Mixed Support for Subprime Bill

The groups gave their testimony before the Committee on Financial Services of the U.S. House of Representatives about The Mortgage Reform and Anti-Predatory Lending Act of 2007 introduced this week.

Federal Reserve Governor Randall S. Kroszner testified that the rate of serious delinquencies among subprime adjustable-rate mortgages stood at nearly 16 percent in August — roughly triple the recent low in mid-2005. Serious delinquency on securitized Alt-A loans has risen to 3 percent from 1 percent only a year ago, according to a transcript of his testimony. About 320,000 foreclosures were initiated in each of the first two quarters of this year, with more than half being on subprime loans. Furthermore, 2006 subprime ARMs are performing the worst, defaulting early and, relative to earlier vintages, carry greater risks beyond weak borrower credit histories, including very high initial cumulative loan-to-value ratios and less documentation of borrower income.

Kroszner said the Fed plans to exercise its rulemaking authority under the Home Ownership and Equity Protection Act and propose rules by the end of this year that would apply to subprime loans offered by all mortgage lenders.

“We are looking closely at practices such as prepayment penalties, failure to offer escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the failure to give adequate consideration to a borrower’s ability to repay,” Kroszner said.

The Fed is also looking to propose improvements to rules governing disclosure of mortgage loan terms after conducting extensive consumer testing to ensure the proposed disclosures will be comprehensible and useful to borrowers. Changes to the Truth in Lending Act under consideration would improve the disclosure process and crack down on deceptive mortgage advertisements.

Kroszner said it would be appropriate for any new legislation to ensure all individual brokers are included in the same nationwide registry.

But he warned provisions of the bill addressing repayment ability must be “specific enough so that creditors can determine whether their practices are in compliance” but “flexible enough to allow them to consider the pertinent factors and individual circumstances of particular consumers and to innovate prudently and fairly.”

In reference to the bill’s language that a refinance loan must provide a “net tangible benefit” to the borrower, Kroszner said it is “critical to carefully craft such laws or rules to ensure they do not inappropriately reduce credit availability in the mortgage market.”

Kroszner added that rules creating liability for securitizers must be very clearly delineated and “great care should be taken to ensure that investors in the securitization market can quickly and accurately assess and mitigate the risks, including the compliance risks, of mortgages sold in this market,” to avoid hindering the ability of lenders to securitize loans.

The American Bankers Association issued a statement indicating it was seriously concerned about “increased regulatory burden for federally insured depository institutions, lack of a national standard and the impact on a bank’s ability to provide products and services.”

Comptroller of the Currency John Dugan said his agency supports national standards for subprime mortgages and the bill’s goal of enhanced regulation of all mortgage brokers, whether used by banks or nonbanks, according to a prepared statement of his testimony. He noted the federal banking agencies guidance on subprime lending and nontraditional mortgages addressed fundamental concerns but because they, only apply to federally regulated institutions, “cannot be truly effective unless they extend to non-federally regulated institutions as well, to create truly national standards.”

“Such national standards could be achieved through state action, Federal Reserve Board rulemaking, or federal legislation, such as the bill that is the subject of today’s hearing,” Dugan said. “Regardless of the path chosen, the OCC supports national standards for subprime mortgages similar to the federal banking agency standards.”

Dugan said certain standards in the bill “raise significant questions and concerns.” For example, “the application of some of the new and extensive national mortgage standards to banks that do not provide subprime mortgages” brings question as to “whether the burden of the licensing and registration requirements for all bank employees involved in any type of mortgage origination is, given existing bank regulation, worth the marginal benefit — especially for community banks.”

Also, the bill’s federal duty of care and anti-steering provisions will be difficult to enforce and “more stringent underwriting standards for subprime mortgages would by definition restrict the availability of credit to subprime borrowers more than the federal banking agency standards,” including preventing more existing ARM subprime borrowers from refinancing.

Furthermore, the legislation’s enforcement remedies appear “even-handed because they apply equally to banks and nonbanks,” Dugan said. “But the reality is quite different. Because of existing enforcement provisions in federal banking law, application of the same set of bright-line standards to banks, brokers, and nonbanks would expose banks and their employees to a much wider range of potential enforcement actions than would be the case for brokers and non-banks. Put another way, banks and their employees would be subject to a stronger enforcement regime than nonbank lenders or mortgage brokers for the very same violations of the bill’s new provisions. We urge attention to the bill’s enforcement mechanisms to ensure that the bill’s standards are as effectively implemented and enforced at nonbank lenders and brokers as they would be at banks.”

The National Association of Mortgage Brokers praised the “even-handed approach” to requiring all mortgage originators to be licensed, undergo criminal background checks, and meet minimum education requirements.

“A national registry will afford all current and prospective homebuyers protection from predatory lenders, who should be given nowhere to go but out of the industry,” NAMB President-Elect Marc Savitt reportedly testified.

However, Savitt worried the bill in its current form could be interpreted to eliminate YSPs paid to brokers, a tool he says important because it allows borrowers flexibility to adjust the amount of cash required at closing. He noted YSPs are no different than other forms of indirect compensation, such as service release premium and gain on sale mortgage bankers receive.

“A ban only on the broker’s compensation will destroy small business mortgage originators in this country, resulting in fewer market participants, less competition and ultimately higher prices for consumers,” Savitt said.

The bill’s banning of prepayment penalties in subprime loans, requirement for lenders to assess repayment ability, and elimination of bonuses lenders pay to brokers to put borrowers in more expensive loans than for which they qualify were commended by seven consumer, civil rights and advocacy groups, including the Center for Responsible Lending, Community Development Financial Institution Coalition and Consumer Federation of America.

“However, we worry the bill lacks sufficient legal recourse for consumers who are taken advantage of by unscrupulous or reckless lenders, brokers, and investors,” the groups said in a joint announcement Wednesday. “The limited remedies in the bill do not give Wall Street investors who buy mortgages and package them as securities adequate incentives to police themselves. Wall Street contributed to the problem, with its appetite for riskier loans, so it must have its fair share of accountability.”

Kurt Pfotenhauer, senior vice president of government affairs and public policy for the Mortgage Bankers Association, said his organization does not support the bill.

“Lowering the HOEPA triggers, establishing the ability to repay and net tangible benefits tests and eliminating some products from the market” will have the effect of leaving many, who could be successful borrowers, locked out of the mortgage market, Pfotenhauer said. He noted 85 percent of subprime borrowers are paying their mortgages on time.

MBA said there is a “soft suitability” standard in several sections of the bill, such as the section dealing with steering that asks regulators to “promote the interest of the consumer in obtaining the best terms.” MBA believes this should be re-phrased in a way that preserves the goal of assisting consumers in identifying the best loan product for themselves while stopping short of encouraging a suitability standard by regulation.

Also, “we believe any bill must include broad pre-emptions that give borrowers a single consumer protection standard, and give lenders the certainty of a single standard to live up to,” but the bill “as currently drafted is not pre-emptive,” MBA said.

Related:

Bill Proposes Elimination of YSPs
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.