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Support HR 3915: Mortgage Reform and Anti-Predatory Lending Act of 2007

October 24, 2007
Mortgage Lending
Congressman Miller, Congressman Watt, and Chairman Frank introduced the "Mortgage Reform and Anti-Predatory Lending Act of 2007" on October 22, 2007. The proposed legislation addresses many abusive lending practices that contributed to today's foreclosure crisis, including reckless underwriting practices, subprime prepayment penalties, and yield-spread premiums. However, it is critical that the details of remedy and enforcement provisions are strengthened in order to ensure protections are meaningful and that industry participants, including the secondary market, take their responsibility to police the market seriously and do not encourage originators to make abusive loans in the future.

What the bill does:

Section I

  • Establishes "Duty of Care" to the borrower for mortgage originators.
  • Requires licensing and/or registration in accordance with other law. HUD will create national registry for non-depositories. Depositories and some affiliates subject to parallel federal regulatory requirements.
  • Requires originator to present mortgage loan product that is appropriate for a consumer's circumstances. HUD shall also issue regulations requiring originators to act solely in best interest of the consumer.
  • Supplements existing federal or state law requirements for mortgage originators.
  • Prohibits yield-spread premiums and other "steering incentives."
  • No yield spread premium or incentive compensation that depends on the terms of the mortgage loan.
  • Requires HUD to issue anti-steering regulations (in consultation with Federal banking regulators.)
  • Limited damages—3 times compensation to mortgage originator in connection with the loan. Does not include any ability to address abusive loan terms as a result of violation of Duty of Care.

Section II

  • Requires subprime creditors to make good faith determination that the borrower has an ability to repay the loan.
    • Requires consideration of debt-to-income ratio, taxes and insurance, and other financial resources. Is silent on residual income assessment.
    • For adjustable rate mortgages, must consider fully-indexed rate and fully-amortizing payment.
  • Requires verified and documented information
  • Requires subprime creditors to determine that a refinanced loan will provide a net tangible benefit to the consumer.
  • Conventional loans are presumed to meet the above requirements (loans that do not exceed comparable treasuries by more than 3 points or 5 points for junior liens). (Reportedly the proposal will be changed to simply exclude prime loans from the ability to pay and net tangible benefit requirements in the first instance.) The presumption can be rebutted for original creditor, not for assignees.
  • Subprime loans are presumed to meet the above requirements where 1) income is verified and documented; 2) are underwritten based on fully-indexed rate and taxes/insurance; 3) total monthly debts do not exceed 50% monthly gross income (including loan); 4) are not negatively amortizing AND 5) are either fixed for the first 7 years OR on an ARM, have a margin less than 3% over the index. Can be rebutted for original creditor, not for assignees.
  • Limited assignee liability: Provided, but terms are somewhat unclear.
    • Exemptions in this section could create large loopholes that limit incentive for secondary market to police against abusive underwriting practices. The bill could allow rescission of loan only against assignees and "securitizers" (although technical amendment is necessary to effectuate that intent.)
    • However, it allows assignee exemption even from rescission if either the assignee "cures," or if it has policies to avoid buying loans that do not meet safe harbor.
    • The definition of which assignees are captured is also limited: The intent is to stop affirmative liability for rescission before "trusts", but allow rescission as defense to judicial or non-judicial foreclosure against any holder. (Again, technical correction necessary to effectuate intent to make rescission available at all.)
  • Prohibits class actions against assignees.
  • Prohibits subprime prepayment penalties and limits prepayment penalties on conventional loans to 3 years (or 3 months before rest on an adjustable rate loan).
  • Prohibits single premium credit insurance on any residential mortgage.
  • Prohibits mandatory arbitration on any residential mortgage.

Section III

  • Creates special protections for high-cost mortgages.
    • High-cost defined as points and fees in excess of 5 percent of loan amount; OR APR exceeding comparable treasuries plus 8 points (10 for junior liens); or prepayment penalty above 2% amount prepaid or longer than 30 months.

§ Inclusive definition of points and fees. Covers yield-spread premiums, prepayment penalties, single premium credit insurance, and other fees already in HOEPA. Excludes bona fide discount points (if rate is conventional rate)

  • Prohibits the following on high-cost loans: balloon payments; recommending or encouraging default; excessive late fees; call provisions; financing any points and fees or prepayment penalties; abusive modification or deferral fees; excessive fees for receiving a payoff statement.
    • Requires pre-loan counseling for high-cost mortgages.
    • Existing HOEPA remedies apply.



Considering the Subprime Mortgage Market: Myths vs. Facts (PDF)

Read CRL's analysis of HR 3915 (PDF).

Read our new Subprime Snapshot.

Joint Statement by Consumer, Civil Rights, and Advocacy Groups re: H.R. 3915.

Legislative Proposals on Reforming Market Practices (PDF), Testimony of Michael Calhoun, President CRL before U.S. House Committee on Financial Services, October 24, 2007.

The Right of Rescission (PDF): The Minimum Remedy Needed to Make Wall Street Accountable for Buying Abusive Subprime Loans

Eliminate the "Exit Tax" on Subprime Loans (PDF): Prepayment Penalties Prevent Qualified Homeowners from Getting Better Loans

Federal Preemption Favors Predatory Lending (PDF)

Assignee Liability: Protecting Homeowners and Strengthening the Mortgage Market (PDF)