WASHINGTON — A last-minute effort by Democrats to toughen liability standards in a mortgage reform bill up for a vote in the House Thursday raised consternation in the lending industry but ultimately fell flat, along with other amendments designed to beef up consumer protections.
The bill, which would impose sweeping changes on the mortgage industry, including reining in mortgage underwriting practices and creating liability for securitizers, passed the House largely unchanged by a 291 to 127 vote from a House Financial Services Committee version last week.
However, even co-authors of the legislation took stabs Thursday at making significant alterations. North Carolina Democratic Reps. Mel Watt and Brad Miller introduced a sequence of amendments designed to strengthen liability provisions in the bill, including increasing the cost of penalties for lenders that violate provisions of the bill.
"The remedies in the bill now are very modest," Rep. Miller told reporters. "The concern that a lot of the consumer groups have and that I have is that a lot of consumers who are clearly in the right … who are clearly in an illegal loan, aren't going to seek the remedies because the remedy is so modest."
Under the bill, borrowers would be able to either rescind or cure a loan when approaching foreclosure if the securitizer had packaged a loan that did not meet certain standards.
But these efforts threatened to throw off balance a delicate compromise with Rep. Spencer Bachus, the House Financial Services Committee's No. 1 Republican, who came on as a sponsor of the legislation after changes were made striking some specific underwriting standards and stripping some of the bills more subjective terms that bankers said could open the door to potential lawsuits.
Rep. Bachus told reporters that increasing liability in the bill would force him to reverse course and vote against it.
"All along, we've said this isn't about creating unnecessary litigation, this is about protecting borrowers," said Rep. Bachus in a brief interview in between floor debate. "I would have to remove my support because, right now, lenders are hesitant to make loans, and if you increase their liability and their exposure beyond a certain point, it's counterproductive."
Reps. Miller and Watt ultimately failed to find the necessary support during the vote on their amendments. One amendment, to let borrowers claim their actual damages rather than only three times the amount of the lender's fee for a loan that failed to adhere to origination standards, failed on a vote of 250 to 169.
Another, that would have made it harder for the secondary market to qualify for an exemption from securitizer liability, failed on a voice vote.
An amendment designed to increase lender liability was debated but ultimately not voted on. Rep. Frank offered an amendment to let regulators fine loan originators and securitizers that displayed a "pattern or practice" of underwriting or financing loans that failed to meet the bill's duty of care standards.
The fines could include $1 million for a violation and an additional $25,000 per loan, which the Treasury Department would use to pay claims by borrowers who were unable to cure their loan or otherwise be made whole by their lender.
Rep. Frank ultimately opted to withdraw the amendment, saying he needed to tighten its language. He said he intended it only to apply to the secondary market, not loan originators.
Instead, he said, he will hold a hearing in December on this issue, along with an idea by Rep. Mike Castle, R-Del., that would exempt modified loans from secondary market liability.
"We are going to have to withdraw it," Rep. Frank told reporters in between debate on the House floor. "I was not paying attention enough. I did not mean for it to cover originators; it was supposed to be for just securitizers … . We'll come back at it."
But Rep. Frank said he supports higher penalties for securitizers who routinely violate the standards.
"Here's the problem: You don't want to overly penalize people for one thing. But if the penalty for the one thing is too low, then some unscrupulous people may say, 'Fine, I'll pay that penalty,' " he said.
In a letter to all members of the House opposing the amendment, the American Bankers Association said it was concerned that a precedent could be established that a company had exhibited a "pattern or practice" for as few as two violations.
Rep. Frank scoffed at such an interpretation and said, since he is a co-author of the legislation, he could specify what constituted a "pattern." His definition would definitely be more than two instances, he said.
Rep. Frank noted that the amendment, which could be added to the bill during the conference on House and Senate versions of the legislation, was offered in part to appease consumer advocates who have complained that the bill did not go far enough.
"It will come back at some point in the process but only [for] securitizers," he said.
Most of the core components in the version that passed the House Financial Services Committee last week by a vote of 45 to 19 remained intact.
The bill would create national minimum standards for mortgage originators which, among other things, would require that subprime borrowers have a reasonable ability to repay their mortgage or receive a net tangible benefit on refinancing loans. It also would establish limited liability for securitizers that package loans on the secondary market to either rescind or cure loans that failed to meet the standards.
The bill also would create disincentives for lenders to offer a larger spectrum of loans considered high-cost by reducing the triggers for loans subject to additional consumer protections of the Home Ownership and Equity Protection Act.
The House approved by voice vote an amendment from Rep. Frank that clarified several points in the bill. For example, the amendment refined a section defining the scope of the preemption of state standards.
The revised language is meant to explain that the limited preemption applies only to assignee liability remedies that could apply for failing to meet ability to repay and net tangible standards.
The bill would not preempt state standards outlawing fraud or unfair or deceptive practices.
Preemption is one of the most vital issues for most of the banking industry. Several industry groups have said they could not support a bill unless it supersedes all state standards.
Despite industry interest in such a standard, no lawmaker even tried to offer an amendment that would broaden the bill's preemption scope. Industry lobbyists said privately it would do more harm than good to lose a recorded vote on the House floor.