House Passes Mortgage Reform to Fight Predatory Lending and Curb Foreclosures

May 7, 2009 Issues: Economy

(Washington D.C.)- The U.S. House of Representatives today voted 300-114 in favor of H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act, bipartisan legislation aimed at protecting homebuyers from predatory lending that has led to the recent mortgage crisis across the country. 

“We must finally act to address the irresponsible, and in some cases predatory, lending practices that significantly contributed to the wave of foreclosures devastating our neighborhoods,” said Rep. Sander Levin.  “Most basically, this bill says that you can’t write a mortgage that a consumer cannot reasonably afford to repay, and you can’t steer them from an affordable mortgage to an unaffordable one."

The legislation is especially critical to Michigan, which according to RealtyTrac had the 6th highest foreclosure rate in nation during the first quarter of 2009.  Over 33,000 Michigan families received a foreclosure filing over the three month period.

“The subprime and exotic mortgages that became so prevalent in recent years have led to an unacceptable number of families losing their homes.  This crisis threatens the ability of middle class families to afford the American Dream of homeownership,” said Rep. Levin.

A summary of the bill is below.


H.R. 1728, the Mortgage Reform and Anti Predatory Lending Act of 2009 is aimed at curbing abusive and predatory lending – a major factor in the nation’s highest home foreclosure rate in 25 years.  The bill would outlaw many of the egregious industry practices that marked the subprime lending boom, and it would prevent borrowers from deliberately misstating their income to qualify for a loan.

The bill would ensure that mortgage lenders make loans that benefit the consumer and prohibit them from steering borrowers into higher cost loans. It would establish a simple standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold. For mortgage refinancing, the bill requires that all loans provide a net tangible benefit to the consumer.  Also, for the first time ever, it would make the secondary mortgage market responsible for complying with these standards when they buy loans and turn them into securities.

Under the measure, lenders and the secondary mortgage market who don’t comply with these standards would be held accountable by consumers for rescission of the loan and the consumer’s costs for rescission, including attorney’s fees. They would also have the option to rework a loan to conform to the bill’s standards within 90 days of receiving notice from the consumer.

In addition, the bill encourages the market to move back toward making fixed rate, fully documented loans. During the housing boom, mortgage lenders moved away from commonsense underwriting practices, giving rise to risky, exotic mortgages and practices such as “no doc” lending and allowing loans with “negative amortization” features.

The legislation would also:

  • Prevent Predatory and Abusive Lending Practices: Statistics show that many homeowners in the current mortgage crisis received more expensive loans than they qualified for. This is often the result of a predatory practice known as “steering,” in which a broker or bank loan officer is compensated for directing applicants toward more costly mortgages.  H.R. 1728 would ban yield spread premiums and other abusive compensation structures that create conflicts of interest or reward originators that “steer” borrowers.  The bill would also require originators to disclose to consumers the compensation they receive from the transaction.
  • Hold Creditors Responsible for the Loans they Originate: The bill would require new federal rules to be written to require creditors to retain an economic interest in a material portion (at least 5 percent) of the credit risk of each loan that the creditor transfers, sells, or conveys to a third party. Federal banking agencies would have the authority to make exceptions to the bill’s risk retention provisions, including form and amount.
  • Protect Tenants who Rent Homes that go into Foreclosure: Renters can also be affected if the homes that they rent go into foreclosure.   This legislation will provide protections for renters so that they receive proper notification and are given time to relocate before the home they rent is foreclosed.