WASHINGTON — The House Financial Services Committee voted 45 to 19 late Tuesday to approve mortgage reform legislation that largely mirrored a bipartisan deal unveiled this week by Rep. Barney Frank, the panel's chairman, and Rep. Spencer Bachus, its lead Republican.
But the committee left several critical issues — including to what extent the legislation would preempt state consumer laws — unresolved ahead of a full House vote, which may come as soon as next week.
The legislation would create standards for all mortgage originators requiring that borrowers be able to repay their loans, and it would extend some limited liability to the secondary market. But the details still up for debate include how far the bill would go in restricting incentive compensation, how lenders would have to treat occupied rental properties that are foreclosed, and what additional loans would be swept under the Home Ownership and Equity Protection Act’s high-cost protections.
The Frank-Bachus deal assuaged a laundry list of concerns various factions of the financial services industry had raised with the original version Rep. Frank introduced last month, but some Republicans pushed for further changes during the panel’s vote.
Of prime concern to most of the financial services industry is the issue of federal preemption. The only provision that would override state standards is a section that would create limited liability for securitizers that package loans on the secondary market.
But Rep. Richard Baker, R-La., said the bill should go further to create a national standard for all the provisions. “I do believe that the reforms with regard to origination and lending are quite appropriate, worthwhile, and strong enough in reform to be the law of the land.”
He offered an amendment that would extend preemption to cover the bill’s origination standards and steering provisions for seven years.
But Rep. Frank reiterated his claim that only the secondary market needs uniformity across state lines to preserve stability in the capital markets. He also defended state’s rights, arguing that even though he and other members had wanted to enact anti-predatory legislation for several years, they had been unable to get the Republican-controlled Congress to move, so states were able to step in and deal with some lending problems regionally.
“The preemption issue is a very difficult issue,” the Massachusetts Democrat said. “There are arguments for strong national standards in some instances, but there are other instances where it would be a mistake to announce that we would take away the powers of the states.”
Rep. Baker’s amendment failed on voice vote, but it was clear lawmakers expected the issue to come up again.
The financial services industry would like the bill to preempt all state consumer laws, but some lawmakers, including Rep. Maxine Waters, D-Calif., who chairs the panel’s housing subcommittee, were lobbying to give states a bigger role in the provision dealing with securitizer liability.
“I’d like to express my concern that I think that legislation misses the mark,” she said. “I’ve heard from my state attorneys general’s office that the preemption language in the bill” is too limiting.
Rep. Mel Watt, a co-author of the bill, said that even though he agreed with the intent of the legislation, the preemption language on securitizer liability was worded too vaguely and could open the door for endless lawsuits.
“Language needs to be clarified,” the North Carolina Democrat said. “My concern is that we should try to minimize litigation about terms in the bill to the extent that we know that is likely to happen.”
Rep. Frank said he would work on Rep. Watt’s concerns before the bill goes to the House floor.
Though the bill appeared to enjoy support among some Republicans, including Rep. Bachus, several conservative GOP members took numerous opportunities to oppose the legislation and urge changes. Of particular concern was a provision that would let renters in foreclosed properties remain in their lease or, in cases without a lease, be given 90 days’ notice before being evicted.
Some industry groups have objected to such a standard, arguing that a lender should not be handed the landlord’s role or be stuck with a deed to an occupied property. Rep. Tom Feeney, R-Fla., said during the debate that lenders would have to price in the risk of such a predicament and potential property damage. “The lender would now be a landlord,” he said.
Furthermore, forcing lenders to let renters stay in foreclosed properties would “drive up the cost of all mortgages.”
After the debate devolved into a heated and lengthy one about renters, Rep. Frank said he would agree to work on language that would limit how long a renter could remain in a property to a year or less before the bill reaches the floor.
Another provision that drew significant debate is meant to stop would-be prime borrowers from being duped into costlier loans than their qualifications would allow by putting restrictions on lenders’ incentive compensation, including yield-spread premiums.
Rep. Steve Pearce, R-N.M., offered an amendment that would strip the anti-steering section from the bill, arguing it would create more opportunities for frivolous lawsuits. But Rep. Frank said the concern was not valid, since the banking regulators, which are leery of litigation, would draft the regulations. “The suggestion that we are trying to help trial lawyers … makes no sense by any measure,” Rep. Frank said.
Other Republicans added to the chorus of concerns about the potential for lawsuits in the steering section, which includes a requirement that refinancings have a net tangible benefit for the borrower. But Rep. Bachus stepped in to back Rep. Frank by saying the standard was similar to what several states enforce and had not created problems. “I’m not aware of any increase of litigation under those statutes,” Rep. Bachus said.
The Pearce amendment was rejected by the committee late Tuesday.
Another key issue that may come up during House debate was a provision that would put more mortgages under the protection of HOEPA. The Mortgage Bankers Association has argued that lowering the HOEPA protection triggers is effectively a usury cap since lenders tend to avoid making loans that qualify under the law.
Rep. Patrick McHenry, R-N.C. offered an amendment to strike the entire section of the bill.
“My concern is we’re going to have a constriction of credit in the marketplace,” he said.
But Rep. Brad Miller, a co-author of the legislation, said adding such protections to a wider class of loans is crucial. “This provision needs to stay in,” he said.
