The House introduced legislation this morning that would require all loan originators to be licensed, while protecting borrowers from forms of predatory lending and penalizing securitizers for bad loans.
“The Mortgage Reform and Anti-Predatory Lending Act of 2007” will “establish a federal duty of care”, prohibiting steering and requiring that mortgage brokers and “bank loan officers” be registered and licensed at the state or federal level.
The anti-steering subsection reads that “no mortgage originator can receive, and no person can pay, any incentive compensation (including yield spread premiums) that is based on or varies with the terms of a mortgage loan.”
So essentially option-arms with 3.5% rebates will absolutely be a thing of the past, and banks won’t be able to push one loan program harder than another, although I’m sure they’ll find a way.
The new legislation will also “set a minimum standard for all mortgages which states that borrowers must have a reasonable ability to repay”, meaning loan originators must work diligently with borrowers to ensure the loan program fits their “existing circumstances” and that full disclosure is presented along the way.
This includes making a good faith assessment of the borrower’s ability to repay based on their credit profile, debt-to-income ratio, income and asset verification, employment status and more.
“Nonstandard loans”, including adjustable-rate mortgages, interest-only loans, and negative-amortization loans will be subject to higher scrutiny.
“People should not be loaned money beyond what they can be expected to pay back,” House Financial Services Committee Chairman Barney Frank told reporters on a conference call Monday morning.
The bill would also make “secondary market securitizers” somewhat liable for damages if they securitize loans that violate those standards.
“The securitizers will be liable if they package loans that should not have been made in the first place,” Frank said in a conference call with reporters. “We are not going to hold them absolutely liable for any bad loan made, and in fact, if they have done some steps then they will be protected.”
The legislation includes a ban on prepayment penalties attached to subprime loans, and requires that all other loans with prepayment penalties expire three months before an interest-rate reset.
Finally, the reform bill contains foreclosure protection for renters, which would require the successor of the property to honor any preexisting lease, and in the case that a lease wasn’t in place, allow the renter to stay in the home for at least 90 days before being required to vacate.
“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,” said Rep. Melvin Watt of North Carolina. “I hope the industry will embrace the changes and allow the bill to move forward quickly.”
According to a House aide, the House Financial Services Committee is expected to hold a hearing on the bill Wednesday.