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Mortgage Reform and Anti-Predatory Lending Act of 2007
by Robert Franco | 2007/11/09 |

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.

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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.


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


Categories: Consumer Advocacy, Legislation, Mortgage Industry, Subprime Lending

2295 words | 3560 views | 21 comments | log in or register to post a comment

Just what we need. Another piece o...
Just what we need. Another piece of loving, compassionate legislation from a warm, caring and protective government whose only concern is to save us from ourselves. They left out the part where they tell us it's all "for the children." 
by Scott Perry | 2007/11/09 | log in or register to post a reply

"steering any consumer to a loan...
"steering any consumer to a loan that the consumer lacks a reasonable ability to repay"

So does that mean that as soon as I default on my mortgage, I have prima facie evidence that I was given a loan that I did not have a reasonable ability to pay? Maybe, maybe not, but I can bet a lot of foreclosures are going to be delayed for years by using all the supposedly consumer-friendly language that lets them excuse a borrower's poor decision-making process.

This bill, like many regulations in this area, will either accomplish none of its goals, or have a chilling effect on legitimate business in the industry, or both.

by David Jenkins | 2007/11/09 | log in or register to post a reply

David: Not quite. The Act does a ...
David: Not quite. The Act does a pretty good job of defining "ability to repay" and covers several circumstances. There is a nice list of factors that the originator must make a good faith effort to comply with. And, of course, there is always the safe harbor provision. 
by Robert Franco | 2007/11/09 | log in or register to post a reply

I like this bill.

I like this bill.

Scott - I understand your comment because I don't like government acting like the big mama of us all, BUT we are immersed in an industry SO corrupt and SO unwilling or unable to police itself that a BIG KICK IN THE YOU KNOW WHERE is entirely in order and the only one to do it IS the government.
by Diane Cipa, General Manager, The Closing Specialists® | 2007/11/09 | log in or register to post a reply

I hear what you're saying, DC, but ...
I hear what you're saying, DC, but that's what we were told RESPA was supposed to do.

Do you honestly think another layer of bureacracy and regulation is going to change anything?
by Scott Perry | 2007/11/09 | log in or register to post a reply

Well, RESPA needs some legislative ...
Well, RESPA needs some legislative umph to be a better enforcement vehicle. These new laws, HR 3915 and HR 3837 contain provisions that would help. We also have RESPA reform on the horizon. It's at OMB now and don't forget the secret meeting of the state regulators and HUD. There are big things out there brewing.

The corrupt establishment in the real estate and related industries are about to face the music. They have not only seriously harmed many thousands of consumers but they have reeked havoc in the global financial markets.

It's going to take some tough prosecutors and regulators to do it but you can't cause this much pain and not expect the belt.

Watch Cuomo, too. He's onto something and others may follow his lead.
by Diane Cipa | 2007/11/09 | log in or register to post a reply

Sounds like much needed reform. Hop...
Sounds like much needed reform. Hopefully it will be enforced. 
by Kevin W. Ahern | 2007/11/10 | log in or register to post a reply


Call me a skeptic,...

Call me a skeptic, but something tells me that the "corrupt establishment" will always be able to find the loopholes and grease the right palms to circumvent the law, just as they did with RESPA.

I think what this industry needs is more people on the front lines like yourself, who truly care about doing the right thing by the consumer. Only then will there be true industry reform.
by Scott Perry | 2007/11/10 | log in or register to post a reply

Well, at the core, you are absolute...
Well, at the core, you are absolutely right, Scott. That's how things used to work but right now the people who truly care have no support structure of peers or they can't see it. It's bizarrely turned into a totalitarian mob-like environment where the good guys are the underground. I know that sounds hilarious and dramatic but we are operating in an entirely corrupt industry - real estate sales, mortgage lending and title insurance. How it got this bad and whose at fault almost don't matter anymore except that we need some big entity to step in and say whoa.

It is a form of revolution and unless the good among us can stand up without getting their heads chopped off - thank heavens I am self-employed - it won't happen.

Hey, on another note and in the interest of helping to find solutions, please join us in debate on qualifications of notary signing agents. As always, all views are welcome.
by Diane Cipa | 2007/11/10 | log in or register to post a reply

As most of the provisions of this b...
As most of the provisions of this bill (i.e. YSP disclosures) don't apply to direct lenders, this bill will serve primarily to eliminate the livelihoods of hundreds of thousands of jobs for those involved in the mortgage broker industry. 65% of all mortgage loans are funded by mortgage brokers. Unlike mortgage bankers, mortgage brokers must disclose compensation earned outside of the closing as Yield Spread Premium. Bankers, who earn Service Release Premium (S.R.P.) will continue to be exempt from this disclosure. This means that to stay competitive, any reasonable mortgage broker will have to affiliate with a mortgage banker to continue funding anything besides very vanilla-flavor prime loans. Stated income loans? Sub-prime loans? Second mortgages? Alt-A loans? If this bill passes in it's present form, this business will no longer be available to mortgage brokers. If you think that won't impact you or the housing market in a negative way, consider the effect on any industry if 65% of the competition is eliminated by legislation. Don't take my word for it, and don't buy into the so-called consumer friendly groups that are pushing this bill. Read the text yourself, make an informed decision and get involved.  
by Alan Blood | 2007/11/12 | log in or register to post a reply

In addition to killing competition ...
In addition to killing competition in the industry, this bill will likely drastically reduce the amount of funds available to be lent and the number of borrowers in the market.

Capital will go where the highest return on investment exists. Capital will not go to a lending industry with an already bad reputation if it is saddled with more up front costs in the form of regulation and more back-end costs in terms of consumer protection laws and more liability. The remaining capital will stay away from sub-prime and other non-traditional categories since the return on investment will be lower for these areas that are already higher risks to begin with.

If you really want to see houses prices deflate, reduce the number of people who can borrow money to purchase homes by substantial percentage.
by David Jenkins | 2007/11/12 | log in or register to post a reply

I don't doubt that this legislation...
I don't doubt that this legislation will have a negative impact on the housing industry in the short term. However, you can't correct the problem by ignoring it and continuing with the practices that led to the crisis. Yes, making more bad loans is a sure way to generate more activity and increase the housing prices. But, that value isn't "real" and we will have to pay the consequences sooner or later.

If mortgage brokers need to sell sub-prime loans and charge YSP's to stay in business, it is probably better for the long-term future of the housing market if they go under. There are too many unethical brokers in the business and its time to clean house. The good ones will no doubt be able to compete by selling prime loans and they will do just fine. And - they can still sell sub-prime loans, there are just more restrictions to make sure that they are acting in the best interest of the borrower. What is wrong with that?
by Robert Franco | 2007/11/12 | log in or register to post a reply

Not a thing. ;)...
Not a thing. ;) 
by Diane Cipa, General Manager, The Closing Specialists® | 2007/11/12 | log in or register to post a reply

The problem is that unethical pract...
The problem is that unethical practices did not lead to this crisis. From everything I read and seen, the vast majority of non-performing loans had a willing borrower and a willing lender. There was full disclosure of what was going on and nobody wanted to face reality about anyone's ability to repay or that interest rates might go up. Both are now suffering consequences for bad decision-making and everyone is looking for a scape-goat.

These regulations are punishing the intermediaries who followed the rules by lining up loans for people who wanted them based on the relaxed criteria created by the people who wanted to lend the money. These regulations are punishing capitalism not corruption.

In the vast majority of these cases, no one violated any usury laws and everything was disclosed up front. Borrowers only looked at the first line of the TIL and covered their ears screaming "la-la-la" when the possibility of increased interest rates was mentioned.

The lenders who are now getting burned decided to take advantage of the flood of money the Fed created to make a quick buck by generating as many new loans as possible without relying on traditional underwriting practices that would have kept their risks low.

Both are now getting what they deserve.
by David Jenkins | 2007/11/12 | log in or register to post a reply

David makes some valid points. We i...
David makes some valid points. We in Cook County, IL, have seen a sampling of what can happen when the nanny state gets too intrusive.

The state's experiment, in the form of HB 4050, selected 10 zip codes with high forclosure rates to be subject to different lending standards from the rest of the state.

The program involved a database into which licensed mortgage brokers were required to enter a long list of items regarding the borrowers and the loan terms. If the loan met certain criteria, the broker was to pay for loan counseling, in the area of $300.00,for the borrower (nonrefundable in the event that the borrower decided against the loan). The state left it to the title companies to police, with loan terms (from the closing documents)to be entered by the title company, without knowledge of the terms entered by the broker. This was necessary to obtain a "certificate of compliance," without which the mortgage could not be recorded.

The result, most lenders refused to lend in those zip codes, brokers closed their doors, and potential home buyers avoided the zip codes. Home sales plummetted relative to the surrounding areas. The governor pulled the plug on the program with a directive to rewrite the program.

There was talk of instituting a similar program county-wide, I suppose so that it would not look to be discriminating against those ten zip codes, or that the lenders would not abandon the entire county.

HR 3915 might not affect the business as severely. But it would inhibit certain legitimate loan busines that could have real value to some borrowers (i.e. stated income loans for affluent business owners).

For $200 or $300, the borrowers can be represented by an attorney to represent their interests. It is a small price to pay, considering the stakes involved.

A final platitude: Freedom Is Not Free. The more government encroaches upon our freedom to make our own choices - to succeed, or fail, as we may - the less freedom we are left with.
by Pat | 2007/11/12 | log in or register to post a reply

Thank you all for your comments. I...
Thank you all for your comments. I appreciate the input and it is always good to have divergent interests presented on the issues.

I do think that unethical practices have led to this crisis. Pushing loans on borrowers that they cannot repay is unethical. Sure, the borrowers want the loan, they want to buy that house, or refinance to get some quick cash. But, it is certainly not in their best interest.

And, the effects of this go way beyond the borrower and the lender. It may be correct that they are all getting what they deserve, but look at the effect this has had on the housing market as a whole. We are in deep trouble now. These loans have all been packaged up and sold to investors on the secondary markets. As we are finding out, they aren't worth what they were selling for. Those investors are hedge funds, mutual finds, retirement accounts, etc... you may even own some mortgage-backed securities in your portfolio.

As a result of the bad loans being sold as good investments, the broader economy is suffering. The slump in the housing market is pulling down the stock market and could lead to a recession.

Thus, I think this is a good reason for more regulation.
by Robert Franco | 2007/11/13 | log in or register to post a reply

This Passed!!!!!! Joy!! Joy!!...
This Passed!!!!!! Joy!! Joy!! 
by Janis Talbot | 2007/11/17 | log in or register to post a reply

The passage of this bill is a disas...
The passage of this bill is a disaster for those consumers who desire to borrower but either cannot or do not want to prove their income.

Remember, this bill does not just affect purchase money first mortgages. It also affects home equity loans.

It is unimaginable that in America a person can own an asset but be prevented by the government from using that asset as collateral for a loan.

Please take note that this bill will primarily hurt moderate income borrowers who might have lendable equity in their property but be denied a loan because they have undocumentable income.

The bill needs to have some type of opt-out from the “Ability to Repay” requirement so that consumers have the flexibility to decide for themselves if they have the ability to repay a loan.

Consumer must have the final says as to whether or not they can afford a loan.
by Mark Warshal | 2007/11/20 | log in or register to post a reply

First the bill has only passed the ...
First the bill has only passed the House, it still has a way to go. Second, the bill will not prevent "stated income" loans! There is a safe harbor provision that presumes the ability of the borrower to repay if it is a qualified mortgage or a qualified safe harbor mortgage. You can read the text of the bill, but basically, you only have to verify and document income on high-cost loans. I don't have a problem with that - it makes perfectly good sense.

If the lender is comfortable with the borrowers ability repay, even though it cannot be verified, they shouldn't have any problem giving them a prime loan. If they feel it must be a subprime, high-cost loan, then they should have to document the borrower's ability to repay it for the benefit of the investors who will buy the loan on the secondary market.
by Robert Franco | 2007/11/20 | log in or register to post a reply

In response to Mr. Franko’s comment...
In response to Mr. Franko’s comments it should be noted that for a loan to be considered a “qualified safe harbor mortgage” the borrower’s income must be documented and verified.
For a loan to be considered a “qualified mortgage”, income does not need to be documented but the APR may be no greater than 300 basis points above a US Treasury Bill of similar maturity. As of Nov 15, 2007, a US Treasury Bill for 120 months was yielding 4.69% and for 240 months was yielding 4.98%.
Therefore, by definition, a stated income loan cannot be a “qualified safe harbor mortgage” and can only be a “qualified mortgage” if the APR is less than 7.69% for a 10 year loan or 7.98% for 20 year loan (based upon treasury yield from Nov 15, 2007).
Consequently, this bill will eliminated all no-doc and stated income loans for borrowers who cannot obtain a low rate “qualified mortgage.”
Additionally, please note that a “High Rate Loan” is not the same thing as a “sub-prime” loan. By definition a “High Rate Loan” is a loan where the ARP exceeds comparable treasury yields by 800 basis points. Based upon yields from Nov 15, 2007, the APR threshold would be 12.69% for a 10 year loan and 12.98% for a 20 year loan.
As one can see, there is a large gap between prime loans and “High Rate Loans”. These are the sub-prime, stated income loans which will be elliminated by this legislation.

by Mark Warshal | 2007/11/20 | log in or register to post a reply

Mark: All very true and explained ...
Mark: All very true and explained very well. I think our only disagreement is over the wisdom of the bill - I think that subprime, stated income loans should be eliminated. If it is a subprime loan, there is already a higher risk of default and the lender owes it to the investors (and the borrower) to take steps to assure that the borrower has the ability to repay the loan.  
by Robert Franco | 2007/11/20 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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