Legislation marked up by the Senate Banking Committee Sept. 21, imposes much greater disclosure requirements on so-called high yield mortgages but includes language that allows the Federal Reserve Board to ensure against a spillover effect for insured lenders and especially the secondary mortgage market.
The so-called anti-redlining legislation the Community Development, Credit Enhancement and Regulatory Improvement Act, S. 1275, defines a "high-cost mortgage" as a consumer lending transaction other than a residential mortgage secured by the borrower's home.
To be defined as a high yield instrument, an instrument must carry a rate of interest either greater than 10 percentage points above Treasury securities of similar maturity or the total points and fees payable by the consumer at, or before, closing of the transactions that will exceed the greater of 8% of the total loan amount, or $400.
The bill, sponsored by Senate Banking Committee Chairman Donald W. Riegle Jr., D-Mich., and Sen. Alfonse M. D'Amato, R-N.Y., is aimed at nonbank lenders offering very high yield mortgage instruments, such as nonbanking subsidiaries of banks or nonbank finance companies. It is a reaction to such recent cases as one in Georgia involving a nonbanking subsidiary of Fleet/Norstar.
The bill also says that those involved in this type of lending can't impose a penalty for prepayment of the loan and can't include a balloon repayment provision.
Of importance to the secondary market and banking regulators, the legislation was amended to allow the Fed "to exempt specific mortgage products from the prohibitions generally applied to high-cost mortgages if such an exemption is "in the interest of the borrowing public" and "strengthens home ownership."
"We believe it was drafted too broadly," said Mike Ferrell, staff vice president and legislative counsel for the Mortgage Bankers Association of America. "And we worked hard to get it to exclude refinances - there was nothing in the bill that said refis were high risk mortgages, yet the way it was written they'd be captured anyway. We didn't think that was the intent that gave rise to the bill. We just wanted to get the bill back to its original intent.'
One amendment would also enable consumers facing foreclosure or other "bona fide personal emergencies" to waive the three-day cooling off period for high cost mortgages just as they can waive the existing Regulation Z cooling-off period.
Another amendment would allow lenders to select third-party providers for services, such as an appraisal, that cannot be selected by the borrower due to a conflict of interest. It allows federal regulators to transfer enforcement actions brought in a state court to federal court.
It is unclear if Congress will have time this fall to pass the legislation, although the administration has declared it a priority. Ferrell predicted that it would be passed this year.
