Legislation in play in the Senate would create a Consumer Financial Protection Bureau within the Federal Reserve that would take over the enforcement of two major laws governing real estate professionals and mortgage lenders — the Real Estate Settlement Procedures Act (RESPA) and the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE).
The sweeping, 1,177-page financial reform bill passed by the Senate Banking Committee on Monday will be subject to further debate and attempted amendments.
The Mortgage Bankers Association, in a letter to the Senate Banking Committee Monday, expressed "strong opposition" to provisions of the bill requiring that companies that sell products like mortgage-backed securities retain at least 5 percent of the credit risk.
The new requirement is intended to ensure that companies that securitize loans "won’t sell garbage to investors, because they have to keep some of (the risk) for themselves," according to a summary of the bill issued by Chairman Chris Dodd, D-Conn.
During the housing boom, "it wasn’t important (to companies originating and selling mortgages) if the loans were never repaid as long as they were able to sell the loan at a profit before problems started," Dodd’s summary said. "This led to the subprime mortgage mess that helped to bring down the economy."
The MBA warned that additional risk retention requirements could have "particularly adverse consequences for both the residential and commercial mortgage markets."
Requiring lenders to keep a portion of the original loan on their books "would eliminate a sizeable percentage of the mortgage lending capacity in this county," the group said, effectively putting out of business independent lenders who don’t have deposits to lend against.
"Elimination of this critical segment of the market — often smaller lenders that serve underrepresented areas and borrowers — would limit capacity and choice for consumers, driving up borrowing costs or limiting access to mortgages altogether — the last thing we need in a real estate market that is just beginning to see signs of recovery," the letter said.
Groups representing lenders have also objected that the bill would not preempt states from passing their own, stricter rules for mortgage lenders.
One provision of the bill that lenders have supported is a requirement that the new Consumer Financial Protection Bureau propose within one year a new mortgage loan disclosure form that would meet both RESPA and Truth in Lending Act (TILA) requirements.
The Center for Responsible Lending issued a statement lauding the passage of the bill out of committee, saying it "sends an important message that Congress must change the rules so that consumers are protected from unfair practices, our economy is protected from the damage of bad lending, and taxpayers won’t have to pay for another Wall Street bailout."
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