WASHINGTON — Following the advice of federal regulators, Democrats took steps Tuesday to broaden the scope of permissible mortgages for a bill designed to overhaul underwriting practices.
The House Financial Services Committee is expected to finish debate today on the bill and pass several amendments designed to address criticism of the legislation.
Changes in the offing would give regulators broad leeway to retool a provision that would have required lenders to retain at least 5% of a loan's risk. The panel also approved an amendment Tuesday to broaden a provision granting safe harbor from penalties. The provision previously included only certain 30-year fixed-rate loans.
"We are moving in the right direction," Rep. Mel Watt, D-N.C., one of the bill's lead sponsors, said in an interview during a break in the debate. "We've got to be careful, because you punch in one place, and it's like the Pillsbury Dough Boy — it pushes out somewhere else. I'm trying not to overreact to anyone's proposals."
One of the more significant changes adopted Tuesday by voice vote was an amendment by Reps. Melissa Bean, D-Ill., and Mike Castle, R-Del., that would expand the qualified safe harbor to allow fixed-rate loans of less than 30 years and adjustable-rate mortgages underwritten to the maximum rate within the loan's first seven years to qualify.
It would also let loans within the safe harbor be presumed to meet the bill's other suitability standards, like ability to repay and net tangible benefit — standards that would regulators define.
The amendment would give several federal entities, like the Federal Housing Administration, Fannie Mae and Freddie Mac, the power to define what loans under their purview would qualify for the safe harbor. The amendment also would give such power to the Federal Housing Finance Agency, the Department of Housing and Urban Development, the Department of Veterans Affairs, the Rural Housing Service and the Department of Agriculture.
Today the panel is expected to approve an amendment pushed by the Federal Reserve Board that would give the regulators power to craft — or even essentially gut — a requirement that lenders keep 5% of a loan's risk. The amendment, sponsored by House Financial Services Chairman Barney Frank, D-Mass., and Rep. Walt Minnick, D-Idaho, would let regulators figure out how to craft a risk retention standard that encourages responsible underwriting.
The amendment would allow regulators to "adjust" the 5% requirement as they see fit.
During the debate, Rep. Scott Garrett, R-N.J., questioned whether such flexibility would let the Fed reduce the percentage to zero if it felt 5% would impede a market recovery.
"We are going to have 5% unless the Fed thinks they shouldn't make it apply," he said. "What if the Fed said no skin in the game?"
Frank said that, given the financial crisis and how the Fed has shifted its position to address underwriting weaknesses more aggressively, he doubted that was a problem, though he conceded it was technically possible.
"It's conceivable," he said. "I would think it unlikely, given how it's written. It says, 'appropriate risk management.' It would obviously trouble me if they did that."
The Frank-Minnick amendment would also give regulators discretion to let securitizers that package loans bear the risk retention requirement. (A provision retained from the base bill would exempt loans that fall within the qualified safe harbor from having to meet the risk retention guidelines.)
The panel also approved an amendment pushed by consumer groups. The provision, from Rep. Paul Hodes, D-H., would give state attorneys general authority to enforce federal standards.
Rep. Brad Miller, D-N.C., another critical sponsor of the bill, said in an interview that he believed the changes would strengthen states' role in overseeing the industry. Currently, the bill would allow states to exceed federal mortgage standards, except in the case of securitizer liability, which dictates standards for a borrower's ability to repay and net tangible benefit for refinancings.
There is "a mix of give and take" in the changes to the legislation, Miller said.
"The preemption is very narrowly drawn and really does move in a great way to protect consumers. That's a significant improvement."