Frank's bill seeks rules for lenders

Federal oversight would be a first for mortgage brokers

Representative Barney Frank wants more lender scrutiny. Representative Barney Frank wants more lender scrutiny. (LISA POOLE/ASSOCIATED PRESS)
Email|Print|Single Page| Text size + By Binyamin Appelbaum
Globe Staff / October 23, 2007

US Representative Barney Frank introduced legislation yesterday that would establish for the first time close federal supervision of mortgage brokers, who have become the dominant providers of home loans - particularly the subprime loans at the heart of the foreclosure crisis.

The legislation would also limit or prohibit some of the lending practices and loan terms closely associated with the ongoing spike in home foreclosures. For example, it curtails prepayment penalties that discourage borrowers from refinancing to more favorable terms.

And it bans lenders from paying rewards to brokers, or their own employees, for persuading borrowers to accept higher interest rates than they are eligible to receive. Federal studies showed that brokers collected billions of dollars in undisclosed rewards from lenders, while borrowers sometimes ended up with unaffordable loans.

The bill would not prevent customers from agreeing to a higher interest rate as a way of financing some or all of their closing costs, including the broker's fees.

"If this had been law in January of 2006, it would have avoided some of the problems that we're having now," said Frank, who chairs the House Committee on Financial Services.

Frank, a Newton Democrat, expressed confidence that the bill will move quickly through the Democrat-controlled House of Representatives, though its prospects after are uncertain.

Three of the largest mortgage industry trade groups quickly released statements of concern or opposition to various parts of the legislation, reminders of a political battle that is already underway and will probably receive a public airing when Frank holds a hearing on the bill tomorrow.

Mostly the groups are concerned that too much regulation will limit the availability of loans.

"The debate surrounding this bill will cut to the heart of finding the right balance between shielding consumers from predatory lending practices and protecting their access to affordable credit," the Mortgage Bankers Association said.

The bill would update the federal government's framework for regulating mortgage lending, which dates in large part to the 1970s. Since then, the industry has shifted from a system where banks made loans to one where banks are basically conduits. Independent mortgage brokers arrange loans on behalf of banks and mortgage companies, who then sell them to investors for packaging and resale as securities. Frank's bill would impose significant regulation on brokers and investors for the first time.

Companies that package loans as investments would be liable for loans they purchase from lenders that violate federal lending standards. Those companies have enjoyed immunity to encourage investment in lending. Borrowers would be able to bring suit.

The legislation also creates a licensing system for all loan originators. States have two years to pass their own legislation; brokers and lenders in states that don't pass laws will be licensed by the federal government. A national database will prevent brokers and lenders banned in one state from resuming business in another.

The ban on compensation for raising interest rates is likely to generate controversy. Other industries use similar incentives to motivate salespeople.

Frank said there was good reason to ban the practice in the mortgage industry specifically. "This is the single biggest purchase most people make," he said. "The incentive to get people to pay more for a steak knife doesn't have the same negative economic consequences."

Frank's bill differs from the latest crop of state laws in limiting or prohibiting various loan terms rather than imposing a general requirement that lenders and brokers only write loans that are suitable for their customers.

"We felt a suitability standard was too vague," Frank said. "We don't want to give people an obligation that is too vague and obscure because you can scare people away from doing anything. We think these are less subjective than suitability."

But industry groups, which generally oppose suitability standards, are not necessarily happier about Frank's approach.

"We have some concerns whether you should hard-wire specific standards versus allowing the market to adjust, and the market has sort of adjusted already," said Roy DeLoach, executive vice president of the National Association of Mortgage Brokers.

Binyamin Appelbaum can be reached at

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