Proposed mortgage rules face hurdles
Democrats introduced legislation Monday that would tighten an array of mortgage lending standards and require U.S. regulators to issue new rules ensuring that loans be made only to borrowers who can afford to repay them.
The bill, by Rep. Barney Frank (D-Mass.) and two North Carolina colleagues, could set the baseline for the emerging debate over how to prevent a repeat of the mortgage meltdown. But its passage is by no means assured, and elements of the bill are likely to draw intense opposition from the lending industry.
Frank, who is chairman of the House Committee on Financial Services, says the bill would protect borrowers against excessive loan fees. It also aims to prevent future defaults by requiring lenders to do a better job of screening their customers.
“People should not be lent money that’s beyond what they can be expected to pay back,” Frank said. “If this had been law on January ’06, I think it would have avoided some of the problems we have now.”
Lobbyists for banks and lenders expressed wariness Monday, warning that the bill could increase regulatory costs and reduce consumer choice.
Lacking substantial changes, “a number of people will move to kill it, and it’s relatively easy to do that in the Senate -- particularly in an election year,” said Wright Andrews, a veteran lobbyist for mortgage lenders.
Republicans also suggested that new restrictions on lending could make it harder for people to get mortgages, especially sub-prime loans for borrowers with weak credit or erratic income.
“Our goals should be to correct problems within the sub-prime market without choking off working Americans’ access to credit,” cautioned Rep. Spencer Bachus of Alabama, the senior Republican on the financial services panel. “This is an important issue, and we need to get it right.”
Frank’s bill would:
Establish a federal standard for home loans, requiring that mortgages be approved only for borrowers who have a “reasonable ability” to repay.
Prohibit financial incentives that encourage lenders to steer borrowers into more costly loans than those they qualify for, including the bonuses known as “yield spread premiums” that lenders pay to brokers.
Restrict costly prepayment penalties charged to borrowers who wish to close out their loans, typically to refinance on cheaper terms. Such penalties would have to expire three months before mortgage interest is scheduled to reset. Prepayment penalties would be banned altogether for high-cost, sub-prime loans.
Require licensing and registration for brokers and bank loan officers. Consumer advocates have called for such rules to protect borrowers from unscrupulous lenders that may move from state to state.
Establish federal minimum requirements while encouraging states to impose tougher rules. Many lenders prefer a new federal law setting maximum standards that states would not be allowed to exceed. Federal rule-making and enforcement duties would go to such agencies as the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Trade Commission.
Brokers said Monday that they could support parts of the package, but they vowed to resist the measure to prohibit the yield spread premium, which brokers get for placing consumers in loans with higher interest rates than those they qualify for.
A spokesman for the brokers defended such payments, maintaining that some borrowers knowingly choose a higher interest rate because it enables them to finance various costs rather than pay out of pocket at the start of a loan.
“We have deep concerns” about the proposal to ban yield spread premiums, said Roy DeLoach, executive vice president of the National Assn. of Mortgage Brokers.
Frank said his bill could reach the House floor for a vote before Thanksgiving. Movement in the Senate is less certain. Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, has said he will also introduce a lending bill, but the timing is unclear. Dodd’s office had no immediate comment Monday.
Howard Glaser, a mortgage industry analyst and former U.S. housing official, said the bill’s fate could also hinge on how much longer the housing slump persists (the weakness is partly tied to rising loan defaults) and how presidential candidates address the issue.
Already, Democratic hopefuls Sen. Hillary Rodham Clinton of New York and Sen. Barack Obama of Illinois have unveiled their own plans to address abuses in the mortgage industry. Republicans, such as Rudolph W. Giuliani, have placed the emphasis on letting market forces correct the problems rather than on applying stiff new regulations.
This difference is likely to play out in the campaign next year, Glaser said.
“Democrats will blame the administration for failing to anticipate or respond to the housing and mortgage problems. Republicans won’t want to admit they were responsible.
“So the issue becomes partisan, and the bill gets stuck without bipartisan support,” Glaser said.