Action on legislation that would impose greater regulations and disclosure on high cost second mortgages is expected to accelerate as a component of a bipartisan legislative package now being drafted in the Senate Banking Committee.
In fact, a markup of the legislation could occur later this month, according to the comments of one member of the panel. That is raising concerns among banking regulators and the secondary market because of fears the legislation will have an unintended spillover effect on the general mortgage market, home equity lending and the secondary market.
However, late Thursday, several of those working on the high cost second mortgage provision said it was being redrafted to meet the concerns of industry and consumer groups.
"Several defects have been pointed out to us, and we are seeking to address them," one said. It is unclear when the redrafted bill might be available.
The legislation was introduced earlier this year by Sens. Donald W. Riegle Jr., D-Mich., and Alfonse D'Amato, R-N.Y., in response to perceived abuses, such as ultra high rates and high levels of repossessions stemming from these instruments.
The mortgages are primarily sold by nonbank lenders or by nonbanking subsidiaries of bank holding companies.
The bill would amend the Truth-In-Lending Act, known as Reg Z, to require additional disclosures to consumers who take out these types of mortgages on their homes. It would also restrict the terms under which these instruments can be offered.
One test for a high cost second mortgage under the original legislation would have been an annual percentage rate on the mortgage that exceeds the yield on comparable Treasury notes by 10 or more percentage points. Another test would have been that after the loan is made, the consumer's total monthly debt payment would exceed 60% of the consumer's growth income.
The banking industry and the Federal Reserve Board have succeeded in taking some of the edge off of the original legislation. For example, the latest version eliminates the use of the debt-for-income ratio as a test for defining high cost mortgages, as well as eliminating unnecessary disclosures that are already provided to customers.
The last available draft also places a dollar minimum on the "points and fees- test in order to protect against inadvertently bringing legitimate small loans under the coverage of the new provisions.
Moreover, certain features could not be included in a high cost mortgage: prepayment penalties, balloon payments, negative amortization and advance payment of principal and interest.
The problem with the legislation is that it has taken on a life of its own, as a major component of a community development banking bill. Senators want it to show their constituents--and deep pocket campaign contributors--that they are working for them.
Besides the "anti-redlining." as the high cost second mortgage instrument is called, and community development bank provisions, the legislation being drafted by the Senate Banking Committee staff in consultation with the Treasury Department also contains language aimed at reducing the "paperwork burden" on banks and facilitating creation of a secondary market in small business loans.
The fear of the industry and regulators is that legislation developed under such pressure will have an unintended effect on other markets, especially the secondary market.
Given the high-powered players with interest in the legislation, especially, Senate Minority Leader Robert Dole, R-Kan.. for one. many industry officials are privately voicing concern about what might result.