What’s in the Mortgage Provisions of the Reform Bill

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We support reforms to the financial marketplace that protect consumers from unscrupulous banks and lenders.

By Consumers Union on Monday, June 21st, 2010

On May 20, 2010 the Senate approved H.R. 4173, groundbreaking legislation to rein in consumer protection abuses in the financial services industry. Read this May 21, 2010 Consumers Union response to this landmark legislation for a helpful overview of the legislation’s major provisions.

One of the major areas of concern driving legislative reform of the financial services industry is mortgage lending. It’s no secret that rampant mortgage lending abuses contributed to the mortgage meltdown leading to record foreclosures levels in modern history. In order to address this significant problem area, the Senate bill must now be merged with a bill passed by the House of Representatives in December. In the next few days it will be up to the Conference Committee to reconcile the differences contained in both bills. Consumers Union and other consumer groups share a goal that new protections can prevent predatory lending, protect against another mortgage meltdown and provide for a strong centralized regulator over the mortgage lending industry.

Here is a summary of the mortgage lending provisions from the House bill that are included in the Senate Wall Street Reform and Consumer Protection Act Base Text.

These provisions are currently under review by the Conference Committee:

Ability to Repay underwriting standard: Both the Senate and the House versions require that lenders verify that borrowers have the ability to repay loans as scheduled. Borrowers must produce and lenders must verify proof of income either through payroll documents, tax returns or bank documents.

Net tangible benefit underwriting standard: Prohibits creditor from extending credit in connection with any residential mortgage loan that involves a refinance unless the creditor reasonably and in good faith determines that the refinanced loan will provide a net tangible benefit to the consumer.

Anti-Steering Regulations: The Senate bill contains more effective anti-steering provisions limiting yield spread premiums that would prohibit loan originators from receiving additional compensation for steering borrowers toward a more expensive and riskier loan than they qualify for based upon credit history and income. The House contains additional anti-steering regulatory authority that would be a good compliment to the Senate bill. These provisions, taken together, would create solid anti-steering limitations. Consumers Union supports the Senate Yield Spread provision with the House language regarding anti-steering regulations.

HOEPA provisions: The House bill contains subtitles improving protections for very high-cost (HOEPA) loans, among them: prohibits prepayment penalties; high cost mortgages cannot contain a scheduled payment that is twice as large as the average of earlier scheduled payments; prohibits a lender from charging a fee to the consumer to modify, renew, extend or amend a high cost mortgage unless this would result in a lower APR on the mortgage for the consumer and the fee is comparable to fees imposed for similar credit transactions secured by the consumer’s principal dwelling.

Prepayment Penalties: Repeals the allowance of prepayment penalties for certain mortgages, including high-cost mortgages subject to HOEPA.

Housing Counseling: The House bill contains subtitles improving protections regarding housing counseling including establishing within HUD the Office of Housing Counseling; charging the Director of which with the duty of establishing a national media campaign promoting the importance of housing counseling; requiring HUD to provide financial assistance to support and expand housing counseling for renters and homeowners; requires organizations receiving federal funding to be HUD certified.

Multifamily Mortgage Program: Directs the Secretary of the Treasury to develop a program to stabilize multifamily properties that are either delinquent, at risk of default of divestment or are in foreclosure (to protect current and future tenants of at-risk multifamily properties).

Appraisals and mortgage servicing: The House bill contains subtitles improving protections regarding appraisals and mortgage servicing.

For more details on what the House passed, see this House Summary of the Wall Street Reform and Consumer Protection Act.

The text of these provisions in the House version has been modified in the Senate version.

Duty of care: Mortgage originator must be appropriately registered when selling mortgages and mark mortgages with unique mortgage identifiers for tracking purposes.

Mortgage Originator Compensation/YSP Restrictions– The Base Text merges the House and Senate Bills approaches so that mortgage compensation can only be financed if all originator compensation is paid by the borrower, and the borrower pays the entire fee by financing it. Permits compensation through the rate for all mortgages as long as they meet the above standard.

Qualified Mortgage Safeharbor: Allows higher interest rate loans into safe harbor; and raises the points and fees limit in the safe harbor from 2% to 3% of the total loan amount and makes other changes to how points and fees are calculated.

HUD/VA/AG/RHS/FHFA. The Consumer Financial Protection Bureau (CFPB) will have sole authority to define “Qualified Mortgage” and it must consult with HUD, VA, AG, and RHS when issuing rules relating to the loans they guarantee and securitize. Before the modifications in the Senate version, under the House bill, these agencies plus FHFA (for Fannie and Freddie loans) had the discretion to define qualified mortgage for these loans.

Assignee/Securitizer Liability: Allows damages for violations of the ability to repay and Yield Spread Premiums (YSP) standards to be set off in a foreclosure.

Liability for Creditors and Mortgage Originators

o Creditors: subject to HOEPA damages—include all interest charges and fees paid by the consumer for violating the ability to repay and YSP provisions. Liable for normal TILA damages for violations of net tangible benefit, duties of care and anti-steering. Deletes House bill’s right of rescission

o Mortgage Originators—subject to damages for violations of the compensation restrictions, duties of care and anti-steering provisions to no more than 3 times originator compensation.

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