No More Yield Spread Premium, if Congress Passes.

The House Financial Services Committee passed a sweeping predatory-lending reform bill that would enact major changes throughout the mortgage industry if put into law by Congress, including the elimination of the Yield Spread Premium (YSP) - a provision that was singled out and applauded by consumer groups.


The passage of the Mortgage Reform and Anti-Predatory Lending Act of 2007, or H.R. 3915, followed an all-day session by committee chairman Rep. Barney Frank.

The bill is the product of numerous private and public discussions Frank has held all year with representatives of the mortgage industry, regulators, consumer groups, lawmakers and other related groups.

The new legislation would require that all mortgage originators to hold licenses under state or federal law, and would force lenders to be reasonably sure borrowers are able to repay the loan they are offered.

Every loan document would identify the originator under the national registry.

The bill would require criminal background checks, testing to demonstrate basic knowledge of loan products and continuing education and professional ethics training for all originators.

At the onset of the loan process, loan originators would have to provide a simple, straight-forward disclosure of their role in a mortgage transaction, including all fees and other sources of compensation.

Another of the bill's provisions would reduce the "points and fees" trigger for "high-cost loans" under the Home Ownership and Equity Protection Act (HOEPA) from 8% to 5% and include all costs and fees charged to the borrower.

The proposed law would also eliminate indirect compensation to mortgage brokers through means such as YSPs.

A wide spectrum of federal regulators - including HUD, OCC, OTS, and FDIC - would draw up the regulations prohibiting originators from steering consumers toward a loan "not in the consumer's interest."

If a securitized subprime mortgages lacks income documentation, the bill would allow borrowers to rescind the loan and recover transaction costs on the stated-income loan.

While the bill would prohibit prepayment penalties on subprime loans completely, prepayment penalties on a prime loan would have to expire at least three months before interest rates reset on a prime adjustable-rate mortgage.

The proposed legislation would also extend some liability to certain parts of the secondary market to ensure that investment banks and others securitizing the loan fundings monitor them for quality and underwriting standards.

If secondary market investors follow certain due diligence and other practices, the bill allows for the creation of safe harbors to shield them from liability.

The Mortgage Bankers Association (MBA) issued a letter in opposition to several major provisions of the bill, including language that would require closer scrutiny of subprime loans that they say would make it more difficult for borrowers to secure such a loan.

The MBA criticized language demanded successors in interest in a foreclosed property to allow existing tenants to remain for 90 days.

The group said the measure in its current form failed to ensure that new federal rules for originators would preempt state and local laws.

"The proliferation of state and local lending laws has resulted in an uneven environment for both consumers and lenders," said the MBA in its letter.

Meanwhile, the Center for Responsible Lending (CRL) applauded the bill's provisions that targets incentive-based pay, specifically noting YSPs.

"If a borrower qualified for a 6.5 percent rate and the broker put them in a loan for 7 percent, the broker got an additional payment from the lender for doing that," said CRL president Mike Calhoun.

Calhoun suggested a prohibition on YSPs would mean that brokers would lose their motivation to steer borrowers to more expensive loans.

He also said the proposed law does not go far enough in holding the secondary market accountable for loans that have soured, claiming that some investors have not only failed to correct abuses, but in some cases actively supported them.

The National Association of Mortgage Brokers (NAMB) voiced serious concern about the elimination of the YSP, however.

"The indirect compensation mortgage brokers receive from lenders is a defendable fee that actually lowers closing costs to consumers," said NAMB President George Hanzimanolis.

"It is an imperative tool for first time homebuyers, and critical to enable so many people to own a home and manage their finances."

NAMB also suggested that many lenders will reject making loans at the heightened HOEPA threshold, which Hanzimanolis likened to government sanctioned ‘red-lining.'

"These restrictions are going to cut off credit to people who are generally in lower economic areas who deserve and need credit," said Hanzimanolis.