November 8, 2007 - HR 3915 is called the Mortgage Reform and Anti Predatory Lending Act of 2007. With a name like that it is clear that the House of Representatives wants the American public to believe that the bill will help protect them from predatory lenders. In actuality, it is one of the most poorly written pieces of legislation that ACCESS has ever reviewed. If it becomes law it will reduce competition, drive up prices for home loans, and benefit nobody other than big banks which are largely exempt from its provisions. It would also make it considerably more difficult or impossible for many people to refinance existing loans. And its introduction comes at the worst possible time.

HR 3915 was introduced by Rep. Barney Frank (D-MA); chairman of the House Banking Committee. The bill was introduced as a result of the recent meltdown in the secondary mortgage market. Many of problems associated with subprime mortgages have been blamed on mortgage brokers and a lack of federal regulation over them. But what is seldomly discussed is the fact that the products offered by mortgage brokers actually belonged to big banks. And those banks actively pushed brokers to offer consumers products that would bring in the highest profits; not products that were necessarily in the best interest of the consumers using them.

While HR 3915 would regulate mortgage brokers, banks are almost completely exempt from its provisions. Here is a brief synopsis of what the bill would do, and who would be impacted:

• It requires that mortgage originators be licensed or registered. This means that brokers would have to be licensed but because banks are exempt, anyone working at a bank would be able to sell mortgages to consumers with little or no training. ACCESS supports the licensing requirement but banks should be held to the same high standards.
• Banks are forbidden from offering brokers YSP (Yield Spread Premiums). This is an incentive that the banks pay to brokers based on various factors associated with loans. The intent of this provision is to prevent brokers from "steering" consumers into higher priced products. But because banks are exempt from the provision, there is nothing to prevent the banks themselves from steering consumers into high priced products that they offer. A far better solution would be to require full disclosure and then enforce the disclosure provisions in much the same way that the SEC regulates securities dealers. The result of this provision will be to drive brokers out of business. In the end, only the banks benefit from this provision and consumers will actually wind up paying more for the money they borrow.
• Loan originators would be forced to determine that there is a "tangible benefit" for anyone refinancing a subprime loan. This means that lenders, not consumers, are the only ones who can determine if refinancing is in the consumer's best interest. The bill completely ignores the fact that individual consumers have different circumstances. While ACCESS is no fan of subprime loans, we are also completely against any regulations which reduce consumer choice.
• In certain high-cost loans, it bars balloon payments and the financing of points. These high cost loans are often used on a short term basis to help homeowners avoid foreclosure and dispose of their assets in a more orderly way. Including these provisions in the bill will almost certainly lead to more foreclosures.

Frank's intent by introducing this bill was force mortgage brokers to act in good faith. But the way that the bill is actually written will help banks, which have been lobbying for it, and hurt consumers. Mortgage brokers typically work with hundreds of lenders and have the ability to compare products from many lending institutions. The rates and terms paid by consumers on similar loan products can vary widely.  Banks offer consumers only their own products.

The timing of the bill couldn't be much worse. There are 4.5 million loans with interest rates that are going to adjust between now and 2009. Well over a million of these loans are expected to go into foreclosure. Reducing consumer choice now will inevitably increase the number of foreclosures that will occur. It will also lead to further reductions in home prices; hurting consumers more than anyone else.

On Tuesday evening, Frank's committee voted 45 to 19 to move the bill to the floor of the House for consideration. Ironically the decision comes on the same day that New York's Attorney General, Mario Cuomo, announced that he is investigating Washington Mutual for collusion with brokers to pump up home values shown in appraisals. If nothing else, Cuomo's action should provide a clear indication to Congress that any bill which sets ground rules for lending practices must hold banks to the same standards as everyone else in the market.

by Jim Malmberg

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