Consumer Law & Policy Blog

House Financial Services Committee Passes Mortgage Reform and Anti-Predatory Lending Billl

Here's the Committee's statement:

The House Financial Services Committee today approved H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009,aimed at curbing abusive and predatory lending – a major factor in the nation’s highest home foreclosure rate in 25 years. The bill would outlaw many of the egregious industry practices that marked the subprime lending boom, and it would prevent borrowers from deliberately misstating their income to qualify for a loan.

The legislation, sponsored by Reps. Brad Miller (D-NC), Mel Watt (D-NC), and Barney Frank (D-MA), was approved by a vote of 49- 21. The House of Representatives is expected to consider H.R. 1728 as soon as next week.

“Probably ten million American families will lose their home to foreclosure in the next four years, many of them falling out of the middle class and into poverty,” said Rep. Miller. “It is shameful that the mortgages that lead to the foreclosure crisis were ever made. We certainly can’t let it happen again.”

“I’m excited that we are moving forward to try to stop the kinds of predatory and irresponsible mortgage loan practices that led to the credit and economic meltdown we are now experiencing,” said Rep. Watt. “If we had passed this law years ago when Brad Miller and I started introducing this legislation, perhaps we wouldn't be in the mess we're in today. But it's better late than never.”

The bill would ensure that mortgage lenders make loans that benefit the consumer and prohibit them from steering borrowers into higher cost loans. It would establish a simple standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold. For mortgage refinancings, the bill requires that all loans provide a net tangible benefit to the consumer. Also, for the first time ever, it would make the secondary mortgage market responsible for complying with these standards when they buy loans and turn them into securities.

Under the measure, lenders and the secondary mortgage market who don’t comply with these standards would be held accountable by consumers for rescission of the loan and the consumer’s costs for rescission, including attorney’s fees. They would also have the option to rework a loan to conform to the bill’s standards within 90 days of receiving notice from the consumer.

In addition, the bill encourages the market to move back toward making fixed-rate, fully documented loans. During the housing boom, mortgage lenders moved away from commonsense underwriting practices, giving rise to risky, exotic mortgages and practices such as “no doc” lending and allowing loans with “negative amortization” features.

The legislation would also:

Prevent Predatory and Abusive Lending Practices: Statistics show that many homeowners in the current mortgage crisis received more expensive loans than they qualified for. This is often the result of a predatory practice known as “steering,” in which a broker or bank loan officer is compensated for directing applicants toward more costly mortgages. H.R. 1728 would ban yield spread premiums and other abusive compensation structures that create conflicts of interest or reward originators that “steer” borrowers. The bill would also require originators to disclose to consumers the compensation they receive from the transaction. 

Hold Creditors Responsible for the Loans they Originate: The bill would require new federal rules to be written to require creditors to retain an economic interest in a material portion (at least 5 percent) of the credit risk of each loan that the creditor transfers, sells, or conveys to a third party. Federal banking agencies would have the authority to make exceptions to the bill’s risk retention provisions, including form and amount.

Protect Tenants who Rent Homes that go into Foreclosure: Renters can also be affected if the homes that they rent go into foreclosure. This legislation will provide protections for renters so that they receive proper notification and are given time to relocate before the home they rent is foreclosed.

Colbert Report on the Gutierrez "Protect Payday Lenders" Bill

Earlier this year Representative Louis Gutierrez (D-IL) reversed his longstanding opposition to payday lending by sponsoring a bill that would authorize payday loans under federal law for the first time. Represntative Gutierrez is touting the bill as a crack down on payday lending, but a broad coalition of consumer advocacy organizations oppose the legislation because it would legitimize and entrench loans with interest rates of between 390 and 780 percent. The legislation also would reverse President Obama's promise of a national interest rate limit of 36 percent.

Stephen Colbert weighed in on the issue on his Comedy Central program yesterday. Colbert's perspective on the effects of payday lending industry campaign contributions may come as no surprise to CL&P Blog readers. But, fair warning: his remarks may leave you with a whole new perspective on pineapples.

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House Financial Services Committee Mark-up of Predatory Lending Bill

Here's the Committee's press release:

Rep. Brad Miller (D-NC), along with Rep. Mel Watt (D-NC) and House Financial Services Committee Chairman Barney Frank, today introduced H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009, aimed at curbing predatory lending, which has been a major factor in the highest home foreclosure rate in the nation in 25 years.  The measure introduced today was also co-sponsored by Reps. Kanjorski, Gutierrez, Bean and Minnick.

The bill is a tougher version of a measure that Rep. Miller sponsored in the previous Congress that would have overhauled mortgage regulations in an effort to prevent another subprime mortgage meltdown. Rep. Miller’s previous bill passed the House in 2007 with bipartisan support, but was never considered in the Senate. H.R. 1728 will be “marked-up” in the House Financial Services Committee on Tuesday, March 31, 2009, beginning at 10:00 a.m.  

“The political climate has changed,” said Rep. Miller. “The foreclosure crisis has wreaked havoc on middle-class families and our economy as a whole. The industry’s arguments for watering the bill down are not at all convincing.”

<>Specifically, the new measure will strengthen restrictions on compensation paid to mortgage loan originators and brokers that is based on a loan’s interest rate and terms, often called yield-spread premiums. Lenders sometimes pay brokers an extra fee for making loans at a higher interest rate than the borrower otherwise could have received. The Congressman says those payment arrangement are an indefensible conflict of interest.

The 2009 measure also includes stronger language on so-called assignee liability. That language would make mortgage securitizers, who package home loans into securities, more liable for fraudulent loans. P>

A key element of the legislation prohibits lenders from underwriting loans that consumers do not have a reasonable ability to repay and prohibits practices that increase the risk of foreclosure for consumers. The bill also encourages the market to move toward making 30-year fixed-rate, fully documented loans, the norm again in mortgage lending. The growth of exotic, non-traditional mortgages was a major factor in the current housing and foreclosure crisis.

<>This bill represents an important step toward preventing the predatory and questionable practices that took hold in the mortgage lending industry in the past several years and undoubtedly contributed to our current housing crisis,” said Rep. Watt.  “Mortgage lending reform is a vital piece of the Congressional effort to prevent a future financial services disaster of this scale.” 

The legislation also protects consumers from being steered into loans that aren’t in their best interest, and if they refinance there must be a tangible net benefit to the consumer.

According to the Center for Responsible Lending, 2.4 million Americans risk foreclosure in 2009. That number could rise to 8.1 million over the next 4 years. The foreclosure epidemic is being caused primarily by families borrowing against their homes to pay their bills when something has gone wrong, not because they are buying more house than they can afford. Families are borrowing against their homes because of job loss, serious illness, divorce and major home repairs. Approximately 72 percent of subprime mortgages from 1998 to 2006 are refinances, not loans to purchase homes.

The bill will also create greater transparency by ensuring lenders make full disclosure of the terms of the loan at the time of signing.

"Americans who lose their home to foreclosure fall out of the middle class and into poverty, probably forever,” said Rep. Miller. “And, middle-class homeowners are seeing their life’s savings disappear with the collapse of home values.”

The Miller-Watt-Frank bill is modeled after North Carolina’s predatory lending statute, which is considered the model state statute for preventing abusive lending practices, while preserving consumer access to credit.

The Committee's summary of the bill appears after the jump.

Paper on Predatory Mortgage Lending

Philip Bond, David K. Musto, and Bilge Yilmaz, all of Penn's Finance Department, have written Predatory Mortgage Lending.  Here's the abstract: 

Regulators express growing concern over predatory loans, which the authors take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, they identify the circumstances in which it arises both with and without competition. The authors find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. They use their model to analyze the effects of legislative interventions.

House Holds Hearing on Used Cars

by Deepak Gupta

Yesterday, the House Subcommittee on Commerce, Trade, and Consumer Protection held a hearing on “Consumer Protection in the Used and Subprime Car Market."  The hearing focused on two types of problems for consumers, especially lower-income consumers: (1) a lack of available information about a vehicle's true history (which can lead to consumers becoming victims of salvage fraud, title-washing, and related practices, and, in many cases, to serious injury or death) and (2) abuses in financing and sales of used cars, some of which are quite similar to predatory mortgage practices.  Here is Public Citizen's statement on the hearing.

I was pleased that there was much discussion at the hearing about the National Motor Vehicle Title Information System, a subject we've blogged about several times here.  Last year, Public Citizen sued the U.S. Department of Justice to force it to implement the system, a long-delayed vehicle history database that Congress first mandated in 1992. The database is intended to gather information from the states, insurers, and junk and salvage yards, and to allow consumers and law enforcement to instantly verify the salvage history of a vehicle.  In our lawsuit, the court ordered the government to issue final regulations and launch consumer access by January 30, 2009, which the government did, right on the deadline. But many states still are not participating. The focus now is on getting all 50 states to comply with the system (including California--which is reporting data but barring consumers from accessing it) and getting the Federal Trade Commission, through its Used Car Rule, to require the placement of NMVTIS data on the car itself.

NCLC and CFA Issue 2009 Report on Tax Refund Anticipation Loans

On Friday, the National Consumer Law Center and the Consumer Federation of America issued their 2009 Report on tax refund anticipation loans (RALs). RALs are very short-term, high-interest loans provided to people in anticipation of their tax refunds. The basic message is this: If you can avoid taking out one of these loans, do so. If not, shop around because not all the deals are the same. Read the comprehensive joint NCLC-CFA Report, or if you want a synposis check out the detailed press release.

Senator Durbin Introduces Federal Usury Bill

This post over at US PIRG's Consumer Blog explains that Sen. Dick Durbin of Illinois has introduced a federal usury statute that would cap consumer loan interest rates at 36%. The post links to a supporting letter from about 100 consumer groups and a statement from Sen. Durbin. The bill has not yet be uploaded to Thomas, but it can be found at this page of the Federal Register.

Arkansas Supreme Court Strikes Down Payday Loan Law

The Arkansas Supreme Court last week struck down the state's Check-Cashers Act, which authorizes and regulates payday lending in the state, as a violation of the state's constitutional ban on usury. The state's constitution prohibits any loan with an interest rate above 17%. Various payday loan contracts authorized by the statute, however, had rates between 168% and 559%, which the Court held to be "clearly and unmistakably usurious" in violation of the state constitution.

Reverse Redlining Predatory Lending Complaint

The Associated Press, via Law.com, reports here that a Texan has brought a reverse redlining predatory lending suit suit.  According to the article, the plaintiff charges that she was "victimized by a loan with onerous terms because of her skin color. "  Baltimore City in Maryland had previously sued a lender on a similar theory.  The article doesn't indicate the authority for the reverse redlining claim (perhaps section 3605 of the Fair Housing Act?), but notes that the plaintiff is suing under HOEPA and the Texas State Constitution.

House of Representatives Holds Hearing on Credit Card Marketing to Students

Check out this post over at U.S. PIRG's Consumer Blog discussing the hearing last Thursday held by the House Financial Service Committee's Financial Institutions and Consumer Credit subcommittee regarding marketing of credit cards to college students. We have previously blogged on this topic here and here (click on the video).