>> Read H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act, Summary

(H.R. 1728 is included in TITLE XIV of H.R. 4173, the Dodd- Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law on July 21, 2010) 

• Setting the record straight on the financial crisis
• A timeline documenting the Republicans’ failure to stop reckless mortgage lending.
• An abbreviated timeline

 Related Articles

• "Credit Score is the Tyrant in Lending" by Joe Nocera, New York Times

• "Holding Bankers’ Feet to the Fire" by Gretchen Morgenson, New York Times

• "Moving Forward on Housing Finance Reform" by Jeffrey A. Goldstein, Under Secretary for Domestic Finance at the U.S. Treasury Department

   

House Passes Historic Mortgage Reform Legislation

May 7, 2009

Washington, DC - The House of Representatives today overwhelmingly approved legislation to curb abusive and predatory lending – a major factor in America’s highest home foreclosure rate in 25 years. H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009, will outlaw many of the egregious industry practices that marked the subprime lending boom. It represents a key step in the overhaul of the nation’s financial regulations.

The measure was introduced by Reps. Brad Miller (D-NC), Mel Watt (D-NC), and Barney Frank (D-MA), and approved by a vote of 300-114.

“Our economy will eventually recover and we will again have a healthy housing market, but we're in for a tough spell. This legislation will ensure that the reckless, predatory mortgage practices that started this crisis will not happen again,” said Rep. Miller.

“My joy at House passage of this important bill is tempered by my belief that we could have avoided the major credit and economic meltdown we are now experiencing had we passed this legislation when Rep. Miller and I originally proposed it 6 years ago. Unfortunately, the alarms we raised were not heeded and millions of consumers, indeed our entire economy, paid a heavy price,” said Rep. Watt.

The legislation counters the trend toward irresponsible lending by establishing a simple standard for all mortgages: lenders must make sure that borrowers have the ability to repay the home loans they are sold. The bill also requires that all mortgage refinancing loans benefit the consumer, and it bans predatory schemes that “steer” borrowers into higher cost loans. The growth of exotic, “no-documentation” loans, along with borrowers who deliberately misstated their income to qualify for a loan, were key factors in the recent subprime meltdown.

In addition, H.R. 1728 encourages a return to sound underwriting practices by prohibiting mortgage lenders from relinquishing all responsibility for the bad loans they make and sell to Wall Street. Under the measure, lenders will now be required to keep “skin in the game” and retain a 5 percent stake in any home loan they make and sell. Also, for the first time ever, the large secondary mortgage market will bear responsibility for bad loans they purchase and securitize, bringing accountability back to every level of the mortgage lending chain.

According to the Center for Responsible Lending, 2.4 million Americans risk foreclosure in 2009, and that number could rise to 8.1 million over the next four years. Mortgage lending reform is a critical part of efforts in Congress to reform America’s financial system and prevent a future crisis of this scale. If Congress had enacted these long overdue mortgage lending reforms, which Democrats have been advocating since 1999, the subprime lending meltdown could have been avoided altogether.

To view a summary of H.R. 1728, click here.

To view the amendments to H.R. 1728 approved by the House, click here.

House Passes Historic Mortgage Reform Legislation

Washington, DC - The U.S. House of Representatives on Thursday, November 15, 2007 approved historic bipartisan legislation to reform mortgage and anti-predatory lending practices by a vote of 291 to 127. H.R. 3915, the “The Mortgage Reform and Anti-Predatory Lending Act of 2007” will establish a national standard to rein in the abusive lending practices that contributed to the current mortgage crisis.

“We are dealing with legislation that seeks to prevent a repetition of events that caused one of the most serious financial crises in recent times. There is no debate about what is the largest single cause of that. Innovations in the mortgage industry in themselves are good and useful, but were conducted in such a complete unregulated manner and led to this crisis,” said Financial Services Committee Chairman Frank. “I thank Ranking Member Bachus, representatives Brad Miller, Melvin Watt, and Financial Services Committee members from both sides of the aisle for their hard work on this bill.”

“Many believe that faulty mortgage lending practices have precipitated the credit crisis, and that the situation will get worse before it gets better,” stated Ranking Member Spencer Bachus. ”This legislation achieves two very important goals: implementing reforms that will help protect consumers from predatory lending practices, and preserving working Americans’ access to consumer credit. While H.R. 3915 is not a perfect bill – no bill ever is – it has been significantly improved through bipartisan negotiations.”

This comprehensive legislation will create a licensing system for residential mortgage loan originators, establish a minimum standard requiring that borrowers have a reasonable ability to repay a loan, and will attach a limited liability to secondary market securitizers. The legislation will also expand and enhance consumer protections for “high-cost loans,” will include protections for renters of foreclosed homes, and will establish an Office of Housing Counseling through the Department of Housing and Urban Development.

The legislation will also include provisions for:

• Registering Mortgage Originators to Prevent Abuses: Currently, there is no national standard for the licensing of mortgage originators. This has allowed for lax oversight and enforcement of how mortgages are made and sold and in many areas had lead to the potential for abuse. H.R. 3915 will require originators to be part of a national registration system, either through the states or the Department of Housing and Urban Development. This system for licensing and registration will ensure that mortgage originators are registered in a national database (much like securities brokers) and meet minimum education and certification standards.
• Ensuring Responsible Lending: Mortgage originators will be required to provide full disclosures and present consumers with appropriate mortgages. This means that the originator will have to ensure that a consumer who receives a mortgage loan: 1) has a reasonable ability to repay the loan; and 2) will receive a net tangible benefit from the loan in the case of a refinancing.
• Preventing Abusive and Discriminatory Lending: Statistics have shown 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.” H.R. 3915 will prohibit the undisclosed and unfair compensation schemes that disadvantage borrowers, and require regulations to prevent steering for subprime loans. Mortgage originators who engage in predatory practices and loan steering will be subject to strict penalties.
• Holding Wall Street Accountable: Because mortgage companies can sell loans on the secondary market, they are often bought by large Wall Street firms and turned into securities for investors. This bill contains unprecedented federal consumer protections that will subject Wall Street firms to liability if they buy, sell and securitize loans that consumers cannot repay. They will be held accountable by consumers and will have the ability for loans to be rewritten and reworked.
• Establishing a National Standard for Liability: The current patchwork of state laws across the country has led to a lack of clear accountability in the lending process. H.R. 3915 will establish a national standard regarding assignee and securitizer liability, requiring that the borrowers have a reasonable ability to repay and ensuring that there will be a net tangible benefit to the borrower. Wall Street firms will finally be held accountable at the federal level for their actions in the mortgage market, while States remain free to pass more stringent laws against lenders and originators.
• Protecting Tenants: 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.
• Providing Consumer Protections for High Cost Loans: Provides Consumer Protections for High Cost Loans: H.R. 3915 expands the scope of and enhances consumer protections for “high-cost loans” under the Home Owners Equity Protection Act by lowering points and fees and interest rate triggers prohibiting practices that increase the risk of foreclosure such as balloon payments, encouraging a borrower to default; and requiring more pre-loan counseling.

Summary of H.R. 3915

Title I (Mortgage Origination)
Subtitle A. Licensing System for Residential Mortgage Loan Originators.

• This subtitle is from Rep. Bachus’ bill (HR 3012) and provides for licensing and registration of individual mortgage brokers and registration of bank employees that originate mortgages, as well as the establishment of a Nationwide Mortgage Licensing System and Registry (NMLSR).
• Applicants for State license and registration will furnish certain information to the NMLSR, including fingerprints and personal history and experience, and meet minimum standards including pre-licensing education and written tests.
• Federal banking agencies will develop and maintain a system for registering the employees of banks and their subsidiaries as registered loan originators with the NMLSR.
• If a State does not have a system that meets the minimum standards for State-licensed loan originators or does not participate in the NMLSR, then HUD will establish a backup licensing system for loan originators that operate in that State. HUD will be granted enforcement authority over such loan originators similar to banking regulators. 

Subtitle B. Residential Mortgage Loan Origination Standards

• Federal Duty of Care: All mortgage originators (including individuals as well as companies and banks that originate mortgages) will be subject to a federal duty of care that requires (1) licensing and registration, as applicable, under State or Federal law (including under subtitle A), (2) presenting consumers with appropriate mortgage loans (i.e., consumer has reasonable ability to repay and receives net tangible benefit, and loan does not have predatory characteristics), (3) making full disclosures to consumers, (4) certifying to lenders compliance with mortgage origination requirements, and (5) including a mortgage originator’s unique identifier in loan documents. 

• Prohibition on Steering Incentives: For mortgage loans that are not prime loans, no mortgage originator can receive, and no person can pay, any incentive compensation (including yield spread premiums or any equivalent compensation or gain) that varies with the terms of the mortgage loan (except for size of the loan and number of loans). Regulations will be promulgated to prohibit mortgage originators from (1) steering any consumer to a loan that the consumer lacks a reasonable ability to repay, does not provide net tangible benefit, or has predatory characteristics, (2) steering any consumer from a prime loan to a subprime loan, and (3) engaging in abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but different race, ethnicity, gender, or age.

• Remedies: Remedies will be up to three times broker fees plus costs.

 Title II (Minimum Standards for All Mortgages)

• Ability to Repay/Net Tangible Benefits: Based on Federal bank regulatory guidance and North Carolina standard. Requires creditors to make a reasonable determination, at the time the mortgage is consummated:
  • that the consumer has a reasonable ability to repay the loan; or
  • for refinancing, that the refinanced loan will provide a net tangible benefit to the consumer.

•  Safe Harbor: A presumption can be made that the minimum standards (reasonable ability to repay and net tangible benefit) are met for “qualified mortgages” and “qualified safe harbor mortgages.” Qualified mortgages (prime loans) are presumed to meet the minimum standards and this presumption may not be rebutted. For qualified safe harbor loans, the presumption may be rebutted only against creditors.
  • Qualified mortgages are prime loans with APRs that do not exceed the North Carolina standard, VA loans, or FHA loans.
  • Qualified safe harbor mortgages are loans with (1) documented consumer income, (2) underwriting process based on fully indexed rate (taking into account taxes, insurance, and assessments), (3) no negative amortization, (4) other requirements that may be established by regulation, AND (5) one of the following: (i) fixed payment for at least 5 years, (ii) for variable-rate loans, APR that varies less than 3% over the interest-rate index, OR (iii) DTI not greater than a percentage prescribed by regulation.

•  Assignee/Securitizer Liability (does not extend to trusts and investors): Subject to exemptions below, for loans that violate the minimum standards (reasonable ability to repay and net tangible benefits), a consumer has an individual cause of action against assignees and securitizers for rescission of the loan and the consumer’s costs for rescission.
  • Exemption from Liability: An assignee/securitizer will not be liable for a loan that violates the minimum standards if the assignee/securitizer provides a cure to make the loan conform to the minimum standards within 90 days of receiving notice from the consumer, OR (1) has a policy against buying mortgage loans that are not qualified mortgages or qualified safe harbor mortgages and exercises reasonable due diligence to adhere to such policy AND (2) has obtained representations and warranties from the seller or assignor of the loan regarding not selling or assigning loans that violate the minimum standards. 

• Defense to Foreclosure: When the holder of a mortgage loan or anyone acting on behalf of the holder initiates a judicial or non-judicial foreclosure, (1) the consumer who has a rescission right under this bill may assert such right as a defense to foreclosure against the holder to forestall foreclosure, or (2) if the rescission right has expired, the consumer may seek actual damages (plus costs) against the creditor, assignee, or securitizer. 

• Absent Parties: If the creditor ceases to exist or is bankrupt, then a consumer may maintain a civil action against an assignee to cure, but not rescind, a loan that violates the minimum standards. If the creditor and each assignee cease to exist or are bankrupt, then the same civil action may be maintained against the securitizer. 

• Effect on State Laws: Provides limited preemption of State laws relating only to assignee/securitizer liability (but not to creditor liability). Provides for a national standard and unique Federal remedy for assignee/securitizer liability arising from a claim regarding lack of reasonable ability to repay and lack of net tangible benefit. States, however, may pass laws or add remedies relating to the liability of other parties, including the creditors. Does not preempt actions based upon fraud, misrepresentation, deception, false advertising or civil rights laws.  

• Renters: Provides certain protections for renters when the homes they rent go into foreclosure. 

• Additional Standards and Requirements: Prohibits certain prepayment penalties, as well as single-premium credit insurance and mandatory arbitration, for mortgage loans.

• Borrower Fraud: Removes civil liability of creditor, assignee, and securitizer and cancels the borrower’s right of rescission if the borrower knowingly, willfully, and with actual knowledge furnished false information.

• Additional Disclosures: Requires additional disclosures to consumers in connection with mortgage loans.

• GAO Study: Directs GAO to conduct a study to determine the effects of the bill on the availability and affordability of credit for homebuyers and mortgage lending, and submit a report to Congress within one year of enactment.

• Mortgage Fraud: Authorizes appropriations of $31,250,000 to hire additional FBI agents and Department of Justice prosecutors to combat mortgage fraud, and $750,000 to support FBI interagency task forces in the areas with the 15 highest concentrations of mortgage fraud.

 Title III (High-Cost Mortgage)

• This title is from the Miller-Watt bill of 109th Congress (HR 1182) and expands the scope of and enhances consumer protections for “high-cost loans” under HOEPA by, among other provisions:
• lowering the APR trigger from 10% to 8% over comparable Treasuries (codifies existing Board standard), except if a dwelling is personal property and the loan is less than $50,000;
• lowering the points and fee trigger from 8% to 5% and including additional costs and fees in the trigger;
• prohibiting the financing of points and fees;
• prohibiting excessive fees for payoff information, modifications, or late payments;
• prohibiting practices that increase the risk of foreclosure, such as balloon payments, encouraging a borrower to default, and call provisions; and
• requiring pre-loan counseling.

Title IV (Office of Housing Counseling)

• This title is from Rep. Biggert’s bill (HR 3019) and establishes within HUD an Office of Housing Counseling that will conduct activities relating to homeownership and rental housing counseling. 
• Requires HUD to provide for the certification of various computer software programs for consumers to use in evaluating different residential mortgage loan proposals.
• Authorizes appropriation not to exceed $3 million for national public service multimedia campaigns for homeownership counseling services for fiscal years 2008, 2009, and 2010.
• Requires HUD to provide financial and technical assistance to States, local governments, and nonprofit organization regarding the establishment and operation of related educational programs, and authorizes appropriation of $45 million for each of fiscal years 2008 through 2011.
• Directs HUD to study and report to Congress on the root causes of the default and foreclosure of home loans. 

Title V (Mortgage Disclosures)

• Requires additional disclosures in a good faith estimate (GFE). A GFE must include the loan amount, whether the loan is a fixed- or variable rate loan, the estimated interest rate, the total estimated monthly payment, the rate lock period, any prepayment penalty, any balloon payment, the total estimated settlement charge, and the total estimated cash needed at closing.
• The Secretary of HUD, in consultation with the Secretary of Veterans Affairs, the Federal Deposit Insurance Corporation, and the Director of the Office of Thrift Supervision, will develop and prescribe a standard form for GFE disclosures be used in all transactions in the United States that involve Federally related mortgage loans. 

Title VI (Mortgage Servicing)

• This title is from Rep. Kanjorski’s bill (HR 3837), and requires escrows for certain mortgages, creates Federal appraisal independence standards, and establishes new consumer protections and disclosure requirements in the area of mortgage servicing. 
• Requires borrowers who might experience difficulty with repayment to have escrow accounts established in conjunction with their mortgages to provide protection against tax liens and the forced placement of hazard insurance, among other things. 
• Requires the inclusion of escrow payments for taxes and insurance in any repayment analysis provided to consumers at the time of a quote on a mortgage, to ensure that lenders alert borrowers to all of costs involved in owning a home. 
• Creates new consumer protections, including detailing when the servicer can impose force-placed insurance, mandating swifter responses to consumer written inquiries, increasing penalties for abuses, and requiring the prompt crediting of full contractual payments. 
• Creates enforceable Federal appraisal independence standards with tough penalties, strengthens appraiser licensing and education standards, and establishes a Federal grant program to the States. 

The Financial Services Committee Work on Minimizing Foreclosures
and Improving Subprime Lending

1. Stop Avoidable Foreclosures. The Financial Services Committee has made some progress toward helping people at risk of foreclosure stay in their homes. As you know, we cannot constitutionally legislate people out of contracts they have already signed. Accordingly, we have worked to ensure that institutions work with people to find “good credit” so they can stay in their homes. For example, a number of FSC Democrats sent letters to the Federal Banking regulators asking that they clarify that depository institutions can “forbear foreclosure” (i.e., use their discretion not to foreclose) in appropriate circumstances.(Click Here) In addition, Democratic Members sent a letter to the Securities and Exchange Commission asking that they clarify that loan servicers can modify loans for consumers where there is a “reasonable likelihood of default” rather then waiting until the loan is already in default, maximizing the possibility that people can remain in their homes.(Click Here) The SEC agreed.(Click Here) In both instances, Democrats took the lead and found that many institutions wanted to help consumers stay in the homes but felt limited by legal ambiguities. The Committee pushed regulators for the clarity needed and in doing so stripped away a perceived impediment to best practices. Following the Committee’s lead, federal and state banking regulators have also begun encouraging institutions to help consumers at risk by modifying their loans.(Click Here) Institutions should now be working diligently with their customers to avoid unnecessary foreclosures.

2. More Liquidity and Outreach. We have also pushed large financial institutions to create new solutions for people facing foreclosure. In response to our efforts, Fannie Mae has begun working with State housing finance agencies to help consumers at risk of foreclosure, Freddie Mac pledged substantial amounts to purchase fixed-rate and hybrid mortgages that will provide lenders with better choices to offer subprime borrowers, and the Financial Services Roundtable has teamed up with NeighborWorks and the Homeownership Preservation Foundation on a nationwide campaign to educate consumers and avoid foreclosures. They have set up a helpline for at-risk consumers to call at (888) 995-HOPE. Unfortunately, even with this progress, we remain concerned that too many consumers may not be able to keep their homes.

3. Expand FHA to Provide Good Loans for People in Trouble. To give homeowners more refinance options, the House passed H.R. 1852, the “Expanding American Homeownership Act of 2007,” to update FHA to serve more subprime borrowers at affordable rates and terms, recapture borrowers that may have received risky loan products in recent years, and offer refinancing opportunities to borrowers currently struggling. In particular, the bill would lower down payments, increase loan limits, and direct FHA to provide loans to higher risk (but qualified) borrowers (without authorizing unnecessary fee hikes on those borrowers).(Click Here)

4. Increase Role and Stronger Regulation of Housing GSEs. In addition, we have passed comprehensive legislation to improve the regulation of Fannie Mae and Freddie Mac, and the Federal Home Loan Bank system. These government-sponsored enterprises provide liquidity to the mortgage markets by buying loans already made (freeing up money for new mortgages and refinances). Under the House bill these entities could purchase more loans in higher cost areas (lowering interest rates for new homes and refinances in those areas). We have also sought increase liquidity now by asking federal regulators to reconsider artificial restrictions on the number of loans that the GSEs can own.(Click Here)

5. Promote Affordable Housing to Lower Need for Risky Loan Products. To ensure that families losing their homes to foreclosure have affordable housing (and ensure that families are not inappropriately pushed into buying homes because of a lack of rental housing), the Committee also passed H.R. 2895, The National Affordable Housing Trust Fund Act of 2007. This legislation would establish a national affordable housing trust fund – for the creation and preservation of affordable housing.(Click Here) Members of the Committee are also encouraging lenders, servicers and banks to work with rent-paying tenants who are caught up in their landlord’s foreclosure. Currently many rent-paying tenants are automatically evicted as part of the foreclosure process even though they are not a fault for the foreclosure; could provide a needed stream of income for the bank; and are much better for communities than the vacant homes they are forced to leave behind. They are also asking whether anything can be done to help convert foreclosed properties into rentals so that they improve rental options and do not weigh down other houses in the community as does vacant property.

Protections for New Loans

6. Promote Better Protections for Risky Loan Products. To ensure that we do not face this problem again, we have also been very active in trying to stop these bad loans from being made in the first place. In response to FSC letters (Click Here) and prodding at hearings, the federal banking regulators (and a number of state banking regulators) have issued guidance that has substantially reduced the flow of risky mortgages, including so-called “2-28” and “3-27” mortgages that have an initial fixed “teaser” rate followed by a longer-term variable rate that brings payment shock (and potentially foreclosure) to consumers. To limit the incentives to make these loans, this guidance is also being extended to loans purchased by Fannie Mae and Freddie Mac.

Supporting Senate Banking Committee Chairman Chris Dodd’s leadership, we have also encouraged the Federal Reserve Board to issue new regulations under the Home Ownership and Equity Protection Act to combat abusive mortgage lending practices. Thanks to Democratic leadership in the House and Senate, the Federal Reserve is finally beginning to use some of its long-standing consumer protection authority and Chairman Bernanke has committed to issue regulations this year.

Although the Committee continues to make real progress, Committee Democrats have concluded that the current regulatory framework (and the progress we have outlined) works well for federally-regulated depository institutions, but is much less effective for others. Accordingly, Democrats on the Financial Services Committee have been formulating comprehensive legislation to rein in the practices that have caused these problems and ensure that the same rules apply to the same mortgages, regardless of who is selling them.

Finally, Democrats on the House Financial Services Committee have pushed for years for substantive regulations and legislation in this area and were long thwarted by the former Republican leadership. Democrats introduced comprehensive subprime and predatory lending legislation long before this crisis. In 2005-6, Representatives Brad Miller, Mel Watt and I engaged in meaningful discussions with then Subcommittee Chairman Spencer Bachus that could have produced a bipartisan bill had House Republican leadership not ordered an end to our effort. 

BARNEY FRANK

Click Here To View Foreclosure Manual