Frank bill lets Wall Street off the hook

by Alan White
Assistant Professor, Valparaiso U. School of Law

   Many thanks to Deepak for inviting me to post here. I'd like to begin with a note about the serious flaws in HR 3915, the predatory lending bill introduced by Barney Frank recently. Yesterday's New York Times editorial alluded to the bill's shortcomings. There has also been some false advertising on the part of the sponsors, who claim that "securitizers" will be liable for violations. This poorly-defined term simply camouflages the fact that the bill immunizes most subprime mortgage assignees from any liability. Consumers with loans from bankrupt lenders will be out of luck.

The bill would require mortgage originators to make a reasonable determination of repayment ability, and prohibit making loans without a tangible net benefit to the borrower. So far so good. However, the bill also bars any liability for "pools of loans" or "securitization vehicles". The critical language is buried in proposed Section 129B(d)(9). For most subprime mortgages, trusts, which are nothing more than pools of mortgage loans, are the entities that are the legal owners of the mortgage, and the only entity with any assets or ability to provide consumer redress. This is particularly true when the original lender has filed bankruptcy, as in the case of New Century and countless others.

The bill drafters seem to believe that there are other entities, called "securitizers" in the bill, who are not the loan trusts but can be effective targets for consumer remedies. The bill is constructed on the false assumption that consumer victims can be made whole, without any losses to investors in mortgage-backed securities. This is simply not possible. This has been pointed out to the sponsors, who are apparently unwilling to reconsider.

To make matters worse, Section 208 of the current draft will preempt any state law regarding assignee or securitizer liability as to any claim "relating to the subject matter" of the proposed new provisions (which concern repayment ability and tangible net benefit). As a result, claims consumers have today under state unfair and deceptive practice laws (or the UCCC) will be unavailable against assignees if the law is passed.

If the Federal Reserve keeps its promise to issue a HOEPA regulation addressing the same issues by the end of the year, consumers will have redress under the existing TILA and HOEPA assignee liability rules, that so far have worked reasonably well. The Frank bill could end up displacing the Fed's rule with a much less effective alternative remedial scheme. The text of the bill is available at HR 3915.

As of this writing the on-line version of the bill is not updated to reflect the changes made this week, but the marked up version should be available in a few days.

Comments

[Richard]

Many people think that foreclosure investors are the parasites who are taking advantage of the misfortune borrowers, but they are not thinking that in order to repay the loan there should be someone to buy there houses and relive them from the problem.

[John]

Many people think of foreclosure investors as being "bottom feeders" or parasites - taking advantage of the misfortunes of others. Others view them as being a necessary evil - or safety net that will help to adjust the market price and stabilize the real estate market. Whatever you think, someone must buy these properties. Just as "vultures" have their place in the natural ecosystem; so too foreclosure investors have a place in bringing some sanity and stability back into a real estate market that had become a feeding frenzy of over extended buyers driving ever higher prices in already over heated markets.
http://www.thejohnbeck.tv

[Mike Volpe]

Cynthia, I lost you right around the time you extolled Alan Greenspan and started blaming NAFTA for this. If Alan Greenspan was so worried about too many sub prime loans, he probably shouldn't have lowered the fed funds rate below one percent. After all, when you allow banks to borrow money that cheaply they are bound to put it into many risky places. Alan Greenspan has plenty of responsibility for this crisis and his words aren't nearly as important as his actions.

www.proprietornation.blogspot.com/2007/10/terribly-mixed-record-of-alan-greenspan.html

That is my analysis of Greenspan and how he contributed to the problem.

Your NAFTA nonsense is just that. While you are claiming NAFTA cost jobs, we went through a revolution of job growth. I guess you haven't heard but we have been gaining jobs every single month since July of 2003. That is almost nine million new jobs and roughly 170k in new jobs last month. NAFTA had nothing to do with it and anyone that claims it did is demgagoguing.

The rest of your comments are spot on and instructive. The government is trying to legislate what is essentially a problem of personal finance. People are in over their heads and the government cannot come up with legislation that will fix that.

I finished reading this bill this weekend and ultimately it will end sub prime. That will of course hurt the very people this bill claims to protect, the poor. This bill is a monstrocity and must be opposed furiously. Here is how I see the bill.

www.proprietornation.blogspot.com/2007/11/ironies-of-hr-3915.html

[Cynthia Robbins]

I cannot tell you how dismayed I am about HR3915, and how misleading this bill is for a group of legistatures who were part of the problem in the 1st place. Let's look at history. Historcially, when you purchased a house you spent 25% or 1 weekly paycheck on housing per month. That meant you could afford that home. And most homeowner's had no problem, of course back then you only had 1 car, if you had a car and paid 20 cents for a gallon of gas. Fast forward to 2007. FHA now says that you can afford 29% of your gross monthly income for a house payment. That is what is called your front ratio. As time went on some groups of individuals were not buying homes for various reasons, the biggest being poor or no credit. They complained, so the government went to ALL the lenders and banks and said you must come up with programs to make it possible for a certain segment of high risk individuals, those with poor credit histories to be able to purchase a home, there can be no discrimination. Non-conforming lenders were better suited to deal with non-conforming clients, however the banks decided there was gold in them there loans and wanted a piece of the action. Sometime in the latter part of the 90's Mr. Greenspan in his annual address warned the Banking institutions that they were making too many non conforming loans, not qualified to make these loans and to stop or they would realize losses like they has never seen before. Prior to that speech, Mr. Clinton signed NAFTA, and Industry started to relocate to Mexico and other foreign countries, leaving homeowner's without an income and foreclosure was inevitable. Not only did workers loose their employment but they also lost their health insurance, all factors in this disaster. The Mortgage Broker had nothing to do with this. Most individuals understand that you must pay your house payment every month. The only reason that a lender forcloses is because you do not pay. Here in Indiana because of our laws it can take up to a year for someone to loose their home to foreclosure. There are many reasons that someone could loose their home, other than the evil Mortgage Broker. There is job loss, there is a health crisis, a divorce, a death of a spouse, the cost of child care, an increase in real estate taxes and how about over spending. None of this has a thing to do with the Mortgage Broker that did your home loan. I resent that this bill is being touted as some sort of saving grace for those congressman just making things worse. The one and only way to not to go through foreclosure is to pay your house payment every month. HR3915 will not pay your house payment, will not guarantee your house payment, and will NOT keep you out of foreclosure.

I am a certified Mortgage Broker with the State of Indiana and Licensed Real Estate Broker.

[Mike Volpe]

With all due respect, you haven't done very much homework on this bill. First, there is already a disclosure called a Net Tangible Disclosure. Thus, this bill only re addresses something that has long been in the industry. The net tangible benefit disclosure must be filled out and it must be stated why the borrower is doing the loan (lower rate, lower payment, bundling debt, etc.) Thus, when you say so far so good, you obviously don't know that so far it has already been so good.

You claim this part is good also, "The bill would require mortgage originators to make a reasonable determination of repayment ability,". It isn't good it is vague and in the mortgage industry when Congress comes up with something vague it means YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET. That's right that portion of the bill will be taken care of with yet another useless document to make every consumer even more overwhelmed when they close their loan. Does that sound so good so far.

Furthermore, you miss the most insidious part of the bill altogether. That is the part that prohibits Yield Spread Premium or YSP. Of course, it only prohibits it for mortgage brokers not retail banks. In other words, this bill gives such an unfair advantage to banks that it regulates the mortgage broker right out of existence. Too bad you didn't mention that part in your long winded explanation of the pooling of loans.

Since there won't be any mortgage brokers there won't be any loans to pool however you just missed that in your analysis.

If anyone wants to understand the true nature of this insidious bill, please read my piece here...

http://proprietornation.blogspot.com/2007/11/congress-vs-mortgage-brokers.html