Lawmakers at a House Financial Services Committee hearing Thursday appeared open to moderating mortgage reform legislation after complaints that it would reduce lending.
House Financial Services Chairman Barney Frank said he is willing to compromise on two key provisions. One would require banks to retain at least 5% of a loan after they sell it to the secondary market, and the other would give lenders legal protections only on 30-year traditional mortgages.
"How you require the 5% is very much an open question, and I do think there is some room for some broadening of the safe harbor," the Massachusetts Democrat said during a break in the hearing. "It's a new idea. How you do it, we are very open about."
The committee is scheduled to vote on the bill next week, and it is unclear exactly how Frank would alter those provisions. He did not seem to be willing to abandon a risk-retention requirement altogether.
Though critics argued at a hearing Thursday that it would push all nondepository mortgage lenders out of the business, Frank said that his job is to protect consumers, not the future of particular players in the business.
The industry's case was bolstered during the hearing by the Federal Reserve Board, which testified that the legislation should be altered.
Sandra Braunstein, director of the Fed's division of consumer and community affairs, raised concerns about the risk-retention requirement and said the safe harbor was too narrow.
"There's not enough clarity on risk retention," she said. "It's not clear if that's a first position or second. I don't know exactly how that would work.
I don't think it's in there right now."
She also argued that limiting the safe harbor only to 30-year mortgages would exclude loan modifications being drawn out to 40 years, safe 15-year mortgages and government-guaranteed loans like those made through the Federal Housing Administration.
Rep. Mel Watt, D-N.C., said lawmakers are trying to find a balance in their bill. "We are aggressively listening to comments about various aspects of this bill," he said. "We are trying to take those comments into account to reach a product that protects consumers and the public, protects the economy from future meltdowns of the kind we have experienced and does not dry up credit."
But Watt acknowledged that finding the right balance would not be easy. "Those are our three primary objectives here, and sometimes those things may be in conflict with each other," he said.
Braunstein also pressed for her agency to have more discretion to implement the law, and she said it should have sole rule-writing power. She argued that the mortgage market is still in turmoil, and it is unclear what it would look like when it settles, so regulators should be given flexibility to handle problems as they arise. "There needs to be some flexibility to respond," she said.
The Fed has given the committee detailed feedback on the bill, Braunstein said, though she did not get into specific suggestions on how to fix key provisions during the hearing, and a request to the committee about the Fed's document was not responded to by press time.
The bill is a revised version of a mortgage reform bill by Frank, Watt and Rep. Brad Miller, D-N.C., that cleared the House in 2007.
Though Frank made it clear that he plans to make some changes, whether the bill can find much bipartisan support remains unclear. In 2007, Frank made several alterations to garner the support of Republicans, including Rep. Spencer Bachus of Alabama, the panel's top GOP member. However, several Republicans, including Bachus, expressed concerns during the hearing Thursday that the bill was too far-reaching.
"Unfortunately, [the bill] fails to meet benchmarks for a successful mortgage origination law," Bachus said. Instead, the measure "creates new standards which are narrow, vague and will ultimately restrict access to arise the cost of mortgages for years to come."
Frank told reporters that since Bachus faced a backlash after he supported the mortgage reform bill two years ago, the legislation is unlikely to attract much GOP support.
"What happened is Spencer Bachus voted for the bill," Frank said. "He almost lost his ranking membership over it The Republicans basically decided, 'No, this isn't a joint venture anymore.' "