House Readies the Red Pen for Mortgage Reform

The House Financial Services Committee plans to meet Tuesday to consider legislation that may bring sweeping changes to the way the mortgage industry conducts business. The bill in question, called HR1728 or the Mortgage Reform and Anti-Predatory Lending Act, aims to curb forms of lending that have been a major factor in the highest home foreclosure rate in the nation in 25 years the committee said in a statement. The sponsor of the bill, Brad Miller (D-NC), and the committee called it a tougher version of the bill approved by the House in 2007 but never passed by the Senate. The goal, however, remains the same: to impose strict regulations on originators to cut down on unaffordable mortgages, refinanced mortgages that have no positive effect on monthly payments, and instances of borrower fraud where borrowers present erroneous documentation to obtain a mortgage. The previous version aimed to prevent another subprime mortgage meltdown, the committee said. The political climate has changed since the failure of the previous version to face a Senate vote, Miller says in a statement on his Web site. “The foreclosure crisis has wreaked havoc on middle-class families and our economy as a whole,” he says.  “The industry’s arguments for watering the bill down are not at all convincing.” In testimony Thursday before the committee, the Mortgage Bankers Association (MBA) chairman David Kittle said the risk retention provision currently drafted in legislation would make it impossible for many lenders to compete, among other faults. “First and foremost, HR1728 does not establish a national standard for mortgage lending to replace the uneven patchwork of state and local mortgage lending laws,” Kittle told the committee. “We are just as concerned about the requirement that lenders retain at least 5% of the credit risk presented by non-qualified mortgages.” Media reports began circling late Thursday that committee chairman Barney Frank, (D-MA), and co-sponsor of the controversial bill, may consider taking a red pen to the legislation in acknowledgment of concerns like Kittle’s that the bill may kill competition among smaller mortgage lenders and severely reduce the industry’s origination capacity. Frank said he might consider two hotly contested provisions of the bill — the 5% risk retention banks would be required to carry, likely in the form of ready-to-use capital, after selling a loan on the secondary market and a provision that would provide legal protections to lenders on 30-year traditional mortgages only, American Banker reported. “How you require the 5% is very much an open question, and I do think there is some room for some broadening of the safe harbor,” Frank said during a break in the hearing, according to the article. “It’s a new idea. How you do it, we are very open about.” Read the bill. Write to Diana Golobay at [email protected].