House votes yes on mortgage reform

WASHINGTON (11/16/07)—The House voted 291-127 Thursday in favor of an amended Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R. 3915), a comprehensive bill intended to combat abuses in the mortgage lending market and to provide basic protections to mortgage consumers and investors.

But by the next day, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) said Congress may not need to act. (American Banker Nov. 16) Dodd told reporters on a conference call that Federal Reserve Board rules that are due out in proposed form in December may be sufficient to address abusive lending practices.

Dodd said he would be pleased if the Fed's action make legislation unnecessary, but the article noted that Dodd will likely feel growing political pressure to move legislation.

Meanwhile, the House-passed mortgage bill targets reform to three areas of mortgage practices. It would:

  • Establish a federal duty of care, prohibit steering, and call for licensing and registration of mortgage originators, including brokers and bank loan officers;

  • Create a licensing system for residential mortgage loan originators,

  • Set a minimum standard for all mortgages which states that borrowers must have a reasonable ability to repay; and

  • Attach limited liability to secondary market securitizers who package and sell interest in home mortgage loans outside of these standards. The bill would not make individual investors in the securities liable.
The bill proposes expanding and enhancing consumer protections for "high-cost loans" under the Home Ownership and Equity Protection Act and includes important protections for renters of foreclosed homes.

Notable among the many revisions to the bill made during the hours of debate before the House vote are:

  • An amendment reflected provisions of Rep. Paul Kanjorski's bill, The Escrow, Appraisal, and Mortgage Servicing Improvements Act (H.R. 3837), which would require escrow accounts for borrowers who might experience difficulty with repayment of their mortgages and would establish disclosure for consumers who waive escrow accounts. The amendment was also designed to improve mortgage servicing, protect appraiser independence, and ensure quality appraisal and regulatory oversight;

  • A requirement was added that borrowers receive an option of a mortgage without a prepayment penalty, if they are offered an amendment with such a penalty. The maximum time for a prepayment penalty would be three years and a maximum prepayment amount would be set at 3% for the first year, 2% for the second year and 1% for the third year;

  • The removal of civil liability of a lender and of a borrower's right of rescission in instances where the borrower lied on a mortgage application. A second degree amendment was added stating that an obligor must have actual knowledge of the false material information for the exemption from liability to take effect.
To address any lingering concerns of critics who charge the mortgage reform bill could cut into the availability of mortgage credit for potential homebuyers, the bill directs the Government Accountability Office (GAO) to determine the effects of the legislation on the availability and affordability of credit for homebuyers and to submit a report to Congress within one year of the bill's enactment.

H.R. 3915 followed a fast track to final approval in the House, with less than a month between the bill's introduction by Reps. Barney Frank (D-Mass.), Brad Miller (D-N.C.) and Mel Watt (D-N.C.) and the House vote. However, no similar legislation is currently being considered by the Senate, a necessary step for enactment into law.

Congress adjourned Friday for Thanksgiving.

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