WASHINGTON — Mortgage lending reform, the banking issue that dominated Congress' attention last year, has dropped off the radar, leaving its fate unclear.
The once-burning issue was upstaged by the pressing need to help struggling borrowers remain in their homes. The Senate Banking Committee passed a foreclosure-prevention bill last week, and the House approved a similar bill May 8.
But champions of broader anti-predatory-lending reform say Congress is missing its best chance to mandate tighter underwriting practices and prevent a repeat of today's problems.
"The Senate has devoted all of its attention to trying to put out the existing crisis as opposed to setting rules of the road going forward," said Rep. Mel Watt, D-N.C., who has sought to shore up lending standards since 2004. "It's not clear to me what their intentions are about the predatory lending bill — they probably have none."
Reps. Watt; Brad Miller, another North Carolina Democrat; and House Financial Services Committee Chairman Barney Frank, D-Mass., shepherded such reform legislation through the House last November, passing the bill 291 to 127.
Senate Banking Committee Chairman Chris Dodd offered an even tougher bill in December but has held no hearings on it.
Rep. Watt: "We reported our bill out of the House thinking that the Senate would act on it as soon as Senator Dodd got back off the presidential campaign trail, but … he just kind of turned his attention to the more urgent stuff."
His frustration with the Senate is clear. "Putting out a crisis is not nearly as good as preventing a crisis," he said in a May 21 interview.
Sen. Dodd defended his priorities. "Shutting the door to make sure no one does that again" remains a goal, he said after his committee voted 19 to 2 for the foreclosure-prevention bill on May 20. "But the reality is, no one's making subprime loans."
The Connecticut Democrat in a brief interview said he considered folding lending reform into the foreclosure-prevention package but decided it would be too difficult to pass.
"I would like to come back to my predatory-lending bill once I get this done. … I thought about trying to do it with this, but I think that was probably biting off more than I could chew," he said.
Sen. Dodd said advancing lending reform this year will depend on how long it takes to wrap up the foreclosure-prevention bill after Congress returns next week from its Memorial Day recess. He and Rep. Frank have pledged to send the legislation to the president's desk by July 4.
It does include one lending reform: mandatory minimum registration and licensing standards for loan originators and brokers. (See
Rep. Frank said the Senate cannot blame a crowded schedule.
"Look, it's rarely time; it's will," he told reporters May 6. "With three full months of legislating left, the problems are always will, not time."
Some advocates are baffled by Sen. Dodd's approach.
"He proposed a very good bill that would outlaw the kinds of practices that caused the problems we are now trying to address through foreclosure remediation," said John Taylor, the president and chief executive of the National Community Reinvestment Coalition. "I don't know what he is waiting for because we have a Democratic House and Senate. … This Congress needs to show its mettle here and now … , and the one responsible for delivering that is Senator Dodd."
Sens. Charles Schumer, D-N.Y.; Robert Casey, D-Pa.; and Sherrod Brown, D-Ohio, were the first committee members to introduce mortgage reform legislation last spring, and they have defended the Senate's commitment to the issue.
Sen. Casey said the topic is still a priority but has been stymied by shifting priorities and timing.
"It is something that is urgently needed," he said, "and I don't think there is any diminution in the feeling that I and others have about the necessity for it. It's really just a question about the order of the work and what we can get done."
Sen. Casey said the odds of enactment rise if Democrats widen their majority in the Senate and win the White House this fall. "That changes the dynamic for legislation in a positive way."
The market and regulatory frameworks are in flux, too.
Since the credit markets seized up lending has become severely restricted and subprime lending has virtually ceased. The Federal Reserve Board also is expected to complete mortgage lending rules in July under the Home Ownership and Equity Protection Act to cover the bulk of the practices lawmakers have sought to rein in.
These rules are expected to establish tougher underwriting standards for higher priced mortgages by requiring lenders to verify that borrowers have the ability to repay.
Prepayment penalties would be limited, and requirements on yield-spread premiums, appraisals, loan administration and servicing, advertising, and disclosures would all be toughened.
Also, the Department of Housing and Urban Development is trying to improve mortgage disclosures under the Real Estate Settlement Procedures Act, and the Securities and Exchange Commission may crack down on credit rating agencies.
If the foreclosure-prevention legislation is enacted, the government-sponsored enterprises will get a new regulator and the Federal Housing Administration's role will be expanded.
"A lot has happened since the fall. There is no subprime market. A lot of those companies have gone out of business. Lending has totally tightened. You've got the Fed regulations … that most people expect to be pretty strong," said Paul Leonard the vice president of government affairs at the Financial Services Roundtable's housing policy council.
What is more, Rep. Frank is gearing up for a massive financial regulatory restructuring that is likely to focus on safeguards against systemic risk, increased consumer protection, agency consolidation, and beefing up regulation of investment banks. Part of his goal is to ensure that systemwide breakdowns stemming from the depth and breadth of interconnectivity of financial companies and their products, like securitized mortgages, are properly prepared for.
"The public policy debate has evolved," said Stephen O'Connor, the senior vice president of government affairs at the Mortgage Bankers Association.
"The original discussion was focused on who is to blame and how do we make sure this doesn't happen again," he said. "Then it evolved to what do we need to do to stabilize the market … and then it migrated on to what do we do to assist borrowers."
Mr. O'Connor called any legislative reform package "a moving target." Congress would "return to it in some measure in the next Congress," he predicted, "but how they return to it and in what form and when will be determined by what happens in the marketplace in the next several months."
