Lawmakers weigh mortgage overhaul

WASHINGTON — Responding to chaos in the mortgage industry, U.S. lawmakers soon will consider a range of long-term measures designed to clamp down on abuses and require that lenders make loans that borrowers can afford to repay.

The package, sponsored by members including Rep. Barney Frank, D-Mass., chairman of the House Committee on Financial Services, would make clear that the rules applied to all key participants in making loans — notably brokers and independent lenders who generally have been overlooked by regulators.

The measure also would impose some liability on Wall Street companies that package mortgages and resell them as securities, a process that has left beleaguered borrowers uncertain where to turn when they fall behind in payments. Further, it would mandate adequate proof of income by those who seek home loans.

"If this had been law on January '06, I think it would have avoided some of the problems we have now," Frank told reporters Monday.

Frank said the bill could pass his committee as early as next week and be voted on by House members before Thanksgiving.

It is less clear that the Senate will move forward this year. Nonetheless, the bill embodies a broad set of federal standards that are expected to influence ongoing debate about preventing a future episode of foreclosures and turmoil in the mortgage industry.

The bill, Frank said, embraces "common sense principles (that) will diminish predatory lending while continuing to support a vigorous mortgage market."

Among the provisions, the bill would:

  • Establish a federal standard for home loans, requiring that mortgages only be approved in cases where borrowers have a reasonable ability to repay.
  • Prohibit any financial incentives that encourage lenders to steer borrowers into more costly loans than they qualify for, such as yield spread premiums paid by banks to brokers.
  • Restrict costly prepayment penalties charged to borrowers who wish to close out their loans, typically to refinance on cheaper terms. Such penalties would have to expire before mortgages are scheduled to reset.
  • Require licensing and registration for brokers and bank loan officers. Consumer advocates have called for such rules as a way to protect borrowers from unscrupulous lenders who may move from state to state.
  • Establish federal minimum requirements, while allowing states to impose tougher rules. Federal rulemaking and enforcement duties would go to agencies such as the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Trade Commission.

Earlier this year, Sen. Charles E. Schumer, D-N.Y., introduced a Senate bill that would overhaul lending standards. More recently, a group of Democratic congressional leaders urged the creation of a czar to help coordinate federal efforts to avoid foreclosures.

But the prospects for a House-Senate deal in the next few weeks seemed uncertain. Lobbyists for private industry recognize that legislation might be inevitable but remain interested in limiting the costs, and also warn that a heavy federal hand could discourage credit availability even for deserving borrowers.

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