In an attempt to address the recent downturn in the real estate market — evidenced by rising foreclosures and falling home prices and which many believe may threaten to undermine the overall economy — the House of Representatives yesterday passed a bill that imposes more stringent regulatory oversight of the mortgage industry.
Called The Mortgage Reform and Anti-Predatory Lending Act of 2007, the bill (H.R. 3915) claims to "amend the Truth in Lending Act to reform consumer mortgage practices and provide accountability for such practices, to establish licensing and registration requirements for residential mortgage originators, to provide certain minimum standards for consumer mortgage loans, and for other purposes."
Some of the primary components of the bill:
- Prohibits steering incentives to mortgage originators, including incentive compensation and any yield spread premium based on, or varying with, the terms of a residential mortgage loan.
- Prohibits mortgage originators from steering any consumer to a residential mortgage loan that is not in the consumer's interest (loans with predatory characteristics).
- Sets forth licensing and registration requirements for mortgage originators.
- Requires creditors to determine, based on verified and documented information, that a consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance, and assessments.
- Prohibits creditors from extending credit for residential mortgage loans that involve refinancing of a prior residential mortgage loan unless the creditor determines that refinancing provides a net tangible benefit to the consumer.
- Sets forth defenses to foreclosure.
- Revises requirements governing prepayment penalties. Prohibits lending without due regard to repayment ability.
The bill passed 291-127, with several Republicans joining the Democratic majority. But the legislation, which is still awaiting a promised companion bill from the Senate, has received criticism from the Bush administration. The White House issued a Statement of Administration Policy on H.R. 3915, stating that "the Administration has concerns with the bill as drafted because it includes provisions that unduly restrict access to credit for potential homebuyers and reduce re-financing opportunities for current homeowners."
In a Web memo posted on the website of conservative think tank The Heritage Foundation, Ronald D. Utt makes several points about how vague language in the bill could lead to unintended consequences that are not good for the very borrowers that the writers of the bill wanted to protect.
There is a precedent for anti-predatory lending legislation receiving a backlash from the people it's designed to protect. Illinois House Bill 4050, a pilot program for 10 Chicago zip codes that was enacted in September 2006, was suspended by Gov. Rod Blagojevich in January of this year after receiving criticism for discriminating against minority homeowners and homebuyers. Earlier this month, Blagojevich took another shot at the issue, signing into law a new bill that incorporates many of the provisions of 4050, but applies to all of Cook County and in some cases all of Illinois. The law takes effect in June 1.
Part of HB 4050's original intent was to curb foreclosures, and it could be argued that the law was successful on that count, based on RealtyTrac foreclosure statistics. Although foreclosure filings in Cook County increased from the third quarter to the fourth quarter of 2006, foreclosure activity in the third quarter of 2007 is down 5 percent from a year ago. That's compared to a 3 percent increase statewide and a 100 percent increase nationwide over the same time period.
Whether the new federal bill will produce similar results — and whether those results are worth other potential consequences such as lower home ownership rates and restricted access to credit — remains to be seen. The legislation faces many hurdles before it even has a chance to be put to that test.