The Mortgage Reform and Anti-Predatory Lending Act of 2007
On November 15, 2007, the U.S. House of Representatives passed HR 3915, an anti-predatory lending bill that creates minimum federal standards for all mortgages and requires lenders to verify that borrowers have a reasonable ability to repay loans. Known as the Mortgage Reform and Anti-Predatory Lending Act of 2007, the proposed legislation has been criticized by the Bush Administration and the consumer credit and finance industry for being overly burdensome and for not preempting the states’ ability to create varying standards. Changes to the bill are expected as it proceeds through the Senate, but some form of legislation is likely to result.
The current version of the anti-predatory lending legislation has the following key provisions:
- Duty of lenders to ensure that each borrower (i) has a reasonable ability to repay the loan and (ii) will receive a net tangible benefit from the loan (in the case of refinancing)
- Increased consumer protections for high-cost loans, including (i) lowering points, fees, and interest rate triggers; (ii) prohibiting balloon payments and encouragement of borrower default; and (iii) requiring pre-loan counseling
- Prohibition against rewards payments (yield-spread premiums)
- Restrictions on prepayment penalties for subprime loans
- Prohibition against compensation for steering borrowers into subprime loans
- Early notification of eviction for renters
- National registration system for all loan originators, including licensing for originators who are non-bank employees or brokers
- Private right of action for borrowers against companies that securitize loans for sale on the secondary market
- Liability for companies that securitize loans for sale on the secondary market if they purchase loans from lenders that violate the new standards
Title I of the bill requires licensing or registration for mortgage originators. The Department of Housing and Urban Development (HUD) is charged with regulating and licensing those originators not otherwise licensed or regulated by state law or associated with depositary institutions. This section also imposes a duty of care on originators to ensure that originators present options to potential customers that are appropriate for customers’ current circumstances and that originators disclose the comparative costs and benefits of each option. In addition, originators must disclose whether they are acting as an agent for the consumer and whether any potential or actual conflicts of interest exist. Title I further prohibits any mortgage originator from receiving, and any person from paying, any incentive compensation (including yield-spread premiums) that is based on or varies with the terms of any residential mortgage loan.
Title II of the bill sets minimum standards for residential mortgages and requires creditors to make a “reasonable and good faith determination” based on “verified and documented information” that the consumer has a reasonable ability to repay the loan along with all applicable taxes, insurance, and assessments. The originator of a subprime loan must also be reasonably certain that any refinancing will provide a net tangible benefit to the consumer. Conventional loans are presumed to meet these requirements
if the interest rate does not exceed the rate on comparable Treasury bills by three points (five for junior liens). Subprime loans are presumed to meet these requirements if (i) income is verified and documented, (ii) loans are underwritten based on fully-indexed rates and taxes/insurance, (iii) the consumer’s total monthly debts do not exceed 50 percent of the consumer’s monthly gross income (including the loan), (iv) the loans are not negatively amortizing, and (v) the interest rate is either fixed for the first seven years or (on an adjustable rate mortgage) have a margin less than three percent over the index. Title II also prohibits subprime prepayment penalties and limits conventional loan prepayment penalties to three years.
Title III creates special protections for high-cost mortgages, which are defined as mortgages (i) having points and fees in excess of five percent of the loan amount, (ii) having an annual percentage rate exceeding comparable Treasuries plus eight points (10 for junior liens), or (iii) having a prepayment penalty above two percent of the amount prepaid or extending longer than 30 months into the term of the loan. Title III also expressly defines points and fees, covering yield-spread premiums, prepayment penalties, single premium credit insurance, and other fees. Also prohibited by this section, with respect to high-cost loans, are (i) balloon payments, (ii) recommending or encouraging default, (iii) excessive late fees, (iv) call provisions, (v) financing any points or prepayment penalties, (vi) abusive modification fees, and (vii) other excessive fees. Finally, consumers seeking high-cost mortgages will be required to go through pre-loan counseling.
Proponents of the legislation, including the 21 representatives who sponsored it and various consumer groups, support the bill for its ban on yield-spread premiums and its anti-steering provisions, which require lenders to offer the best terms to consumers for the mortgage loan for which a consumer qualifies. Opponents maintain that these provisions hamper the lending marketplace by restricting choices for both lenders and borrowers and prohibit willing parties from entering a contract where the terms and conditions are clearly understood.
The Bush Administration has publicly announced its concerns that HR 3915 creates subjective obligations for mortgage originators and could overly constrict the primary and secondary markets for mortgage finance. In general, the Administration has stated that a mortgage origination standard should preempt the ability of the states to create varying standards to avoid market confusion across state lines. In contrast, the bill’s author, Barney Frank (D-MA), has stated that he expects the increased regulations to improve investor confidence. As the bill approaches final form, many expect states to begin their own versions of increased regulation.