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Tougher Mortgage Lending Laws Looking More Likely

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Bloomberg News

Published: September 18, 2007

U.S. Rep. Barney Frank, whose efforts to clamp down on mortgage-lending abuses were thwarted by the last Republican Congress, is about to try again. He should have better luck this time.

Frank, the Massachusetts Democrat who runs the House Financial Services Committee, soon will introduce legislation aimed at shielding consumers from deceptive practices. His proposals come after those floated by his Senate counterpart, Banking Committee Chairman Christopher Dodd, and President Bush.

With a record number of homeowners facing foreclosure, momentum is building behind legislation that lawmakers will be able to cite when they run for re-election next year. Mortgage industry officials are bracing themselves.

'There has been such an incredible meltdown of the industry, with so many people taking losses, something will emerge that will be tougher than expected,' says Wright Andrews, a lobbyist who fought Frank's previous effort to get a bill on predatory lending. 'I don't think that members on either side of the aisle will object to a much tougher bill than you would have seen a couple of years ago.'

Any new law likely will focus on what lawmakers say are the worst abuses: setting stricter standards for mortgage originators, banning mortgages to consumers who have no reasonable ability to repay, and abolishing some prepayment penalties on loans.

The legislation is less likely to include a proposal Frank advocates that would hold those who package mortgage-backed securities for sale to investors responsible for flawed loans. Nor is it likely to include a government bailout for homeowners.

Fed Ordered To Write New Rules

The collapse of the mortgage market for subprime borrowers (those with bad or sketchy credit histories) has roiled global credit markets, contributed to the largest U.S. housing slump in 16 years and sparked demands that Washington respond.

At least 100 mortgage companies have sought buyers or halted business since the start of 2006, according to Bloomberg data.

The Federal Reserve also has come under pressure to wield its power to write consumer-protection rules, with Frank warning a Fed official in June to 'use it or lose it.' Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson are scheduled to testify this week before Frank's committee.

Frank argues that the subprime crisis might have been averted had the last Republican-led Congress passed the predatory-lending measure he pushed with Representatives Mel Watt and Brad Miller, both North Carolina Democrats.

Industry, Consumer Balance Sought

In fashioning his proposals this year, Frank, who became chairman when the Democrats took control of Congress after the 2006 elections, says he is mindful of the need to balance consumer protection and the interests of investors and the industry.

'In the subprime market, it is clear that financial innovation outstripped regulation,' Frank said at a hearing Sept. 5. 'Can we come up with regulation that will diminish the harm without chilling the whole operation?'

His proposal to hold firms that bundle mortgages into securities liable for bad loans is causing the most consternation among investor groups.

So-called assignee liability 'is one of the principal concerns of the secondary market,' said George Miller, executive director of the American Securitization Forum, a New York-based industry group.

'There may be no practical ability, even with extreme care and diligence, to avoid funding defective loans,' Miller said. 'And if that's the case, the only recourse is for investors and others to stop providing liquidity to the market.'

Although industry officials are all but resigned to some new legislation, they warn lawmakers they won't roll over and accept provisions they find objectionable.

'If the industry is flat out against a bill, it's going to be a real uphill battle to pass it,' said Kurt Pfotenhauer, senior vice president of the Washington-based Mortgage Bankers Association. 'If it's a bad bill, we'll fight it.'

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