Congress has a responsibility to stop Predatory Lending.
One of my highest priorities since coming to Congress has been stopping predatory lending practices. Along with Chairman Barney Frank, and my colleague from North Carolina, Mel Watt, I have been the lead sponsor of legislation to combat predatory lending practices in each of the past three sessions of Congress. Last November, the House passed HR 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007 by a vote of 291-127.
Specifically the bill will do the following:
Require lenders to ensure a borrower's ability to repay. The bill establishes a simple federal standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold. Lenders would have to determine that a borrower has a "reasonable ability to repay," based on income, credit history, indebtedness and other factors. For refinancing, the bill will require that all loans provide a net tangible benefit to the consumer.
Prohibit certain unfair lending practices. The bill prohibits financial incentives for higher cost loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as "yield spread premiums" that lenders pay to brokers for getting them in a loan with a higher interest rate the borrower qualified for. The bill limits the prepayment penalties charged to borrowers who wish to close out their loans, typically to refinance on more affordable terms.
Establish federal minimum requirements while enabling states to impose tougher rules. Federal rule-making and enforcement duties would go to Federal agencies such as the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Trade Commission. The bill’s provisions (except for those specifically affecting secondary market liability as set forth narrowly in the bill) will set a floor so that all Americans are protected. However, states are allowed to go after new abuses that appear in the marketplace.
Provide stronger consumer protections for high-cost mortgages. Title III, which is based on the groundbreaking North Carolina law, is also part of this legislation. This section of the bill expands the protections available under federal rules on high-cost loans -- lowering the interest rate and the points and fee triggers that define high cost loans. The bill further enhances consumer protections for “high-cost loans” by:
- prohibiting practices that increase the risk of foreclosure, such as balloon payments, encouraging a borrower to default, and call provisions,
- prohibiting excessive fees for payoff information, modifications, or late payments,
- prohibiting the financing of points and fees, and
- requiring more pre-loan counseling.
For most American families, the purchase of a home is the most important investment they will ever make. Sixty-eight percent of American families now own their own homes. Home equity constitutes at least half of American homeowners’ net worth, and more than 60 percent for low-income and minority families.
Predatory lending can take different forms, but includes steering borrowers into a higher priced loan when they could qualify for a loan on better terms, stripping equity from a borrower by including exorbitant fees or unnecessary products in a loan and financing the costs, and engaging in practices that spur foreclosure, such as making a loan without regard to the borrower’s ability to repay the mortgage.
There are incentives for brokers to force lenders and borrowers to pay yield spread premiums (YSP) that can strip hard earned equity from homeowners, especially when someone needs to refinance for a rainy day.
North Carolina was the first state to adopt an anti-predatory lending law. The 1999 North Carolina law, in addition to changes made in 2001 and 2007, limit indefensible up-front fees that rob vulnerable consumers of the equity of their homes, and repeated refinancing of loans to generate more up-front fees that take more and more of the consumer’s equity. NC also prohibits balloon payments that make another refinancing inevitable, and loans with payments that do not reduce the loan balance.
