Mortgage industry facing dramatic changes

From Inman News:

Senate Democrats propose new restrictions on mortgage lenders

Senate Democrats have rolled out a bill that, like legislation passed by the House last month, is aimed at preventing mortgage brokers from steering borrowers into higher-cost loans in order to collect bigger fees, and bars prepayment penalties on subprime and high-cost loans.

The Homeownership Preservation and Protection Act of 2007, introduced Wednesday by Sen. Chris Dodd, D-Conn., would require loan servicers to implement loss mitigation strategies before initiating foreclosure proceedings against borrowers.

The Senate bill would also require lenders to follow existing federal guidelines for subprime and nontraditional mortgage loans, and lower the threshold for loans to fall under even stricter requirements for high cost mortgages as defined by the Home Ownership Equity Protection Act, or HOEPA.

But like legislation approved by the House Nov. 15, Dodd’s bill would limit the “assignee liability” of investors who buy securities backed by mortgage loans, protecting them from class-action suits by borrowers.

And while the House bill, HR 3915, would create a national registration system for all mortgage originators requiring background checks, fingerprinting, education and testing, Dodd’s Senate bill includes no such provision.

Absent from both bills is language advocated by mortgage lenders and the Bush administration that would create uniform national standards for mortgage originators preempting state laws, in order to eliminate what critics say is a patchwork of regulations that varies from state to state. Without a uniform standard, states would be allowed to adopt stricter rules for lenders not regulated at the federal level.

Mortgage Bankers Association Chairman Kieran Quinn said several provisions of the Dodd bill “concern us deeply,” including “duty of care” and assignee liability requirements.

Although investors in mortgage-backed securities would not be subject to class-action lawsuits, they could still be sued by individual borrowers if they did not take steps to ensure the loans they invest in are originated in accordance with the bill’s restrictions.

The bill would institute a “duty of good faith and fair dealing” for all mortgage originators, both lenders and brokers, and establish a fiduciary duty for brokers to represent the interests of borrowers in arranging loans.
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The bill would trigger consumer protections, including a ban on yield spread premiums, prepayment penalties, and the financing of points and fees on loans defined as “high cost” under HOEPA, and would tighten the definition of loans that fall within the scope of HOEPA.

First mortgages with annual percentage rates (APRs) exceeding Treasury securities of comparable maturities by 8 percent would be considered “high cost.” The threshold for second mortgages would be 10 percent.
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Originators of all loans would owe a duty of good faith and fair dealing to borrowers, and make “reasonable efforts to make an advantageous loan to the borrower,” in light of the borrowers circumstances.

Mortgage originators would be prohibited from steering borrowers to more costly loans than they are qualified for. Yield spread premiums — to be banned altogether on high-cost, subprime and nontraditional loans — would be allowed only on “no-cost” loans. Brokers receiving yield spread premiums would be barred from receiving other compensation from any other source and prepayment penalties would be prohibited.

The bill would also establish good faith and fair dealing requirements for appraisers and loan servicers.

Appraisers would be required to obtain bonds equal to 1 percent of the value of the homes appraised. And in cases where appraisals exceed the market value of a home by 10 percent or more, borrowers would have legal cause of action against the lenders and would be allowed to collect damages from the appraiser’s bond.