Action on Legislation

Credit Cards
HR 627, S 414, S 235, S 165, S 392, S 131
The Senate was expected to continue debating credit card reform legislation today that would upend several common practices. The bill is expected to pass, but debate could drag into next week.Senate Banking Committee Chairman Chris Dodd, D-Conn., and Sen. Richard Shelby of Alabama, the committee's No. 1 Republican, said they had reached a compromise May 11, but it did little to soften Dodd's reform bill. The legislation passed the committee March 31 by a vote of 12 to 11, without any Republican support.

The Dodd-Shelby bill is actually tougher in some areas than the earlier version — and it would go beyond federal regulations set to go into effect in mid-2010.

It incorporates changes sought by the Obama administration, including a requirement that card companies get customers' permission before charging over-the-limit fees. Dodd had previously included a provision that would have given customers a chance to opt out of such fees.

The bill also would make it tougher for borrowers under 21 to obtain cards, by requiring them to prove that they have sufficient income to cover the credit limit, or to have a parent cosign.

The bill did soften a requirement that would have barred card companies from increasing interest rates on existing balances. Under the Dodd-Shelby deal, issuers could increase rates if a consumer were 60 days late, though they would have to re-evaluate the account in six months and reduce the rate increase if the consumer's credit improved.

That provision is still tougher than one in a House bill, which would make it easier for issuers to raise rates by letting them do so for customers who are only 30 days late.

The Senate bill would allow issuers, a year after an account is opened, to consider reasons unrelated to the borrowers' account when increasing rates on new charges. That provision is similar to wording in the House bill and in rules promulgated by the Federal Reserve Board last year.

On April 30 the House overwhelmingly passed a card reform bill by Rep. Carolyn Maloney by a vote of 357 to 70. Differences between it and the Senate bill would need to be harmonized before a final bill could be sent to the president and signed into law.

The Dodd-Shelby bill would become effective nine months after enactment, which could speed up the timetable for reforms. The banking industry has argued they would not be ready in time if implementation were required before July of next year.

The House bill would go into effect in a year or when the regulations go into effect, whichever comes first.

The Dodd-Shelby bill would incorporate a provision Maloney added to the House bill that would speed implementation to 90 days after enactment of a requirement that card companies give borrowers 45 days' notice before rate increases, giving the customer time to close the account and pay off the balance at the current rate.

The Dodd-Shelby deal would require regulators to impose parameters ensuring that fees are reasonable and require issuers to give consumers 45 days notice before increasing fees, including finance charges.

The bulk of the Dodd and Maloney bills would codify and expand on rules adopted last year by the Fed and other regulators. The regulations will take effect in July of next year. They will ban double-cycle billing and largely ban rate increases based on off-account credit reasons — a practice known as universal default.

Both bills include a provision supported by the Obama administration requiring promotional rates to last at least six months.

For subprime cards, both bills would ban charging fees of over 25% of the credit limit in the first year.

There are many similarities between the House and Senate bills, but differences remain.

The House adopted an amendment that would require card companies to notify consumers 30 days before closing an account.

Both bills seek to provide consumers warnings about the consequences of making only minimum payments but do so in different ways.

Mortgage Reform
HR 1728
On May 7 the House voted 300 to 114 to pass a mortgage reform bill that aims to abolish lax lending by tightening underwriting standards and increasing liability throughout the mortgage chain.

The bill, sponsored by House Financial Services Committee Chairman Barney Frank, D-Mass., and two North Carolina Democrats, Reps. Brad Miller and Mel Watt, won the support of 60 Republicans.

Frank has predicted the bill will be enacted this year, because of a stronger Democratic majority in the Senate and a growing sense of exasperation with the financial crisis, but Dodd said May 12 that passing a bill this year would be tough.

The House bill would require regulators to develop standards that ensure borrowers can repay their loans and receive a net tangible benefit from refinancings. It would also ban incentive compensation that steers borrowers into costlier loans.

Two major modifications supported by the banking industry were incorporated into the bill at the committee level, where the bill passed 49 to 21 on April 29.

During that debate, the bill was amended to broaden the scope of mortgages that would fall into a qualified safe harbor against legal liability.

As modified by an amendment from Reps. Melissa Bean, D-Ill., and Mike Castle, R-Del., the bill's safe harbor would include certain fixed-rate, adjustable-rate and jumbo mortgages with limited fees and rates that fall within average prime rates. The original bill protected only 30-year fixed-rate loans.

Loans that fall within the safe harbor would be exempt from risk retention requirements.

The panel adopted an amendment from Frank that would give regulators more flexibility in requiring lenders to retain some risk. The provision originally would have required lenders to keep at least 5% of a loan's risk when selling it into the secondary market. But the amendment would let regulators determine how to require lenders to retain some risk and for how long. It also would allow regulators discretion to incorporate securitizers in risk retention requirements.

Other Frank amendments that were adopted clarified that yield-spread premiums would be allowed if they did not correlate compensation with higher-cost terms. Another one would increase liability for securitizers that fail to cure loans that did not meet the bill's underwriting standards.

The committee also approved an amendment from Rep. Paul Hodes, D-N.H., that would let state attorneys general enforce the bill's federal standards.

The bill also contains a provision that would require the Housing and Urban Development Department to pull a controversial rule due to go into effect at the beginning of next year that would update the mortgage settlement process under the Real Estate and Settlement Procedures Act.

The revisions are meant to ensure borrowers receive simple, easy to read, good-faith estimates of their mortgage terms, but the rule came under fire for making the disclosures too complicated and conflicting with other disclosures.

The bill retains its core underwriting standards from a similar bill by Frank, Miller and Watt that the House passed in 2007 that would require originators to assess a borrower's ability to repay a loan at the fully indexed and fully amortized rate according to verified and documented information, including the consumer's credit history, current and expected income, the debt-to-income ratio and other financial resources.

Liability would end at the securitizer that packages the loan, stopping short of the end investor or trust.

Lenders and the secondary mortgage market who fail to write and securitize loans that meet the bill's ability to pay and net tangible benefit would be held accountable by consumers for rescission of the loan and the consumer's costs for rescission, including attorney's fees.

The bill includes a host of other mortgage protections. It would limit prepayment penalties, ban creditors from financing single-premium credit insurance and require specific disclosures for loans with negative amortization features.

Financial Crisis Commission
S 378
The House passed a bill May 6 that would create a 10-member Financial Markets Inquiry Commission to examine the causes of the financial crisis.

The commission would focus on more than 20 areas, including the role of fraud and abuse in the financial sector, rating agencies, lending practices, corporate governance and executive compensation. It would be empowered to hold hearings and issue subpoenas, and it would report its findings to Congress by Dec. 15, 2010.

The measure was part of a bill meant to crack down on financial fraud.

The Senate passed its version of the bill 92 to 4 on April 22. It would require a report within 18 months and give the panel the ability to refer evidence of wrongdoing to law enforcement officials. Its 10 members would be nominated by members of Congress.

Premium Relief and Foreclosure Mitigation
S 896, HR 1106
The Senate passed legislation 91 to 5 on May 6 that would seek to reduce foreclosures and improve bank liquidity.

The bill includes a major provision sought by bankers that would allow the Federal Deposit Insurance Corp. to extend its borrowing authority.

The agency has said that if the bill passed, it would slash in half a planned 20-basis-point premium designed to restore the Deposit Insurance Fund.

The bill by Dodd would more than triple the FDIC's credit line with the Treasury Department, to $100 billion, to help shoulder costs from bank failures. In addition, the bill would make a credit line of up to $500 billion available temporarily in emergency situations until next year; the line could be tapped with approval by the FDIC board, the Fed board, the Treasury and the president.

The bill also would make improvements to the Hope for Homeowners program to help underwater borrowers refinance into government-insured mortgages, and it would provide liability protection to servicers that modify mortgages.

It would also extend the temporary increase on FDIC insurance to $250,000 per account to the end of 2013. The increase was originally supposed to expire at the end of this year.

The bill includes an amendment from Sen. Jack Reed, D-R.I., that would let the Treasury Department hang on to warrants it took for injecting capital into banking companies under the Troubled Asset Relief Program after they have repaid the funds to the Treasury. Reed said the Treasury could better protect taxpayers by letting the market improve while the government retains its stake in financial firms.

Mortgage Bankruptcy
S 896, HR 1106
The Senate rejected a measure 51 to 45 on April 30 that would have let judges modify mortgages in the bankruptcy process.

The measure had been supported by the Obama administration and had cleared the House as part of a bill to increase the FDIC's borrowing authority.

Though several bankers worked with the measure's sponsor, Sen. Dick Durbin, D-Ill., to limit its scope, negotiations broke down. Bankers had sought to prevent borrowers who were offered a loan modification by the government from being able to have their loan modified in the bankruptcy process.

The issue could come back again if an Obama plan to stem foreclosures does not show progress, observers said.

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