The Mortgage Reform and Anti-Predatory Lending Act of 2007 AKA H.R. 3915 was developed to address the current mortgage crisis and protect borrowers from lending abuses that can lead borrowers straight to foreclosure. Highlights if the bill include:
- Mandatory pre-loan counseling for some borrowers
- Certain foreclosure protections for renters
- The elimination of loans with pre-payment penalties, negative amortization and balloon payment loans for high risk mortgages
- Refinance restrictions - Restricting the ambition for borrowers to refinance without providing net tangible benefit
- Minimum loan repayment standards - including taxes and insurance payments - based on adequately verified and documented borrower information
- The creation of a nationwide registration regime for brokers
- A duty of care standards for residential mortgage loan originators
- Regulations to prevent steering a borrower to a loan that is not of their best interest so that the broker can get a larger restriction (good-bye YSP)
While the bill does contain some reasonable and necessary changes to the industry policies and procedures, there are some other details worth mentioning. The bill does a reasonable question of unfair advantages for depository instiutution originators and could possibly put mortgage bankers and originators out of business.
To explain further - there is essentially a line drawn by the bill between people that work for a depository institution that originate mortgage loans and companies whose sole business is to originate mortgage loans that do not accept deposits like checking and savings accounts, such as mortgage bankers and brokers.
Non-depository originators are outraged in particular about three specific elements of the bill. The proposed legislation will prohibit Yield Spread Premiums (YSP) to be paid to brokers, eliminate qualifying benefits for adjustable rate and interest only borrowers, and will essentially declare that 'no doc' and 'lite doc' loans (stated income) to be illegal.
The National Association of Mortgage Brokers (NAMB) expressed grave concerns about the legislation, particularly regarding the elimination of YSP which is at many times an important tool for loan originators - Giving borrowers the flexibility to adjust the amount of cash required at closing. It helps many consumers who are desiring to buy a home, but overcome the hurdle of significantly high closing costs, or the borrowers who realize that by saving their cash as liquid funds in their bank accounts is favorable, adding all the closing costs of their loan into the rate itself. This is a imperative tool for first time home buyers, and critical to enable so many people to manage their own finances while obtaining their 'American Dream'.
The licensing requirements is another element of the bill that has mortgage bankers and brokers stomping their feet. While just about everyone in the mortgage business supports a universal licensing and registration system, many feel that the one being proposed is too strict. The brokers suggest that this creates a strong disadvantage for them when being compared to depository institutions. Specifically, non-depository originators are required to take a 20 hour course, pass a written exam, and secure continuing education while depository lenders are exempt from these requirements.
Furthermore, H.R. 3915 requires that all mortgage originators operating in any state "Which are not depository institutions or institution-affiliated parties of a depository institution must meet effective minimum requirements and at all times must maintain a minimum net worth of 100k, or pledge a surety bond in the minimum amount of 100k". An amendment to this bill stipulates that a non-depository originator must demonstrate 'financial responsibility', but it's unclear as to exactly what that implies? Maybe you have to be a home owner. It's possible that you may not be a home owner, so how much net worth do you have? What portfolios are you vested in? How is your credit?
The MBA released a proposal earlier this month that calls for legislative and regulatory action requiring mortgage brokers to -
- Maintain a financial net worth consistent with FHA requirements (currently 63k plus 25k for each branch office).
- Carry bonding worth 75k or an amount equal to 10% of the brokers annual volume, which ever is higher.
- Provide timely and improved disclosures regarding the services to be performed by the mortgage broker.
- Disclose the total compensation at the quoted rate before the borrower commits to the mortgage broker, including how much of the compensation will be derived from the lender based on the loan terms and how much will be paid by the borrower in indirect fees.
- Disclose to borrowers whether or not the broker is acting as the borrowers agent, and if the broker is acting as the borrowers agent, the mortgage broker aught to be treated as an agent under the law.
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