Bill would set minimum standards for home-loan underwriting

Hoping to prevent a future bout of risky mortgage lending, House Financial Services Chairman Barney Frank (D-Mass.) unveiled legislation on Monday to institute basic underwriting standards for all home loans.

Among other things, the bill would require all mortgage originators to present consumers with loan products appropriate to their current circumstances, ban prepayment penalties for sub-prime mortgages and forbid incentive payments to lenders who steer borrowers into higher-cost loans.

{mosads}States would be empowered to go further than the minimum federal standards set forth by banking regulators, prompting the mortgage lending industry to charge that it will create a patchwork of state laws that will be costly to comply with. This is seen as the most controversial aspect of the bill. 

“This bill represents a significant step forward to clean up and prevent a number of the questionable practices that, unfortunately, took hold in the mortgage lending industry in the last several years,” said Rep. Mel Watt (D-N.C.), who along with Rep. Brad Miller (D-N.C.) introduced the bill with Frank.

“We’re going to set a federal minimum standard, but we’re not going to pre-empt state law beyond that,” Frank said in a conference call with reporters.

Lobbyists for mortgage lenders reacted cautiously to the bill, saying they would fight aspects of the legislation. Meanwhile, consumer groups praised the bill, but argued that the penalties for lenders did not go far enough.

“The whole bill has got us on edge and we’re examining every aspect to see where the concerns are appropriate,” Erick Gustafson, vice president for government relations at the Mortgage Bankers Association, said.

“The proposal creates a floor and not a ceiling for states to create additional protections for the homeowner,” Josh Nassar, vice president for federal affairs at the Center for Responsible Lending (CRL), said. “However, we’re concerned that the legislation doesn’t create enough rights and remedies to ensure that market participants police themselves in order for homeowners to have sustainable mortgages that can help build wealth.”

Apart from tightening underwriting standards, the legislation would require states to register and license all mortgage originators, bar lenders from refinancing borrowers into loans that don’t improve their financial position, and lower the trigger for loans subjected to a raft of consumer protections under the 1994 Home Ownership and Equity Protection Act (HOEPA).

In addition, the legislation would prod so-called securitizers, the Wall Street firms that buy home loans and then repackage them for sale to investors, to stand guard against predatory practices. Where securitizers fail to meet certain standards, victims of lending abuses would have the right to recoup costs and pay back only the principal of the loan.

Frank acknowledged the bill would do nothing to help people already trapped in bad mortgages, calling it “entirely forward-looking.” By contrast, legislation that he has passed to modernize the Federal Housing Administration and a measure he is pushing to lift temporarily the portfolio caps on Fannie Mae and Freddie Mac are aimed at helping troubled borrowers.

Frank said he would likely mark up the legislation within two weeks, after holding a full-day hearing on the legislation on Wednesday. He predicted the legislation would reach the House floor by mid-November.

Particularly toxic to the industry is language in the bill preserving states’ ability to enact tougher standards. “The industry will flat-out oppose anything that doesn’t have full national standards,” one banking lobbyist said.

Industry lobbyists also criticized language that required them to present “appropriate” loans to consumers as too vague and sweeping. They pointed out that the financial circumstances of borrowers change and they lack perfect information about their spending habits and other factors. 

“Presenting an appropriate mortgage loan to a consumer is done at a fixed point in time and the next day, or even later that afternoon, what is appropriate for that consumer can change,” one lobbyist said.

The American Securitization Forum and the Securities Industry and Financial Markets Association, which represent many of the Wall Street securitizers of mortgages, issued a joint statement praising the “participatory process” that Frank fostered during the bill’s drafting, but warning that the final bill “must provide pre-emptive national standards and carefully address the needs of the secondary market.”

Talking to reporters, Frank suggested there was room for some negotiation, but predicted that the legislation would “pass very substantially as written.”

Defending the provisions relating to securitizers, he called the secondary mortgage market the “biggest contributor” to the problems rocking the credit markets, which he said represent the “biggest financial crisis” since the 1997 collapse of several Asian economies.