WASHINGTON — On Capitol Hill the name of the game on mortgage reform legislation is "Let's Make a Deal," and for now that game seems to be tipping in the financial services industry's favor.
House Financial Services Committee Chairman Barney Frank, D-Mass., unveiled a bill last week that aims to guarantee that borrowers can afford their mortgages and to make it risky for the secondary market to securitize loans that do not meet specific standards.
Since then, lawmakers, congressional staff members, and others have been embroiled in intense negotiations on ways to modify the bill.
Industry lobbyists said they see inroads on a number of provisions they considered most threatening. In the offing are changes that could sweep more subprime loans into the securitization process, take the bite out of a suitability standard, and taper down an anti-steering provision that would prohibit all incentive compensation for originators.
Though the biggest issue — whether the bill would fully preempt any state laws on consumer protection — remains unsettled, top Democrats appear open to making changes that will win them significant Republican support, including that of the House Financial Services Committee's top GOP member, Rep. Spencer Bachus of Alabama, before a panel vote expected next week.
"I've talked to Spencer … and he's spoken to Barney as well, and we're not ridiculously, hopelessly far apart. … There is some common ground," Rep. Brad Miller, one of the bill's lead sponsors, said in an interview this week. "We'll certainly see whether we can include him and some proportion of the Republicans without abandoning the overall purpose. We are not going to agree to an ineffective bill so that we can call it a bipartisan bill, but if we can achieve an effective bill that would have bipartisan support, then we are going to do that."
The North Carolina Democrat said he ruled out votes from the ultra-conservative block of Republicans on the panel, like Reps. Tom Price of Georgia, Jeb Hensarling of Texas, and Patrick McHenry of North Carolina. Nevertheless, several of the more senior committee Republicans could support the bill, including Reps. Deborah Pryce of Ohio, Mike Castle of Delaware, and Chris Shays of Connecticut, Rep. Miller said.
"There are some more reasonable, conciliatory, less stridently partisan Republicans who recognize we have a problem," he said.
Though a revised draft is not likely to surface until Monday, the day before the panel is expected to vote on the bill, several industry lobbyists said they are optimistic many of their problems — which were largely highlighted by Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich in a hearing last week — are being addressed.
Lawmakers are paying particular attention to comments from Mr. Dugan, a banking lawyer and former Treasury Department official, who objected to language that said a loan must be in the borrower's best interest. In his testimony, he argued that the language could "expose banks to a greater degree of litigation risk."
Sources said they expect the provision to be watered down and language to be inserted that would require federal banking regulators to write rules governing suitability.
Another standard likely to change is intended to remove incentives for originators to sell borrowers costlier loans by barring "any incentive compensation (including yield-spread premium) that is based on or varies with the terms of any residential mortgage."
Sources said one way to fix the steering language would be to exempt prime and possibly even fixed-rate subprime loans, since abuses have occurred mostly with subprime adjustable-rate mortgages. Depository institutions are also seeking further carveouts.
"We appreciate the constructive, inclusive process and the desire to produce a balanced product that does not unduly restrict credit," said Floyd Stoner, the head lobbyist for the American Bankers Association.
Scott DeFife, the senior managing director of government affairs with the Securities Industry and Financial Markets Association, said that there are no guarantees until he sees new legislative language, but that he felt the committee also was looking to mitigate concerns the secondary market raised with the securitizer liability section of the bill.
"We think this is headed in the right direction," he said. "There are very constructive conversations going on. The committee on a bipartisan basis is addressing many of the concerns that we have articulated with the bill."
At issue were specific standards meant to define the types of mortgages the secondary market could securitize without fear of legal risk. The bill creates a class of "qualified safe harbor mortgages" which generally define the criteria required for securitizing subprime loans.
Industry representatives and some of the regulators had said that the definitions in the bill were too restrictive and would curtail legitimate lending.
In particular, they questioned a standard initially suggested by Federal Deposit Insurance Corp. Chairman Sheila Bair that would require a loan's debt-to-income ratio to stay below 50%. Sources said they expect that requirement to be stripped out and replaced with a requirement that the regulators decide an appropriate ratio.
Another section expected to be ironed out creates origination standards, including registration and licensing. Several sources, including Rep. Miller, said the committee likely would swap in language proposed by Rep. Bachus in his more narrowly targeted bill. The fix is expected to quell industry concerns about increased regulatory burden.
But John Taylor, the president and chief executive of the National Community Reinvestment Coalition, said that consumer groups are seeking increased penalties for violating the securitizer liability standards, and that they worry Democrats could be conceding too much to industry interests.
"If tomorrow we are talking about a serious capitulation in a lot of areas to the industry, that doesn't move us any closer to widespread embracing of this bill," he said.
One critical unresolved question is how far the bill would go to preempt state laws, and it is likely to remain open until the end of the bill's debate.
Rep. Frank has said it is necessary to create a national preemptive standard for the secondary market section to keep stability in the capital markets. But he also has said that the industry, which is seeking complete preemption, has not offered a compelling reason for wiping out the states' ability to go further on origination standards.
Rep. Mel Watt, D-N.C., another lead sponsor of the bill, said he is taking all specific proposals into consideration to achieve broad support. "Our desire is to have a bipartisan bill that is broadly supported by industry, regulators, and consumer groups, and if we can get to that, then we will have accomplished something that we all can be happy with," he said.
