for borrowers of high-cost loans under the "Home Owner and Equity Protection Act." The bill will also attach limited liability to securitizers that package and sell investment vehicles tied to mortgage loans. Investors themselves would not be held liable.
Miller believes the bill could prevent the mortgage crisis from having a "ripple effect" on the country's economy. "It will probably be the most significant consumer legislation in more than a dozen years," he said. "Thousands of middle-class homeowners could be saved from foreclosures should the bill become law."
Frank wants to get the bill on the House floor in three-to-four-weeks, but many of its provisions are already being met with criticism from market participants. Drawing the most ire from brokers is a proposal to eliminate yield spread premiums (YSP). Lenders pay brokers the YSP as compensation for charging the borrower an interest rate above the lender's par rate. Borrowers, in turn, can save on upfront costs by paying more in interest rates.
The provision eliminating the YSP is meant to curb predatory lending practices by prohibiting brokers form steering borrowers into costly loans they cannot afford. But some in the mortgage industry argue that the yield spread premium helps many borrowers secure a home loan. "The indirect compensation mortgage brokers receive from lenders is a defendable fee that actually lowers costs to consumers," George Hanzimanolis, president of the National Association of Mortgage Brokers (NAMB), said in a statement.
Roger Fendelman, vice president of compliance for Interthinx, a provider of risk mitigation and regulatory compliance tools, believes eliminating the YSP will have too broad of an impact on the mortgage industry. "Sellers will stop paying it to brokers and that will be the end of it," he said. "Then there really is an unknown there. How will brokers get compensated? Is it going to be upfront? Is it going to be just wiping brokers out and driving everyone to the originators themselves? It could literally be modifying the way people get loans."
In a statement on Oct. 24 before the House's committee on financial services-for which Frank serves as chairman-Kurt Pfotenhauer, senior vice president for government affairs and public policy for the Mortgage Bankers Association, argued that eliminating the YSP "would have a deleterious affect on the ability of cash-poor borrowers to pay closing costs through a higher rate and monthly payment if they so choose."
Kate Bourland, a loan officer and mortgage planner for Fixed Rate Funding in Sacramento, believes eliminating the YSP is a way of unfairly targeting the mortgage industry over the banks, creating an unfair playing field. She argued that the fee should be allowed as long as it is disclosed to the borrower. "You're taking away an option for the consumer," she said. "The banks don't disclose these fees so the buyer is not necessarily going to know what the yield spread premium is if they are getting a loan from the bank. It's a double standard."
Analysts for RBS Greenwich Capital noted in an Oct. 26 research report that the bill will likely undergo changes and expressed doubt that the Senate would "approve such a sweeping change." In their limited comments about the bill, the analysts wrote that the legislation would "effectively kill the third party originators" because they do not have the financial resources to protect themselves against liability. They also maintained that the bill might actually hurt borrowers. "The bill would prevent the subprime mortgage market from re-growing to its former prominence, but will not help existing borrowers at all, as their refinancing option will be severely limited," the analysts wrote.
The mortgage industry is not universally opposed to every provision of the bill. NAMB's Hanzimanolis supports the establishment of strict national standards for all loan originators that he said would "help modernize the regulatory system and drive bad actors from our industry." NAMB also supports the establishment of a national registry, assuming it is governed by a federal agency.
Ann Graham, a banking law professor at Texas Tech University, called the bill "a good starting point" but is concerned that it comes attached with too much heavy-handed regulation. "One of my biggest problems is the idea that there would be licensing of bank employees," she said. "Obviously that looks like regulatory burden to me. It looks like it's duplicative. It doesn't account for the fact that they are already highly regulated."
Because the bill is in its early stages, chances are good that its final version could be significantly changed from its current incarnation. Fendelman, for his part, would hope so. "I think it's an unworkable proposal," he said. "It almost looks like a wish list of items that consumer advocates would like to see. Clearly there's no way for all of them to make it into law because it's just such an overly-complex bill and it's too far-reaching."
Added Graham, "Some of the standards are subjective. I think that's unavoidable and will be clarified throughout the process."
But even those who are critical of the bill differ somewhat on an alternative solution. Fendelman would like to see "a hint of federal oversight that preempts state law" as some Republicans have proposed over the past few years. He also supports a national licensing requirement. "Let's have a uniform national standard and give clarity to the industry that will reduce costs to the borrower," he said.
This includes basic rate and fee thresholds. "We'll hold people accountable for it this time, which never has really happened," he said.
Graham, who worked as a regulator during the Savings and Loan scandal in the 1980s, would like to see increased burden fall on the states to enforce consumer protection laws within the mortgage industry. "I would be in favor of allowing substantial room for state regulation," she said. "Real estate is local and consumer protection issues are local. The states have much more incentive to protect their own consumers."
Graham noted that almost every state has consumer protection departments in the attorney general's office that is already staffed and trained to enforce laws. Doing it on a federal level would require start-up and training time, she said.
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