WASHINGTON — House Financial Services Committee Chairman Barney Frank’s approach to crafting legislation aimed at toughening standards for mortgage underwriting and lending practices is garnering the unlikely acceptance of the financial services sector.
Though certain pockets of the banking industry had sought a national anti-predator standard for years to supplant the patchwork of state laws, large segments of the industry have remained wary of reform, particularly during the current credit crunch, an environment of rising foreclosures, and a Congress controlled by Democrats.
Despite that backdrop, industry lobbyists briefed by Rep. Frank’s staff privately this week said the bill the Massachusetts lawmaker is drafting seems reasonable and may be something they could ultimately tolerate.
Representatives from Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc., Bank of America Corp., Morgan Stanley, Credit Suisse Group, and a handful of trade groups attended the briefing Wednesday and were given a two-page summary of Rep. Frank’s legislation. Several attendees plan to provide feedback to the staff members at another meeting Monday.
Industry participants would not discuss the meeting publicly, but several said privately that they were relieved their input seems to have been taken into consideration thus far. One participant who attended the briefing said that even though the industry has some concerns, “we can get to a place that’s workable.”
Another said the industry felt Rep. Frank’s staff was genuinely attempting to address many of the industry’s concerns.
“They are reaching out to us, and we are working with them back,” the participant said. “They are trying to make their bill work, and we are trying to help them.”
The bill’s outline is cryptic, and industry representatives said they were withholding judgment until they see the precise legislative language. Sources said that language may begin circulating as early as next week. Rep. Frank is said to be eyeing a House Financial Services vote Oct. 24 on the bill, they said.
Consumer groups, which were expected to meet separately with Rep. Frank’s staff Thursday, are also providing input. While industry representatives are pleasantly surprised that Rep. Frank is taking many of their concerns into account, consumer groups have seemed disappointed in recent weeks. Several are said to be pushing lawmakers to adopt tougher measures.
“The staff are making significant progress in drafting a bill. There is a lot of discussion to be had on definition and the parameters of the work plan. We’re going to continue to work collaboratively to realize a meaningful bill,” said David Berenbaum the executive vice president National Community Reinvestment Coalition.
Still, though the industry may be able to accept the bill, participants in the meeting did raise concerns about individual provisions. For example, according to the summary, a copy of which was obtained by American Banker, the bill would require all loan originators to “diligently work to find the most appropriate loan given the consumers’ circumstances.”
Secondary market liability also remains one of the most controversial measures Rep. Frank is pursuing, with industry critics asserting that additional liability on the securitization end could shore up access to credit.
Sources said his approach is to create securitizer liability that would not hold the end investor accountable but would apply in certain circumstances to the company that bundles the loans for securitization. In concept, borrowers who were given loans they could not afford would have the right to cure or rescind a loan, according to the summary.
“In addition to specific lender liability … a limited liability would extend to assignees (acting in good faith) of the loan to the ‘securitizers’ for loans (liability would not extend to bondholders/investors) that violate these standards if the securitizer has failed to take sufficient steps to not purchase non-safe harbor loans,” the summary said.
The draft references carveouts in New Jersey and Massachusetts laws that limit liability for companies that conduct due diligence that the loan was underwritten soundly.
The safe harbor for assignees would require loans to be underwritten with appropriate documentation, at the fully indexed and fully amortized rate, and with other objective characteristics such as a debt-to-income ratio of less than 40% or a fixed payment for seven years. The criteria also bans certain prepayment penalties, single-premium credit insurance, and mandatory arbitration.
The draft summary slightly teases out other provisions that were outlined in a shorter summary last month. The bill would prohibit lenders from steering borrowers into loans that were “not in the borrowers’ best interest” and would eliminate yield-spread premiums as an incentive in steering the borrower. It would also require state licensing and registration for all mortgage originators and would require borrowers to be presented with disclosures laying out the “costs and benefits of particular loan products, the nature of the originator’s relationship with the consumer, and any conflict of interest that might sever the broker’s interest from the consumer’s.”
The outline said the bill would also would lower the definition of “high-cost” loans under the Home Ownership and Equity Protection Act to include those with points and fees totaling 5% of the loan’s value.
