WASHINGTON — The congressional response to the subprime mortgage crisis continued to evolve Wednesday as Sen. Charles Schumer said he would introduce legislation to give borrowers a simple, one-page form outlining the structure of their home loan.
The plan is a response to widespread criticism that borrowers have taken on risky mortgages without knowing some of their most basic features. The legislation would be modeled largely on a one-page disclosure form developed this year by Alex Pollock, a resident fellow at the American Enterprise Institute and the former chief executive of the Federal Home Loan Bank of Chicago.
"The key information should be stated in a simple and clear way," Mr. Pollock told the New York Democrat during a Joint Economic Committee hearing Wednesday. "The mandatory use of such a form would help achieve the required clarity and make borrowers better able to protect themselves by understanding what the mortgage really means to them."
Sen. Schumer gave few details about the legislation he would propose, but he indicated a desire for bipartisan support.
"I think your idea of one page is excellent. I'm going to introduce something to that effect, and I might ask one of my Republican colleagues to join me," he told Mr. Pollock during the hearing.
Mr. Pollock's form outlines the length of the mortgage, the initial interest rate, and how the payments may inflate over time. It also details the fully indexed rate, the maximum possible rate, and how prepayment penalties or balloon payments may affect the loan.
The form is accompanied by two pages of definitions explaining terms such as "appraised value," "fully indexed rate," "fully indexed housing expense ratio," "prepayment fee," and "payment option."
The debate over what caused the subprime crisis and how to solve it has turned often to the issue of lender disclosure. The Federal Reserve Board is writing rules under the Home Ownership and Equity Protection Act that may boost disclosure requirements. But consumer activists have countered that enhanced disclosure alone is insufficient, and they have targeted controversial practices such as the use of prepayment penalties.
Sen. Schumer's legislation would add to the growing number of subprime mortgage bills lawmakers are considering. Senate Banking Committee Chairman Chris Dodd, D-Conn., said this month that he would propose a comprehensive subprime bill, and Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee, has introduced legislation that would license mortgage originators.
Also, Sen. Schumer has introduced a bill to restrict lending practices and one that would temporarily raise the mortgage portfolio cap and conforming loan limits for Fannie Mae and Freddie Mac. That bill would require the government-sponsored enterprises to spend 50% of the portfolio cap increase on subprime mortgages. However, the senator told reporters after Wednesday's hearing that he may change that provision to require the entire increase to support subprime lending.
"One thing I'm going to explore is increasing the portfolio cap but require 100% of that increase to go into subprime, and you might even get the administration to be supportive," he said. "I'm not sure — but maybe."
