WASHINGTON — House Financial Services Committee Chairman Barney Frank put speculation over the details of his mortgage reform bill to rest by introducing legislation to create new standards for all mortgage originations, require new underwriting standards, and hold securitizers liable for poor loans.
But the bill did not resolve the most pivotal question for financial institutions: whether the new standards would override tougher state protections.
For now, the Massachusetts Democrat said Monday he intends his bill as a floor, not a ceiling. He said he wants to allow states to go further in crafting rules governing lending standards, but he plans to preempt state laws on assignee liability.
"We are setting a federal minimum standard but we are not going to preempt state laws beyond that," he said.
Still, Rep. Frank acknowledged that preemption is one of the focal points. Industry lobbyists are fighting to include it in the bill, while consumer groups are battling to ensure any preemptive federal standards are as tough as possible.
"Everything is negotiable, by virtue of the very simple fact I got to get a majority of votes at all points," Rep. Frank said on a conference call with reporters. "Everything I do as chairman is negotiable, because I'm not emperor, and the interaction of state and federal … that's one of the important points."
The question of preemption is likely to be a key point of discussion Wednesday at a hearing on the bill that will feature regulators, industry representatives, and consumer groups. Several of those set to testify already are drawing lines in the sand on the point.
Michael Calhoun, the president of the Center for Responsible Lending, said his group believes that Rep. Frank would be giving the industry too much by preempting any state laws on assignee liability. "The concern is there are many instances for securitizers where the borrower has to go into foreclosure to have a remedy against the person who holds the loans, and we would clearly not support that as a standard, much less a preemptive standard," he said. "Unfortunately, it's the weakest portion of the bill that they are proposing the most sweeping preemption on."
During the conference call, Rep. Frank said including preemption for assignee liability was necessary, because allowing multiple states to go further could disrupt the secondary market. Such problems have surfaced already with certain state laws intended to hold the buyers of mortgages responsible for the original loan, he said.
"That was one of the problems … where states did various bills and states tried to do some securitizer liability," he said. "There was a reasonable complaint that you could have a real patchwork, and how would you package a security if you have different levels of liability. The securitizer liability will be one uniform national standard. … That obviously has to be uniform, so there will be no room for the states to vary."
Though that comment pleased industry groups, they said that the entire bill needs to preempt state standards, and that they could not support legislation without such a provision.
"The uniform consumer protection standard is the minimum we need in order to even consider getting behind this bill. It comes before the conversations about what's in it," said Kurt Pfotenhauer, the head of government affairs for the Mortgage Bankers Association.
"We have a national mortgage market, and we need a national standard in order to protect consumers and in order to keep the costs of lending simple and low," he said. "When you've got one set of rules, you really eliminate picking winners and losers from various business models. You make it harder to gain in the regulatory system. You make it easier to educate consumers and more attractive for investors who can understand one set of rules."
Andrew Sandler, a partner in the Washington office of Skadden, Arps, Slate, Meagher & Flom LLP, said that the subprime mortgage meltdown should have proved that uniform standards need to be invoked.
"The only prospect for industry support of federal legislation is if it becomes a single standard. Otherwise, all the federal legislation is doing is imposing another layer, but it isn't solving the fundamental problem of 50 different sets of rules," he said. "The central lesson from the subprime meltdown is there needs to be a uniform set of guidelines that are clearly understood and rigorously enforced. Any federal legislation which does not accomplish that will be ineffective."
However, consumer groups said they could not support the bill if it preempted state laws unless Rep. Frank toughened the standards.
"Our feeling is if we are going to have a bill that preempts state law, that bar is pretty high in terms of what we would want to see. We would have to have pretty amazing protections in place for that to happen," said Janis Bowdler, the senior housing policy analyst for the National Council of La Raza. "From what we've seen, I would not put preemption in this bill."
Hilary Shelton, the director of the Washington bureau of the National Association for the Advancement of Colored People, said its concern is that a bill that included preemption would stop local communities from responding to a new, potentially dangerous mortgage product.
"One of the biggest concerns is that many of these predatory lending packages — the 2/28s, the exploding … [adjustable-rate mortgages], that kind of thing — really are provisions that pop up overnight," he said. "We know very well that these are issues that continue to grow once you address one set of concerns to help prevent predatory lending. New issues pop up, so the final point is that we want to make sure that as we talk about issues of preemption, that becomes more of a floor than a ceiling."
The legislation would create licensing and registration standards for all mortgage originators and ban the use of compensation incentives, including yield-spread premiums, to steer borrowers into particular loans.
It also would create minimum standards for all loans requiring a borrower to be able to repay the loan, including taxes and insurance, according to several criteria, including income verification documentation, credit score, debt-to-income ratio, and employment status.
Refinancing loans would have to demonstrate a net tangible benefit, and the loan costs, including fees, points, and other charges, would not be able to exceed the newly advanced principal. The bill also would hold securitizers responsible for securitizing a loan that was not beneficial to the borrower.
The legislation would give primary rule-writing power to the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision to implement provisions of the bill, with consultation with the Federal Trade Commission.
The Federal Reserve Board was left out on purpose because it was not sufficiently consumer-oriented, Rep. Frank said.
"Frankly, I just haven't found this to be a high priority for the Fed," he said. "We have enough bank expertise at the OCC, FDIC, and OTS."
