Federal regulators should expedite the process of issuing new guidelines for subprime mortgage lending and reject any industry attempts to water them down, members of the influential Senate Banking Committee say.
But a group of six industry trade associations warns that overly restrictive policies would shut some worthy borrowers out of the home-buying market.
In a statement issued Monday, industry groups — including the American Bankers Association, the Mortgage Bankers Association and the Housing Policy Council — said any new regulations, including forthcoming federal guidelines on subprime lending, must strike “a careful balance that provides enhanced consumer protections without unintentionally limiting the availability of home ownership to creditworthy borrowers.”
From the industry’s perspective, one problem with the proposed guidelines is that they will apply only to federally chartered banks and savings and loans, unless states choose to adopt them on a case-by-case basis.
The proposed guidelines for subprime loans are based on instructions issued by regulators last fall for nontraditional, or “exotic,” loans, such as interest-only and pay-option adjustable-rate mortgages. The guidelines direct lenders to evaluate a borrowers’ ability to repay a loan at the “fully indexed” rate and provide borrowers with more complete disclosures of loan terms.
Countrywide Financial Corp. CEO Angelo Mozilo on Monday railed against the guidelines for nontraditional loans, saying they “really put a dent” in the use of “a perfectly good product,” Reuters reported.
Although 33 states have implemented the guidelines for exotic mortgages, the remainder have yet to take such action. The lending industry statement released Monday urges lawmakers to “establish a single uniform national standard that will provide consistent protections to consumers in all 50 states and U.S. territories.”
The March 2 proposal by federal regulators to extend the guidelines for nontraditional mortgages to all subprime loans followed prodding by members of the Senate Banking Committee. In a May 17 letter to regulators, five members of the committee urged that the guidelines be finalized quickly, without scaling back their proposed scope.
In the letter, Committee Chairman Sen. Chris Dodd, D-Mass., and his colleagues said that if lenders are complaining that extending the guidelines for exotic mortgages to all subprime loans would prevent some borrowers from refinancing, that’s an admission that the original loan was inappropriate.
“It stretches credulity to argue that the path out of one poorly underwritten loan is another unaffordable loan underwritten on the same faulty basis,” the letter said.
The letter’s recipients included Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corp. Chairwoman Sheila Bair, and Comptroller of the Currency John C. Dugan.
In one of his most extensive speeches on subprime lending to date, Bernanke said last week that market forces should play the largest role in guiding lending practices. When government intervention is required, guidelines are preferable to rules, Bernanke said.
Bair recently told members of the House Subcommittee on Financial Institutions and Consumer Credit that she favored a national predatory lending standard that would require underwriting based on the borrower’s ability to repay the true cost of the loan instead of payments based on a teaser rate.
In their statement on subprime lending, industry groups agreed that lenders should only make subprime home loans to consumers whom they “reasonably believe” have the ability to repay, based on information available at the time the loan is made.
“Our trade associations believe that all mortgage lenders should embrace responsible subprime lending principles,” the statement said. “We support the efforts by industry and the federal banking regulatory agencies to strengthen underwriting standards and to protect borrowers against unfair and deceptive mortgage lending practices.”
However, the groups said, many lenders have already tightened subprime lending standards, and introduced programs to assist troubled borrowers that offer loan refinancing, restructuring, forbearance and rescue funds.
This month, a number of lenders and industry groups endorsed a set of voluntary principles for conducting such “workouts” with borrowers, which were drafted by the Senate Banking Committee.
Current proposals for stronger legislation governing mortgage lending include a proposal by Sen. Charles Schumer, D-N.Y., to extend federal enforcement of the Truth in Lending Act to all mortgage brokers and non-bank loan originators.
Schumer’s bill, the Borrower’s Protection Act of 2007, would impose suitability standards for assessing a borrower’s ability to repay a mortgage, and hold lenders accountable for the actions of brokers and appraisers.
Schumer’s bill would establish a fiduciary duty for mortgage brokers and originators and create a “faith and fair dealing” standard for all originators. SB 1299 would require originators to underwrite loans at the fully indexed rate and create escrow accounts for subprime loans to pay taxes and insurance.
The legislation would also prohibit “steering,” or counseling borrowers to accept unsuitable rates, charges and principal amount or prepayment terms.
Another bill, the Predatory Mortgage Lending Practices Reduction Act, HR 2061, would amend the Real Estate Settlement Procedures Act of 1974 (RESPA) to require that mortgage brokers who offer subprime “federally related” mortgages be certified by the U.S. Department of Housing and Urban Development.
The bill, introduced by Rep. Stephanie Tubbs Jones, D-Ohio, defines subprime loans as those with characteristics including higher fees or penalties, interest rates, debt-to-income or loan-to-value ratios, taken out by borrowers with a history of loan delinquency, lower credit scores, recent bankruptcy or lack of credit history.
