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Joint Letter: Improve H.R. 3915

Thursday, November 15, 2007
The Honorable Barney Frank The Honorable Spencer Bachus
Chairman Ranking Member
House Financial Services Committee House Financial Services Committee

Dear Chairman Frank and Ranking Member Bachus:

We, the undersigned organizations, write to present our views on H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007. While we greatly appreciate your efforts to reduce predatory lending and to restore balance to the mortgage market, we believe this bill requires improvements in the areas described below in order for the bill to achieve its goals.

Subprime lending has been a disaster of monumental proportions, shattering hopes of economic progress for millions of families and triggering a devastating chain reaction of losses for communities and businesses. More than two million families will likely lose their homes as a result, and for most families – especially African-American and Latinos – their home equity represents the greatest share of their family wealth. Wall Street's demand for risky loans with higher interest rates played a key role in encouraging reckless lending, and brokers delivered whatever loans they could sell.

When HR 3915 was introduced, we applauded many of its strongest provisions, such as the originator duty of care and anti-steering rules, the bans on yield spread premiums, prepayment penalties, mandatory arbitration, and single premium credit insurance, and the special protections for extremely high-cost mortgages and for renters.

It is crucial to retain those strong provisions, to improve the remedies and market incentives in the bill, and to avoid preemption of state laws related to these issues. Unfortunately, as the bill has passed through the legislative process, several of the strongest provisions (such as the duty of case and ban on yield-spread premiums) have been weakened, the remedies have been weakened rather than strengthened, and a preemption clause has been added that would eliminate important state claims that help homeowners protect their homes.

Our concerns about the bill fall into four main areas:

"Ability to Pay" Standard Does Not Apply to All Loans, Undercuts Agency Guidance, and Will Not Change Market: The bill requires no ability to pay standards for approximately 90% of the current mortgage market and creates an irrebuttable presumption that any loan below 8.25% is affordable. This immunity undercuts the existing joint agency guidance that currently sets ability to pay standards for risky loans, especially loans such as payment options ARMs, the majority of which are "qualified mortgages." Moody's estimates that monthly payments on $220 billion of POARMs will reset – in most cases to much higher monthly payments -- between 2009 and 2011. Additionally, because there is no requirement that secondary market purchasers conduct due diligence, we fear that the secondary market will continue to purchase abusive loans and choose to absorb the expense of any cures as part of the cost of doing business.

Prohibition on Steering is Weak and Upselling of Loan Rate Still Possible: Rather than prohibiting yield spread premiums, as was originally intended, the bill as amended now essentially authorizes such practices as long as there is disclosure to the consumer. Research shows that disclosure has virtually no effect on preventing abusive lending practices such as steering. We also fear that incorporating Title II into the Title I standards significantly weakens the entire structure, and the permitted damages are insufficient to change the market. Moreover, the damages for violation of the steering provision are too low to change broker behavior.

Homeowners Cannot Prevent Foreclosure: As currently drafted, homeowners have no rights against the actual holder of the loan (in other words, against the entity that will foreclose on them) until a foreclosure has already begun. At that point, not only has the family been traumatized, but the damage to the homeowner's credit is done, which will likely prevent the use of the rescission remedy. Moreover, even in foreclosure, it is not fully clear that homeowners will be able to reach the holder in the vast majority of situations.

Preemption is Too Broad: Although we appreciate that there is not preemption for the entire bill, the broad preemption in the area of assignee liability would wipe out the many existing state laws, such as UDAP statutes [and UCC protections?], that provide remedies against assignees. Since most loans are sold soon after origination, and since so many originators and creditors are thinly capitalized (assuming they even are still in business), many homeowners will be left without any remedy for unaffordable loans.

Ultimately, unless legislation fundamentally changes the incentive structure both for Wall Street and for mortgage originators, predatory lending is likely to continue in one form or another.

We look forward to continuing to work with the Congress as this bill moves through the legislative process.

Sincerely,

Association of Community Organizations for Reform Now (ACORN)
Black Leadership Forum
CDFI Coalition
Center for Responsible Lending
Central Illinois Organizing Project
Consumer Federation of America
Leadership Conference on Civil Rights
National Association for the Advancement of Colored People (NAACP)
Ohio Attorney General Marc Dann
Opportunity Finance Network

For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.