A bill aimed at removing incentives for mortgage brokers to put borrowers in risky loans while requiring lenders to retain some "skin in the game" could hurt the very consumers it’s designed to protect if it further constricts mortgage lending, real estate industry critics say.
At a recent hearing on the bill, some consumer advocates — and state banking regulators who stand to lose some of their authority if the bill is passed — said the bill’s language is too weak to accomplish its lofty goals.
Staking out a middle ground in the debate, the National Association of Realtors is endorsing several of the bill’s provisions, while warning lawmakers to strike "an appropriate balance" between safeguarding consumers and preserving access to mortgages at a reasonable cost.
HR 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009, addresses several aspects of the loan origination, securitization and servicing process. The bill was debated Thursday at a House Financial Services Committee hearing.
HR 1728 would require loan originators to determine a borrower’s ability to repay a loan, and only refinance mortgages when there is a "net tangible benefit" to the consumer. Loan originators would no longer be able to collect yield-spread premiums or other compensation that some critics say served as incentives to steer borrowers into high-cost loans.
The bill would also lower the trigger for loans to be considered "high cost" and subject to the more stringent requirements of the Home Ownership and Equity Protection Act (HOEPA). Lenders say loans subject to HOEPA are difficult or impossible to securitize and sell to secondary-market investors.
To encourage responsible lending, the bill would also create a limited "safe harbor" from lawsuits for "qualified mortgages" — prime, fully documented, 30-year fixed-rate mortgages. Those loans would be exempt from some of the bill’s requirements.
NAR’s perspective
NAR supports the "anti-mortgage-flipping" provision of the bill, requiring loan originators to determine a net tangible benefit for consumers who are considering refinancing, said NAR President Charles McMillan.
But if lawmakers provide a safe harbor only for 30-year fixed-rate mortgages, lenders may shelve other mortgage products — including 15-, 20- and 25-year fixed-rate loans, and traditional 5/1 and 7/1 adjustable-rate mortgage (ARM) loans — McMillan said in his prepared testimony.
McMillan also questioned the bill’s language on "assignee liability," which would give consumers the ability to sue mortgage securitizers for rescission of their loan if they could prove its terms violated the tougher standards for loan originators spelled out in the bill.
NAR’s president called the language governing the right of rescission "extremely broad," creating the risk that sound lenders will leave the marketplace.
The bill also aims to make sure lenders have some "skin in the game" by requiring them to retain at least 5 percent of the risk when they securitize and sell "nontraditional loans" to investors. Nontraditional loans include mortgages with negative amortization or interest-only features.
McMillan said that requiring lenders to retain credit risk could be detrimental to consumers if loans not covered under the safe harbor, such as 15- to 25-year fixed-rate mortgages, are no longer available.
"Undue regulation of the mortgage market that makes the sector unattractive for business participants will be as harmful to the consumer as the lack of regulation that allowed for the level of irresponsibility and abuse we have just experienced," McMillan said.
Rep. Paul Kanjorski, D-Pa., said the bill’s "skin-in-the-game provisions" are intended to encourage prudent underwriting, not "ending securitization as some have maintained."
"I admit that the 5 percent retention requirement now in the bill needs some work," Kanjorski said in his opening statement, echoing similar comments by Committee Chairman Rep. Barney Frank, D-Mass. "Rather than hearing more complaints about it, we need suggestions to perfect it."
Call for preemption
Mortgage Bankers Association Chairman David Kittle said lenders want Congress to replace the current "patchwork" of state laws governing their conduct with national standards for mortgage lending that preempt state regulations.
"Some states have highest-cost loan laws that track federal law, some have their own highest-cost loan laws, some have both their own highest-cost and higher-cost laws, and some do not have highest-cost or higher-cost loans at all," Kittle said in his prepared testimony.
As written, only the provisions of the bill governing assignee liability provide the kind of preemption of state law lenders are seeking, Kittle said. …CONTINUED
Requiring lenders to retain at least 5 percent of the risk associated with "non-qualified" mortgages would make it impossible for many lenders to operate, Kittle said, including companies that rely on warehouse lines of credit rather than deposits for short-term loan funding.
Lenders already have "skin in the game," Kittle said, through their responsibilities to investors. At a time when policymakers are "focusing so much of their efforts on injecting capital into the financial services sector," he said, requiring them to retain a predetermined percentage of risk "would threaten to further impair their ability to lend at all."
Consumers’ perspective
But Massachusetts Commissioner of Banks Steven Antonakes warned Congress not to strip states of their power to enact and enforce their own, stricter laws governing mortgage lenders.
Speaking on behalf of the Conference of State Bank Supervisors, Antonakes said states have been "leading the fight to rein in abusive lending" through predatory lending laws, licensing and supervision of mortgage lenders and brokers, and enforcement of consumer protection laws.
"Rather than thwarting or banning such protections, the committee and Congress should incorporate the early warning signs and interventions that state laws and regulations provide in your legislation," Antonakes said in his prepared testimony.
Congress should eliminate federal preemption of state consumer protection laws rather than establishing a "federal ceiling" of regulation and exposing consumers "to even greater potential risk than exists today," Antonakes said.
Antonakes said state regulators began building a licensing and registration database in 2003 to track problem lenders — an effort endorsed by Congress in passing the Housing and Economic Recovery Act of 2008 (HERA).
The resulting Nationwide Mortgage Licensing System, launched in January 2008, is now being used by 24 states, and Antonakes said 43 states are expected to be on board by January 2010.
Antonakes agreed with NAR that lawmakers should not limit a "safe harbor" to 30-year, fixed-rate mortgages.
"The limitation on loan repayment periods less than 30 years makes little sense to us," Antonakes said. If borrowers can afford to make the higher monthly payments, he said, 15-year or 20-year mortgages "offer the opportunity to save tens of thousands of dollars in interest and an accelerated growth in real equity."
Michael Calhoun, president of the Center for Responsible Lending, said the bill’s proposed assignee liability provisions, which would preempt state laws, would be "a step backward for consumer protection." State laws are the strongest tools consumers have to save their homes from foreclosure, he said.
In his prepared testimony, Calhoun said HR 1728 won’t stop Wall Street investors from providing the financing for risky loans, because it would prohibit borrowers from filing class-action suits and limit the ability of consumers to seek recourse against the owners of their loans unless they were in foreclosure.
Calhoun also complained that as written, the bill would not eliminate "perverse incentives" that encouraged loan originators to push risky products on consumers. He called for more powerful anti-steering prohibitions and a tighter ban on yield-spread premiums.
One of the most effective steps lawmakers could take would be to ban prepayment penalties altogether, allowing consumers to refinance at will if they are able to find a better mortgage, Calhoun said.
The next stop for HR 1728 is a Tuesday markup session, during which the committee will make changes to the bill based on input received at the hearing.
A previous version of the bill, HR 3915, passed the House in 2007 but was opposed by the Bush administration and not taken up in the Senate.
In introducing HR 1728 in March, Rep. Brad Miller, D-N.C., said the foreclosure crisis has "wreaked havoc" on the economy and that "the industry’s arguments for watering the bill down are not at all convincing" (see story).
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