Mortgage Reform and Anti-Predatory Lending Act of 2007

by Robert Franco

November, 10, 2007

For those of you who may not be aware, the U.S. House Committee on Financial Services has been working on H.R. 3915, dubbed "The Mortgage Reform and Anti-Predatory Lending Act of 2007." The bill provides for licensing and registration of individual mortgage brokers and registration of bank employees that originate mortgages, creates residential mortgage loan origination standards, and establishes minimum standards for all mortgages. Not surprisingly, there are some provisions in the bill that have stirred up some controversy - mainly with mortgage brokers. But, there is no doubt that this is an extremely consumer friendly bill.

Here are some of the highlights from the committee's press release and the full text of the Act:

Federal Duty of Care: All mortgage originators (including individuals as well as companies and banks that originate mortgages) will be subject to a federal duty of care that requires (1) licensing and registration, as applicable, under State or Federal law (including under subtitle A), (2) presenting consumers with appropriate mortgage loans (i.e., consumer has reasonable ability to repay and receives net tangible benefit, and loan does not have predatory characteristics), (3) making full disclosures to consumers, (4) certifying to lenders compliance with mortgage origination requirements, and (5) including a mortgage originator’s unique identifier in loan documents.

Anti-Steering: For mortgage loans that are not prime loans, no mortgage originator can receive, and no person can pay, any incentive compensation (including yield spread premiums) that varies with the terms of the mortgage loan (except for size of the loan and number of loans). Regulations will be promulgated to prohibit mortgage originators from (1) steering any consumer to a loan that the consumer lacks a reasonable ability to repay, does not provide net tangible benefit, or has predatory characteristics, (2) steering any consumer from a prime loan to a subprime loan, and (3) engaging in abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but different race, ethnicity, gender, or age.

Remedies: Remedies will be up to three times broker fees plus costs, including a reasonable attorney's fee.

There is quite a lot of benefit packed into just this short section and the Act goes on to define the specifics in great detail. And, really, it seems like a lot of common sense. License loan originators, require them to put consumers in appropriate loans that they can afford to repay and give the consumers a private right of action for violations that includes reasonable attorney's fees. That sounds like a good plan to me.

There is even a safe harbor provision that will allow loan originators to put consumers in loans with assurance that they are not violating the provisions of the Act. If the originators choose to venture in to loans with more risk, they will need to be sure to dot all of the "i's" and cross all of their "t's."

Safe Harbor: A presumption can be made that the minimum standards (reasonable ability to repay and net tangible benefit) are met for “qualified mortgages” and “qualified safe harbor mortgages.” Qualified mortgages (prime loans) are presumed to meet the minimum standards and this presumption may not be rebutted. For qualified safe harbor loans, the presumption may be rebutted only against creditors.

Qualified safe harbor mortgages are loans with (1) documented consumer income, (2) underwriting process based on fully indexed rate (taking into account taxes, insurance, and assessments), (3) no negative amortization, (4) other requirements that may be established by regulation, AND (5) one of the following: (i) fixed payment for at least 5 years, (ii) for variable-rate loans, APR that varies less than 3% over the interest-rate index, OR (iii) DTI not greater than a percentage prescribed by regulation.

The majority of the controversy seems to stem from the prohibition on the use of yield spread premiums (YSP). YSP's are paid by the lender to the originator for selling the consumer a loan at a rate above par. The mortgage brokers have a problem with this prohibition on "even disclosed YSP's." However, the prohibition is only on subprime loans and it makes good sense. Borrowers do not fully understand the YSP even when it is disclosed. Often they are explained by the mortgage broker as "a fee paid by the lender, you are not paying it so you don't have to worry about it." If the broker said something like "I could have gotten you a lower interest rate and payment, but I chose to put you in a loan with a higher rate because the lender pays me to do that," it isn't likely the borrower would be so inclined "not to worry about it."

This is a good bill already, and it does even more.

Assignee/Securitizer Liability (does not extend to trusts and investors): Subject to exemptions below, for loans that violate the minimum standards (reasonable ability to repay and net tangible benefits), a consumer has an individual cause of action against assignees and securitizers for rescission of the loan and the consumer’s costs for rescission.

Exemption from Liability: An assignee/securitizer will not be liable for a loan that violates the minimum standards if the assignee/securitizer provides a cure to make the loan conform to the minimum standards within 90 days of receiving notice from the consumer, OR (1) has a policy against buying mortgage loans that are not qualified mortgages or qualified safe harbor mortgages and exercises reasonable due diligence to adhere to such policy AND (2) has obtained representations and warranties from the seller or assignor of the loan regarding not selling or assigning loans that violate the minimum standards.[1]

Defense to Foreclosure: When the holder of a mortgage loan or anyone acting on behalf of the holder initiates a judicial or non-judicial foreclosure, (1) the consumer who has a rescission right under this bill may assert such right as a defense to foreclosure against the holder to forestall foreclosure, or (2) if the rescission right has expired, the consumer may seek actual damages (plus costs) against the creditor, assignee, or securitizer.

Renters: Provides certain protections for renters when the homes they rent go into foreclosure.

Additional Standards and Requirements: Prohibits certain prepayment penalties, as well as single-premium credit insurance and mandatory arbitration, for mortgage loans.

Enhances Consumer Protections for High-Cost Mortgages: Adopted from the Miller-Watt bill of 109th Congress (HR 1182), this expands the scope of and enhances consumer protections for “high-cost loans” under HOEPA by, among other provisions:

lowering the APR trigger from 10% to 8% over comparable Treasuries (codifies existing Board standard),

lowering the points and fee trigger from 8% to 5% and including additional costs and fees in the trigger,

prohibiting the financing of points and fees,

prohibiting excessive fees for payoff information,
modifications, or late payments,

prohibiting practices that increase the risk of foreclosure, such as balloon payments, encouraging a borrower to default, and call provisions, and

requiring pre-loan counseling.

According to a "No on H.R. 3915" petition, the bill "will actually harm" consumers. The petitions currently has more than 110,000 signatures. Here is the complete text of the petition:

To: U.S. Senator Jon Kyl, U. S. John McCain, President George W. Bush, U. S. Rep Harry E Mitchell

We want to express our opposition to H.R. Bill 3915. We believe it is burdensome to the independent mortgage broker, anti-competitive, and in the name of consumer protection, it will actually harm consumers. In an already tough lending and real estate environment, this bill will put additional unneeded pressure on real estate prices and cause unforeseen harm to homeowners, mortgage professionals and real estate professionals everywhere. It will also limit the choices consumers have in finding a residential mortgage loan to strictly large financial institutions.

Sincerely,

The Undersigned

Despite the strong support for the petition, I disagree with the protesters' point of view. The bill will not have an impact on "prime loans," and as the market has shown, subprime lending has become a terrible burden on the real estate market. Of course, this will make it more difficult for some consumers to obtain mortgages and become homeowners, but not everyone should be able to buy a home. And, perhaps some potential homeowners just need to lower their sights a bit. Creative financing has been extensively used by borrowers to buy a more expensive home than they otherwise could afford. By extending themselves to the max, many were teetering on the verge of financial crisis as soon as they closed.

Realtors and lenders pushed subprime loans because there was a lot of money to be made in doing so. If they had not abused these programs and stretched borrowers beyond their means, these measures may not have been necessary, but they are. Surely, the borrowers are not blameless - but most do not have the sophistication to understand the consequences of their actions. They often trust their Realtor and loan originator to let them know what they should do. When they get pre-qualified for their loan, they assume that they would not have been offered a loan they could not afford. Because the past few years have shown us that neither the real estate professionals, nor the borrowers, were capable of self-regulating their actions - this bill is a necessity.

Robert A. Franco has been in the real estate title industry for nearly 15 years in the state of Ohio. The owner of VersaTitle, a full service abstracting and title company, and the founder and president of Source of Title, a Web site devoted to providing media and marketing services to the title industry, Franco has dedicated much of his professional career to furthering the role and significance of title examiners in the title insurance industry.

You can write him at rfranco@sourceoftitle.com or visit his Blog