Last Thursday, the House Financial Services Committee held a hearing to discuss H.R. 1728, the proposed Mortgage Reform and Anti-Predatory Lending Act of 2009. A summary of H.R. 1728 sets out the major changes proposed in the bill, including: (i) imposing a federal duty of care on mortgage originators and setting forth the originator’s liability should there be a breach of that duty; (ii) limiting yield spread premiums and steering incentives to brokers; and (iii) requiring creditors, assignees and securitizers to determine that a residential mortgage borrower has the ability to repay and that refinancing produces a net tangible benefit for the borrower. Witnesses on the three panels included:

Panel 1

  • Sandra Braunstein, Director of the Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System

Ms. Braunstein provided the committee with an update on recent regulations issued by the Federal Reserve under the Truth in Lending Act (TILA) and Home Ownership and Equity Protection Act (HOEPA). She noted that many of the requirements contained in the new regulations mirror those found in H.R. 1728, including additional disclosure and other requirements.

  • Steven L. Antonakes, Commissioner of Banks for the Commonwealth of Massachusetts on behalf of the Conference of State Bank Supervisors

Mr. Antonakes’ testimony provided that the Conference of State Bank Supervisors supports the principles underlying H.R. 1728, but that the group had some concern with specific provisions contained in the bill. Noting that “problems in the residential mortgage market are constantly evolving and shifting” he urged the Committee to “improve supervision and enhance consumer protection by contributing to the development of a coordinated system of supervision.”  

Panel 2

  • John Taylor, President and Chief Executive Officer, National Community Reinvestment Coalition  

Mr. Taylor supported several provisions of H.R. 1728, including its: (i) ban on prepayment penalties for subprime and nontraditional loans; (ii) ban on single premium credit insurance; (iii) ban on mandatory arbitration; (iv) and additional protections for high-cost residential mortgage loans.

Mr. Calhoun’s testimony discussed the history of the current market collapse. He asserted that “[t]he key to reform is to realign the incentives of the market with as many bright-line rules as possible, yet also with adequate remedies to ensure that no one will fall through the cracks.” He went further by noting that the bill’s language does not go far enough to meet this objective.

Ms. Saunders testimony indicated that her organization did not support H.R. 1728. In its current form, she stated, “[t]he bill is complex, convoluted and simply will not accomplish its main goal – to fundamentally change the way mortgages are made in this country.” Specifically, she criticized portions of the bill that would, in her opinion, limit certain state law protections for borrowers and that the bill does not provide meaningful remedies against the loan holders for violations of the bill.

Ms. Aponte noted that NCLR saw three provisions in H.R. 1728 as being essential. First, the requirement that lenders consider the borrowers ability to repay the loan and present borrowers with appropriate mortgage loans should be retained. Second, creating a safe harbor for qualified mortgages which will remove the incentive in the market place for exotic mortgage products. Finally, the retention of provisions dealing with tenant protection.

  • Hilary O. Shelton, Vice President for Advocacy and Director, Washington Bureau, NAACP

Mr. Shelton outlined several areas that the NAACP considered essential to the bill. These included: (i) banning compensation based on the terms of the mortgage, such as yield spread premiums, that create an incentive for brokers to steer borrowers to more expensive and risky loans; (ii) establishing a duty of care on the originator; (iii) prohibitions on prepayment penalties on subprime mortgages; and (iv) additional protections for consumers for high cost loans.  

Panel 3

  • G. Gary Berner, Executive Vice President, Commercial Real Estate, First Niagara Bank on behalf of American Bankers Association (ABA)  

The ABA’s representative provided background regarding recent regulatory reforms and noted that the “reforms reflect the sound underwriting principles that have formed the foundation of traditional bank mortgage lending.” Mr. Berner stated that H.R. 1728 should be amended to reflect the current supervisory processes and oversight banks are under, provide safe harbors for bank products and ensure that the bill does “not overly restrict quality credit being made available to creditworthy borrowers.”

  • John H. Dalton, President, Housing Policy Council, The Financial Services Roundtable

Mr. Dalton generally supported provisions in the bill relating to requirements that lenders consider the borrower’s ability to repay the loan and prohibitions on the use of yield spread premiums. He disagreed, however, with several provisions. In discussing the duty of care provisions, he noted that originators are not in a position to know whether a loan is “appropriate” for a given borrower. He stated that the Roundtable also disagrees with H.R. 1728’s requirement that lenders retain 5% of the credit risk for every loan sold, noting that this provision could reduce a bank’s incentive to make mortgage loans and increase the costs of mortgage lending.

The MBA criticized the fact that H.R. 1728 would not create a national standard for mortgage lending but instead would create a floor, on top of which states may implement more stringent standards. By leaving a “confusing regulatory patchwork of lending laws” at the states, Mr. Kittle argued that the costs of compliance will increase costs ultimately borne by the consumers. Mr. Kittle was also concerned about the 5% risk retention requirement for lenders and the lack of definitions surrounding limits on incentive-based compensation for loan brokers.

  • Michael S. Menzies, Sr., President and Chief Executive Officer, Easton Bank and Trust Company on behalf of Independent Community Bankers Association (ICBA)

The ICBA, much like the testimony from the ABA, criticized the added uncertainty reflected in the current language of the bill. Mr. Menzies also noted that the additional litigation costs arising from the new cause of action would increase lenders’ costs, which would ultimately be borne by consumers.

  • T. Timothy Ryan, Jr., President and Chief Executive Officer, Securities Industry and Financial Markets Association (SIFMA)

Mr. Ryan offered three suggestions for improving H.R. 1728. First, he recommended that the safe harbor language for qualified mortgage be expanded to protect the prime market. As currently written, Mr. Ryan stated that a large portion of the prime market would not be entitled to the safe harbor. Second, his testimony noted that SIFMA members had expressed concerns that overly burdensome standards relating to subprime lending could reduce their ability to provide liquidity in the market and their inability to hedge or shed risks would limit their competitiveness and lending capacity. Finally, Mr. Ryan recommended that “a single clear standard for secondary market participants related to the ability to repay and net tangible benefit test” be established.

  • Denise M. Leonard, Vice President, Government Affairs, National Association of Mortgage Brokers

Ms. Leonard offered recommendations on a title by title basis. Recognizing the need to provide consumer protection, Ms. Leonard stated that her group supports the overall concepts of H.R. 1728, but is “extremely concerned that specific provisions in Title III will further harm many consumers who are currently in the most need of available and affordable credit.” Specifically, her testimony indicated that recent regulatory revisions by the Federal Reserve under TILA and HOEPA address many of the same issues that are addressed by Title III of the bill and that the mortgage industry must be given time to adjust to these new requirements.

Mr. McMillan cautioned that H.R. 1728 should create an appropriate balance between safeguarding consumers and making sure that consumers have access to mortgage products at reasonable costs. He noted that overly burdensome or undue regulation of the mortgage market will increase the costs associated with mortgage products.

Mr. Amorin’s testimony focused on Title VI of H.R. 1728 dealing with appraisal activities. He noted that, among the fundamentals of mortgage lending, proper valuation of underlying collateral serves an essential role in prudent lending.

  • Jim Arbury, Senior Vice President, Government Affairs, on behalf of the National Multi Housing Council and the National Apartment Association

Mr. Arbury focused on the housing market more generally. He recommended that federal lawmakers: (i) enact a more balanced housing policy, rather than its decades-long “homeownership at any cost” policy; (ii) continue to ban seller-financed down payment programs; (iii) retain and expand the supply of affordable rental housing; (iv) reject new mandates on owners multifamily property; and (v) preserve that apartment industry’s access to capital.