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Bill Proposes Elimination of YSPs

Predatory lending bill introduced

October 23, 2007


Provisions of a new predatory lending bill introduced by Democrats yesterday would eliminate yield spread premiums, reduce the threshold on loans considered to be high cost and force servicers to honor existing leases on properties they have foreclosed on.

The bill, H.R. 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007, was introduced by Reps. Brad Miller (D-NC), Mel Watt (D-NC) and Barney Frank (D-MA) Monday, according to an announcement from the House Financial Services Committee.

"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," Rep. Watt said in the statement.

The congressmen have proposed that the payment of YSPs to mortgage brokers be prohibited.

"HUD, OCC OTS, and FDIC, in consultation with FTC, will jointly prescribe regulations to prohibit mortgage originators from steering any consumer to a mortgage loan that is not in the consumer's interest," a document outlining some provisions of the bill stated.

But the National Association of Mortgage Brokers warned that the YSP provision will harm borrowers.

"The indirect compensation mortgage brokers receive from lenders is a defendable fee that actually lowers closing costs to consumers," NAMB President George Hanzimanolis said in an announcement yesterday. "It is an imperative tool for first time homebuyers, and critical to enable so many people to own a home and manage their finances."

Among the bills provisions is a requirement that loan originators, mortgage brokers and bank loan officers be licensed and regulated under federal or state laws. All loan documents would need to identify the originator according to a national registry.

"If States do not pass qualifying laws that meet the standards set forth in the bill, then HUD will promulgate regulations requiring mortgage brokers in such states to act 'solely in the best interest' of the consumer," the supplemental documentation said. "States will have two years from the date of enactment of this Act to pass qualifying state licensing laws, and HUD will have the authority to extend this deadline by six months for individual States acting in good faith."

NAMB, which had opposed the exemption of bank loan officers to a national registry, called this provision a "huge victory."

"The all-originator approach this bill envisions will be good for consumers and good for the mortgage industry,"Hanzimanolis said.

The legislation also calls for a suitability standard that would require lenders to document a borrower's ability to repay the loan. Loans with exotic features such as adjustable rates, interest only and negative amortization would require that the lender take additional steps, including determining the debt ratio based on a fully indexed rate. Lenders doing refinances would need to prove there was a tangible benefit to the borrower.

A loan could be exempt from the suitability standard if the loan's annual percentage rate is less than 3 percent higher than the comparable Treasury and 175 basis points over the Federal Reserve H.15 rate for first lien loans. On junior liens, the threshold would be 5 percent over comparable Treasuries and 375 basis points over the Federal Reserve H.15 rate. In addition, the safe harbor provision would require debt ratios below 51 percent along with a number of other limitations.

Prepayment penalties must expire within the 90 days preceding any payment resets under the proposal. Single-premium credit life insurance would be prohibited as well as mandatory arbitration.

The threshold would be lowered to 5 percent from 8 percent over comparable Treasuries for loans subject to the Home Owners Equity Protection Act, the legislation said. Additionally, points and fees used in the calculation would be expanded to include some insurance premiums and prepayment penalties on the new and the refinanced loan.

NAMB warned that the lower threshold would force many lenders to stop making high cost loans -- leaving borrowers in lower income areas vulnerable as interest rates rise

Under the proposed legislation, investment banking firms that securitize would be liable for all of the loan costs if there was predatory lending, though individual investors would be shielded. Securitizers can avoid liability if they demonstrate policies, procedures and seller agreements that prohibit predatory lending or if they take steps to ensure the loan conforms to the proposed requirements within 90 days of being notified by the borrower.

Additionally, the bill includes a provision that would force lenders who foreclose to honor pre-existing leases, while renters without a lease would be given at least 90 days to vacate.

Originators can be fined up to three times total origination fees plus the borrower's legal expenses, the proposal indicated.

Among other provisions proposed are the prohibition of prepayment penalties for high cost loans below the local FHA loan limit, some limitations on the use of balloon payments and the requirement that originators not encourage borrowers to skip a payment when refinancing into a high cost loan.

"The debate surrounding this bill will cut to the heart of finding the right balance between shielding consumers from predatory lending practices and protecting their access to affordable credit," Kurt Pfotenhauer, senior vice president for government affairs and public policy for the Mortgage Bankers Association, said in a statement Monday. "We welcome a full and open debate on how to best protect consumers from unscrupulous mortgage originators."

MBA said the legislation should enable national uniform standards, warning that without such uniformity in all 50 states, "this legislation could only serve to foster more confusion in the marketplace."

The House committee is scheduled to hold related hearings on Wednesday.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

Yield Spread Premiums
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