Frank prepares bill to curb predatory mortgage lending

The wave of defaults in the sub-prime mortgage market has increased momentum for legislation to rein in lending abuses.
Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services panel, is planning to unveil a bill later this month to tighten consumer protections in the mortgage industry. Lobbyists believe the measure has strong odds of passing the House this fall.

{mosads}“I think the prospects for better consumer protections in this area have increased, unfortunately, because of events in the markets,” said Allen Fishbein, the director of housing and credit policy for the Consumer Federation of America.

Curbing predatory loans won’t help people trapped in unaffordable mortgages, but it could prevent another binge in risky lending, proponents argue. The prospects for the bill, which faces steeper odds in the Senate, are likely to rise as conditions in the mortgage market worsen. New default data due later this month from the Mortgage Bankers Association will add “more fuel to the fire” and place “enormous political pressure on lawmakers to respond,” predicted Jaret Seiberg, a financial services policy expert for the Stanford Group.

Frank’s legislation will tighten underwriting standards and include language designed to prod states to enact minimum standards for mortgage originators involving disclosure and broker licensing, according to discussions that Financial Services Committee staffers had with lobbyists over the recess.

In an interview, Frank suggested that he wanted to bring the standards applied to non-bank mortgage lenders and brokers more in line with those adhered to by the banking industry. “We have a regulated and an unregulated sector in terms of mortgage loans, and the regulated sector has worked much better,” he said.

The legislation is also likely to allow victims of lending abuses to sue the Wall Street banks that purchased their mortgages and resold them to investors — thereby forcing Wall Street to stand guard against predatory loans.

Yet Frank is expected to stop short of imposing full “assignee liability” to these financial firms. Instead, these firms may shield themselves from liability if they adhere to certain precautions and standards. “The degree of liability you place on the secondary market isn’t as much as on the originators,” Frank said.

Consumer advocates argue that Frank’s approach doesn’t go far enough to ensure that unscrupulous lenders may not offload their loans to investors. These groups, such as the Center for Responsible Lending and the Consumer Federation of America, are likely to fight for full assignee liability. According to one consumer advocate, that means, “If you hold the loan, you have liability for what the originator did.”

Wall Street lobbyists counter that the secondary market for mortgages will vanish unless the industry has a safe harbor against lawsuits. “Wherever broad, unlimited assignee liability exists, the market dries up,” argued Scott DeFife, who is senior managing director at the Securities Industry and Financial Markets Association (SIFMA).

As its core, the Frank legislation will draw from a bill sponsored by North Carolina Democratic Reps. Brad Miller and Melvin Watt in the last Congress involving “high-cost” or riskier mortgages. Such loans became subject to tighter consumer protections under the 1994 Home Ownership and Equity Protection Act (HOEPA). The Miller-Watt bill would have swept in a far larger category of mortgages under the act and, as a result, it attracted the strong opposition of the banking industry.

Frank declined to comment on the degree to which he would use Miller-Watt as a starting point for his bill, saying only that he is working closely with the two congressmen on the legislation. Said one banking lobbyist, “If they put the Miller-Watt bill in there whole, as it was last year, it’s something we would have a lot of problems with.”