A leading House Democrat drafted a bill to restrict lending practices partly blamed for the nationwide surge in mortgage defaults and foreclosures.
The legislation introduced by Rep. Barney Frank, chairman of the House Financial Services Committee, aims to prod states into enacting stronger mortgage regulations and sets up federal-level regulations if they don't do so. A banking trade group criticized the bill, saying it would raise costs and reduce options for borrowers.
The bill is designed to protect future borrowers, not the estimated 2 million to 2.5 million borrowers with weak credit histories whose monthly costs are expected to jump over the next 18 months when their adjustable-rate mortgages reset. It would:
- bar mortgage lenders and brokers from receiving incentive payments to sign up borrowers for overly expensive loans;
- make banks that package mortgage securities into investments explicitly liable for violations of lending laws;
- require mortgage brokers and bank loan officers to be licensed by state or federal authorities;
- enact strict limits, but not an outright ban, on penalty charges made to borrowers who make their payments early.
Frank said in a conference call that the bill reflects what he described as a common sense principle: "People should not be lent money that's beyond what they can be expected to pay back."
Mortgage lenders have pushed for a single federal standard that would wipe out stricter regulations already in place in many states.
Floyd E. Stoner, executive director for congressional relations and public policy at the American Bankers Association, said in a statement that the bill "would increase costs and decrease choices for consumers" because it would mean more regulations for banks and would allow standards to vary from state to state.
Frank was hopeful the House could pass the bill by year-end, but was uncertain of its prospects in the Senate, which has not acted on legislation passed by the House on several mortgage issues, including an overhaul of the Federal Housing Administration that would make affordable government-insured loans more widely available.
In a portion of the bill that has sparked worry on Wall Street, banks that package mortgage securities - but not investors in those securities - would be legally responsible for loans that violate minimum standards. Borrowers would be granted the right to file a lawsuit to get the loan nullified.
Frank also said he plans a hearing on efforts by federal regulators to get mortgage service companies to modify loans due to reset at higher rates. "We're trying to get the current (mortgage) holders to let people out from under mortgages they can't possibly meet because foreclosure isn't in anybody's interest," Frank said.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., has suggested that mortgage service companies consider doing broad conversions of adjustable-rate loans to fixed-rate loans if the borrowers were current on their payments and living in the homes.