The U.S. of Representatives moved to protect borrowers and improve lending disclosure by passing the Mortgage Reform and Anti-Predatory Lending Act late yesterday. Democrats were joined by 64 Republicans to pass the much needed bill by 291 to 127. Mortgage brokers and bank loan officers will have to be licensed and will have to register to be involved in mortgage lending - something that's been needed for years - if the legislation becomes law. No longer will they be able to make deals behind the scenes that cost borrowers more money for years in higher interest payments without fully disclosing the costs.
The bill, if passed by the Senate, would bar a lender from making a loan unless the borrower has a reasonable ability to pay and would set clear federal standards that apply to all lenders. The bill would also prohibit financial incentives to sell mortgages at higher rates than the borrower qualifies for. Brokers defend these incentives, known as yield spread premiums, as worthwhile for borrowers who want to finance certain expenses to hold down closing costs. But the higher rates cost them much more money over the life of loan. Many times the yield spread premiums are not even disclosed to the borrower. The bill's chief proponent, Rep. Barney Frank, said the bill will allow these premiums provided the borrower knowingly agrees to the higher rates.
The bill would also make Wall Street banks responsible for lending practices that violate this law even if their only involvement with the mortgage was to package and sell it as a security. This provision certainly will make banks much more cautious before putting together these securitized mortgage pools. But, banks must abide by Fannie Mae or Freddie Mac standards to sell the loans to these government-chartered entities, so a similar underwriting process is already in place and practiced regularly by the banks.
The White House is strongly opposed to the bill, as are some Congressional Republicans and the mortgage industry. They all insist this will reduce the number of available loans and make it almost impossible for poor people to get loans. But, isn't the problem now that the growing number of foreclosures involve people who could not afford to pay?
Do we really want an ongoing cycle of buying houses and then more foreclosures? If people can't afford the loan why should mortgage companies be permitted to sell them? Sure the mortgage brokers make money whether or not the borrower ultimately pays the loan, but aren't those profits on the backs of people who default while the rest of us suffer? Banks are stuck with loses and people who are making payments on time watch their home prices drop as more homes around them foreclose.
Senator Chris Dodd, Chairman of the Senate Banking Committee, expects to introduce his version of a mortgage bill in the Senate soon. Hopefully this can get done quickly so the markets know what to expect and can be able to begin the process of healing.
Lita Epstein has written more than 20 books including "The 250 Questions You Should Ask to Avoid Foreclosure" and the "Complete Idiot's Guide to Improving Your Credit Score."