House passes controversial anti-predatory-lending bill
The House of Representatives Thursday approved controversial legislation intended to combat predatory lending, amending some provisions to address criticism that the bill could worsen the credit crunch, but strengthening others. HR 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, would create a national licensing system for mortgage loan originators and require lenders to determine that borrowers have a reasonable ability to repay a loan. The bill would also create limited liability for companies that bundle mortgages for sale to Wall Street investors.

House passes controversial anti-predatory-lending bill
Friday, November 16, 2007

By Matt Carter
Inman News

The House of Representatives Thursday approved controversial legislation intended to combat predatory lending, amending some provisions to address criticism that the bill could worsen the credit crunch, but strengthening others.

HR 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, would create a national licensing system for mortgage loan originators and require lenders to determine that borrowers have a reasonable ability to repay a loan. The bill would also create limited liability for companies that bundle mortgages for sale to Wall Street investors.

Although the Bush administration opposes many of the bill's provisions (see Inman News story), HR 3915 received bipartisan support in the House, where it was approved in a 291-127 vote.

Whether some of its more controversial provisions are embraced in the Senate remains to be seen. Sen. Christopher Dodd, D-Conn., is expected to introduce legislation with similar goals, but which may not incorporate all of the new restrictions envisioned by the House.

The House bill's most contentious restrictions include a ban on incentive payments brokers and loan officers receive when they place borrowers in high-cost loans, and prohibitions on prepayment penalties used to discourage borrowers from refinancing their loans.

Rep. Tom Feeney, R-Fla., called HR 3915 "the landlords and lawyers relief act," because he said it would make it more difficult for renters to become home buyers, and make lenders and the investors who back them more vulnerable to lawsuits.

Formerly a "galloping horse," the housing market has "gotten very sick," Feeney said. "What we are doing for the sick horse is feeding it strychnine," by restricting home buyers' access to credit, he said.

Rep. Mel Watt, D-N.C., said neither consumer nor industry groups are completely happy with the bill, which he said began taking shape four years ago as a response to predatory lending.

Consumer groups like the Center for Responsible lending have said the bill provides too many loopholes for investors who buy securities backed by mortgage loans. Borrowers, some consumer advocates say, should have the right to sue investors when loan originators employ deceptive or predatory practices.

HR 3915 would create limited "assignee liability" for companies that securitize loans, but prohibit class-action lawsuits by borrowers. The bill would also preempt states from passing laws that would give borrowers additional rights to sue loan securitizers and other assignees.

"Maybe it's best to have a bill nobody is completely comfortable with," Watt said before the bill's passage, promising that Congress would continue to work on refining it as the Senate weighs similar legislation.

The House did amend the bill Thursday to make it clear that it would not stop borrowers from choosing to pay higher up-front points and fees to obtain lower interest rates, but strengthened restrictions on prepayment penalties, extending them to prime, as well as subprime, loans.

The House also incorporated provisions of another bill aimed at curbing coercion of appraisers and deceptive servicing practices into HR 3915. That bill, HR 3837, introduced Oct. 16 by Rep. Paul Kanjorksi, D-Ohio, would require escrow accounts on high-cost loans to cover property tax and insurance payments, a feature incorporated by amendment into HR 3915.

Incentives for originators

Critics say incentive payments to loan originators, such as yield spread premiums paid to mortgage brokers, encourage originators to place borrowers in high-cost, subprime loans when they might qualify for more affordable prime loans.

But mortgage brokers maintain that banning incentives such as yield spread premiums would reduce the incentive for lenders to do business in poor neighborhoods that might otherwise be underserved.

Some critics said the bill, in attempting to eliminate incentives for loan originators to place borrowers in higher-cost loans, would not allow borrowers to choose a loan with higher up-front fees in exchange for a lower interest rate.

An amendment introduced by Rep. Barney Frank, D-Mass., and approved by voice vote clarified that borrowers would still be permitted to choose loans with higher origination fees or costs, and to finance those fees into the loan.

The amount of compensation paid to the loan originator "cannot vary based on (loan) terms," Frank's amendment stipulated.  

Frank said further modification of the bill's language may be necessary to achieve its intent, but that "it will be very clear to anybody by the time this bill becomes law, there is no possibility of anyone getting higher compensation in return for putting someone in a higher-cost loan."

If similar legislation is passed by the Senate, differences in the bills will need to be ironed out, offering further opportunities to fine tune its language.

As adopted by the House, the bill caps damages for steering consumers into high-cost loans at three times the fees earned by originators.

Watt argued that borrowers should be allowed to recover their actual damages "so that limited remedy doesn't simply get figured into the cost of doing business." The North Carolina Democrat proposed an amendment to allow borrowers to recover actual damages, which was voted down.

Prepayment penalties

As approved Nov. 6 by the House Financial Services Committee, HR 3915 prohibited prepayment penalties on subprime loans. Prepayment penalties on other loans were to be allowed, but were to expire three months before a rate reset.

Some lenders say prepayment penalties give them certainty that they will receive loan payments for a predetermined period of time. In exchange for that certainty, they are able to offer borrowers lower interest rates. Eliminating prepayment penalties will make it harder for borrowers to refinance existing loans that carry such penalties, critics of the bill said.

Feeney said that the lower interest rates on loans with prepayment penalties can be attractive to retired people living on fixed incomes.

"I happen not to like prepayment penalties," but borrowers should have a choice to choose a loan whose terms are best suited to them, the Florida Republican said.

While many Americans move homes often, a loan that carries a prepayment penalty in exchange for a lower interest rate might be the only affordable option for some borrowers who plan to stay in a home for 15 or 30 years, he said.

The House rejected such arguments, adopting an amendment that would also curtail the use of prepayment penalties on prime loans.

The amendment, introduced by Rep. Carolyn Maloney, D-N.Y., would limit prepayment penalties on prime loans to 3 percent of outstanding balance during the first year of the loan, 2 percent during the second year of the loan and 1 percent in the third year of the loan. Lenders would not be allowed to collect any prepayment penalties on prime loans after three years.

Amendment co-sponsor Rep. Albio Sires, D-N.J. -- who as part owner of a title insurance agency before coming to Congress claims "more knowledge about mortgages than the average consumer" -- said he was "shocked" to learn he owed a $7,500 prepayment penalty when he sold his home upon being elected to Congress.

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