As the number of home foreclosures continues to rise, the United States House of Representatives recently passed legislation directed at a range of players involved in the sub-prime crisis. Interestingly, the bill expressly creates remedies for borrowers against those entities that are involved in acquiring sub-prime mortgage loans and securitizing them as marketable investment products, a group that includes many of the largest Wall Street banks.
The bill focuses primarily on loan origination. It includes provisions prohibiting lenders from making loans to borrowers who ostensibly lack a reasonable ability to re-pay those loans. It also calls for regulations to prohibit lenders from steering borrowers toward loans that they cannot reasonably re-pay or that provide no “net tangible benefit.” The bill also creates a national licensing system for loan officers and mortgage brokers in order to enforce minimum certification standards.
Notably, the bill also creates a private cause of action against those who purchase or otherwise receive mortgage loans for the purpose of converting them into securitized investments. Specifically, homeowners with loans that allegedly violate the legislation's provisions regarding reasonable ability to re-pay can bring suit against loan securitizers, often large Wall Street investment banks, for loan rescission and rescission costs. The bill does contain an exception for loan securitizers who either: (1) provide a cure to bring non-conforming loans into compliance with the bill’s standards within 90 days of notice from the borrower, or (2) have implemented a policy against purchasing or receiving non-conforming loans and have received representations and warranties from loan originators as to conformance.
The bill, designated H.R. 3915, passed by a vote of 291 to 127. It now moves to the Senate where a similar bill has been stalled for several weeks. You can read the U.S. House of Representatives Financial Services Committee’s summary of H.R. 3915 here.