Groups Oppose Industry’s Positions

“We are pushing for assignee liability and extension into Wall Street because, without that, we are creating the moral hazard of irresponsible lending and investing,” one panelist said.

One by one, the 19-member panel expressed concern that accountability for Wall Street is missing from H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007. The bill was passed by the full U.S. House of Representatives yesterday.

John Taylor, NCRC’s president and chief executive officer, said Wall Street is currently insulated from liability for fraudulent and predatory loans. As a result, he supports Rep. Mel Watt’s (D-NC) amendment to the House bill that calls for stronger assignee liability.

Assignee liability imposes liability on purchasers or assignees of mortgage loans so that borrowers can purse legal claims against assignees for loans that involve illegal action or abusive terms.

Explaining that an estimated 2.2 million households are facing foreclosure and that only one percent, about 22,000 mortgage loans have so far been modified, one panelist said “massive loan modification” is needed but is being held up by Wall Street’s unwillingness to acquiesce.

Pooling and servicing agreements between stakeholders and loan servicers place limitations on loan modifications for loans in a pool. A panel participant said that in order to modify home loans a servicer or consumer representative has to “literally find out who the investor is holding the loan and then beg the investor to approve the modification.”

“Where there has been fraud or predatory lending, we ought to be able to hold Wall Street accountable,” the panelist declared.

Panelists were skeptical that a repeat of the events that took place in one state when it imposed assignee liability would occur.

During May, Donald C. Lampe, an attorney with North Carolina-based law firm, Womble Carlyle Sandridge & Rice, testified before the House financial services subcommittee that assignee liability could shut down the national secondary market as happened in Georgia when that state imposed unlimited liability on anyone who made or took assignment of a home loan. He said the Georgia General Assembly acted quickly to amend the law and restore the mortgage market after several banks declared they would not lend in the state.

But one NCRC panelist noted, “You can walk away from one state, but you can’t do that with national legislation.”

NCRC criticized one of the amendments to H.R. 3915 as not going far enough to deter predatory lending behavior. The assignee liability provisions exclude the trust holding the loan, yet the trust is typically the party with the right to foreclose, NCRC wrote in a statement analyzing the Manager’s amendment.

“This exclusion leaves borrowers without recourse when the originator has gone out of business — and more than 90 subprime lenders have gone out of business this past year alone. The assignee liability provisions also prohibit class actions and include a broad exemption for assignees with certain purchase policies in place, a loophole that most assignees are likely to use,” NCRC said in the analysis.

One opponent of assignee liability is President Bush, who said in a statement Wednesday that “provisions of H.R. 3915 that could overly constrict the primary and secondary markets for mortgage finance, such as the bill’s specific underwriting standards, assignee liability provisions, and the subjective obligations for mortgage originators.”

The Mortgage Bankers Association is also opposed to assignee liability, according to congressional testimony from the group’s Chairman John M. Robbins in June. He said investors can’t be held responsible for investing in loans that have predatory lending features.

The panelists were blunt in their opposition to yield spread premiums, arguing that the premium harms borrowers and has saddled consumers with high-cost loans.

“It’s a problem,” said James Carr, NCRC’s chief operating officer, explaining that many consumers unknowingly pay several interest points more for loans than they should have because of the practice.

But the National Association of Mortgage Brokers has opposed the proposal in H.R. 3915 calling for the elimination of YSPs, explaining that they are an important tool that allow borrowers flexibility to adjust the amount of cash required at closing. The group pointed out that YSP fees are no different than other forms of compensation such as service release premiums and gain on sale fees, which is how banks and other lenders report similar fees.

NCRC’s Talyor also criticized risk-based pricing. “Everyone has accepted it as though it is the Holy Grail,” he said, accusing the government-sponsored enterprises and big banks of embracing the concept.

Indeed, FHA has announced plans to implement risk-based premiums that match the borrower’s credit profile with the insurance premium they pay so that riskier borrowers pay more. This risk-based pricing structure will begin on January 1, 2008.

Taylor said risk-based pricing has contributed to the current mortgage lending problems and has led to a system where the people least able to pay higher interest rates most often get them.

But HUD has said it believes a risk-based premium structure not only encourages consumers to become safer risk by, for example, increasing their downpayment or improving their credit scores, stories, but “will also ensure the future financial soundness” of FHA insurance programs.

“By offering a range of premiums based on risk, FHA will be able to offer options to mortgagees serving borrowers who were previously underserved, or not served, by the conventional marketplace,” HUD said in a Sept. 20 notice.

Taylor also suggested the establishment of a heightened enforcement authority and a regulatory apparatus to go with it. “There’s been a moral failure of the regulatory agencies to enforce,” he said.