WASHINGTON — Coming off a monthlong break in which problems in the subprime mortgage market only worsened, Senate Banking Committee Chairman Chris Dodd said Wednesday he would introduce legislation to revamp the mortgage industry.
The same day a House Financial Services Committee hearing ended with a pledge from the Securities and Exchange Commission to investigate conduits used to sell commercial paper.
The twin actions served as opening salvos in the congressional response to problems in the credit and subprime mortgage markets.
House Financial Services Chairman Barney Frank, D-Mass., who has said he plans to introduce his own comprehensive bill, told reporters after his panel's hearing that he had not "had a chance to look at" Sen. Dodd's legislation.
The Connecticut Democrat's announcement caught industry observers off guard.
"Sounds like Sen. Dodd is going out there by himself on this," said Mike Calhoun, the president of the Center for Responsible Lending, which said it supports Sen. Dodd's efforts. "It looks tough, like the coverage is very similar to the issues and topics that Barney Frank has said he is interested in."
Sen. Dodd's bill, which is to be introduced in the coming weeks, would cover a larger class of loans than are currently protected by the Home Ownership and Equity Protection Act, according to an outline of the bill released by the committee. Like a bill Sen. Charles Schumer, D-N.Y., introduced this year, the bill would hold lenders liable for brokers' actions.
It would "strictly limit" fees associated with high-cost mortgages, and it would prohibit balloon payments, prepayment penalties, and yield-spread premiums for such mortgages, according to the outline.
"Predatory lending needs to be stopped, which is why I intend to introduce legislation that will put an end to the practices that have forced thousands of Americans into foreclosure," Sen. Dodd said in a press release.
The bill also would impose new faith and fair-dealing standards for all lenders and brokers, and it would clarify "the fiduciary duty of mortgage brokers towards the borrowers," the summary said.
It would include a measure, previously endorsed by Rep. Frank, to give the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency rulemaking authority under the Federal Trade Commission Act's unfair and deceptive acts or practices provision.
"The Dodd proposal reflects the testimony that has been presented by many of the consumer groups that have testified before the committee," said James Ballentine, the American Bankers Association's director of grassroots and community outreach. "At the end of the day, should a legislative solution be crafted, neither the industry nor community groups will be entirely pleased."
Noticeably absent from the summary was any assignee liability. The banking industry has fought any efforts to hold buyers of mortgage-backed securities liable for defunct loans, arguing it could dry up credit. But Rep. Frank has said such a provision is crucial for instituting market responsibility by removing incentives for the secondary market to finance poorly underwritten loans.
Sen. Dodd made his announcement after months of speculation that sooner or later he would have to respond to problems in the subprime mortgage market.
During the House hearing, lawmakers learned that the market's turmoil likely had spread outside the mortgage industry. Erik Sirri, the director of market regulation at the SEC, told the committee that his agency was investigating the effects of the market upheaval on commercial paper conduits at consolidated supervised entities.
"Access to high levels of liquidity is particularly important in times of abnormally high market stress, so we are monitoring CSE firms' access to their usual sources of both secured and unsecured funding," he said. "In addition, the commission staff is also monitoring contingencies that might place additional strains on the balance sheets of the CSE firms. These include the potential unwinding of off-balance-sheet funding structures, such as conduit structures."
On Wednesday Citigroup Inc. issued a statement responding to a Wall Street Journal story earlier in the day about the New York company's exposure to affiliated investment vehicles that issue billions of dollars of commercial paper. The article said Citi represents 25% of the so-called structured investment vehicle market, which has come under pressure recently.
Citi said it is "comfortable with the highly rated assets in the SIVs portfolios managed by Citi Alternative Investments, as well as the multi-seller conduits managed for corporate clients by markets and banking."
The House hearing was meant to focus mostly on the credit crunch but frequently meandered into other areas, including transparency at the credit rating agencies, subprime mortgage legislation, and reforming the government-sponsored enterprises and the Federal Housing Administration.
"In the subprime market, it is clear that financial innovation outstripped regulation," Rep. Frank said.
But Republican members of the Financial Services Committee argued that problems in the subprime market are being overstated, and they urged their colleagues against overreacting.
"Ninety-five percent of the mortgages in America are being paid," said Rep. Spencer Bachus of Alabama, the ranking Republican on the House committee.
Regulators questioned by the panel had divergent explanations for the events that led to the credit crunch. FDIC Chairman Sheila Bair criticized the process in which banks sell the mortgages they originate.
"The transactional nature of the 'originate and sell' model has contributed to lending practices that have damaged the immediate interests of consumers, mortgage lenders, and mortgage investors and now pose a risk to the broader economy," Ms. Bair said.
But Comptroller of the Currency John Dugan insisted that the banking industry is not in crisis.
"Unlike many nonbank lenders, national banks generally have strong levels of capital, stable sources of liquidity, and well diversified lines of business," Mr. Dugan said. "As a result, national banks remain active in major markets and continue to extend credit to corporate and retail customers."
