ALERT: HFSC Hearing on “The Mortgage Reform and Anti-Predatory Lending Act of 2009” (H.R. 1728)

    23 April 2009

    This is an interim update on today’s HFSC hearing on “The Mortgage Reform and Anti-Predatory Lending Act of 2009” (H.R. 1728), a measure to curb predatory lending that is anticipated to be marked up in HFSC next week. Key issues discussed so far include: (1) appraisal standards and possible Kanjorski amendment; (2) federal regulation of appraisal management companies; (3) need to further refine the credit risk 5 percent retention requirement; (4) assignee liability; (5) preemption; and (6) lack of Republican support for measure compared with previous H.R. 3915 measure of the 110th Congress.


    By way of background, H.R. 1728 is a tougher version of an earlier measure (H.R. 3915) that passed the House in the 110th Congress stalled in the Senate. Whereas the older version of the measure primarily targeted subprime lending practices, the present measure is broader in scope and certain measures would apply to non-traditional loans such as adjustable rate mortgages as well. The bill would increase liability for mortgage originators, require originators to make the loans only to borrowers who they can reasonably repay them, includes provisions for investors who purchase non-traditional loans, imposes “skin in the game” requirements including a 5 percent retention requirement that loan originators have a 5 percent share of credit risk, includes an assignee liability provision, among other measures.


    To recap, key issues discussed at the hearing so far include:


    * Appraisal Standards & Consumer Protections / Kanjorski Amendment. In his opening remarks, Rep. Kanjorski (D-PA) emphasized the need for consumer protections in appraisal standards. Rep. Kanjorski indicated that he is preparing an amendment to H.R. 1728 that would, among other things: (1) provide subprime borrowers with access to a written appraisal; (2) improve independence standards so appraisers can operate as honest referees, free of interference; and (3) enhance confidence in the results produced by automated valuation models.


    * Federal Regulation Over Appraisal Management Companies. Rep. Kanjorski (D-PA) further indicated that appraisal management companies have little supervision, and noted that Congress must ensure that these entities that operate in the nation’s financial system be subject to appropriate oversight.


    * Need to Further Refine the Credit Risk 5 Percent Retention Requirement in Section 213. This provision was a focal point of issues in opening statements, and would require originators who make non-traditional mortgage loans to retain a 5 percent stake in those mortgages until they are paid off. Chairman Frank (D-MA) has previously admitted that the 5 percent retention requirement in the bill needs further refining. At the hearing, Rep. Kanjorski (D-PA) conceded that although the skin-in-the game requirement was important, that the 5 percent retention requirement needs to be perfected. Rep. Castle (R-DE) emphasized that Congress needs to approach the credit risk retention requirement closely – as the requirement would force originators to have a 5% share of credit risk. Rep. Castle indicated that the bill presents the right concept but we need to make sure we get the details right; for example, how the 5% retention requirement would impact small lenders and how the requirement would be implemented? Further, Rep. Garrett (R-NJ) indicated that he has serious issues with sect. 213, the credit risk retention requirement; he expressed serious concerned over how the condition is crafted, how it would work, and how it would impact small lending institutions. Rep. Garret said he would like to craft a more feasible alternative. Rep. Minnick (D-ID) emphasized that loan originators should have to keep certain percentage on every loan they take, and that originators should not be able to shed all risk.


    * Assignee Liability. Witnesses expressed concern over the assignee liability provision which would enable borrowers to sue (to rescind their mortgage and recoup legal costs) their lenders and investors who purchase their loans, where the origination of the loan violated the standards of the bill. Mr. Calhoun, Center for Responsible Lending, criticized that the assignee liability remedies for consumers did not go far enough.


    * Preemption. Several consumer protection and state regulatory advocates expressed concern over whether the bill would preempt tougher state laws on predatory lending. Mr. Antonakes, Conference of State Bank Supervisors, said that the HFSC needs to clarify that the bill’s measures would be a floor and not a ceiling; that the measure would not preempt more strict state laws. Similarly, Ms. Saunders, National Consumer Law Center, criticized the bill and said her group would not support the legislation in part because the bill preempts some tougher state laws.


    * Lack of Republican Support for Measure Compared With Previous H.R. 3915 Measure of in 110th Congress. Ranking Member. Bachus (R-AL) noted this bill is very different from the 110th Congress’s version of the bill that passed with Republican support. He said he feels this bill may cause people to turn to payday lenders and other alternative lending. In particular, Ranking Member Bachus indicated that Congress needs to further look at credit risk retention requirement.

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    Written by Kirsten Wegner and Vinoda Basnayake