Requiring lenders to retain at least 5 percent of the risk associated with "non-qualified" mortgages would make it impossible for many lenders to operate, Kittle said, including companies that rely on warehouse lines of credit rather than deposits for short-term loan funding.
Lenders already have "skin in the game," Kittle said, through their responsibilities to investors. At a time when policymakers are "focusing so much of their efforts on injecting capital into the financial services sector," he said, requiring them to retain a predetermined percentage of risk "would threaten to further impair their ability to lend at all."
But Massachusetts Commissioner of Banks Steven Antonakes warned Congress not to strip states of their power to enact and enforce their own, stricter laws governing mortgage lenders.
Speaking on behalf of the Conference of State Bank Supervisors, Antonakes said states have been "leading the fight to rein in abusive lending" through predatory lending laws, licensing and supervision of mortgage lenders and brokers, and enforcement of consumer protection laws.
"Rather than thwarting or banning such protections, the committee and Congress should incorporate the early warning signs and interventions that state laws and regulations provide in your legislation," Antonakes said in his prepared testimony.
Congress should eliminate federal preemption of state consumer protection laws rather than establishing a "federal ceiling" of regulation and exposing consumers "to even greater potential risk than exists today," Antonakes said.
Antonakes said state regulators began building a licensing and registration database in 2003 to track problem lenders — an effort endorsed by Congress in passing the Housing and Economic Recovery Act of 2008 (HERA).
The resulting Nationwide Mortgage Licensing System, launched in January 2008, is now being used by 24 states, and Antonakes said 43 states are expected to be on board by January 2010.
Antonakes agreed with NAR that lawmakers should not limit a "safe harbor" to 30-year, fixed-rate mortgages.
"The limitation on loan repayment periods less than 30 years makes little sense to us," Antonakes said. If borrowers can afford to make the higher monthly payments, he said, 15-year or 20-year mortgages "offer the opportunity to save tens of thousands of dollars in interest and an accelerated growth in real equity."
Michael Calhoun, president of the Center for Responsible Lending, said the bill’s proposed assignee liability provisions, which would preempt state laws, would be "a step backward for consumer protection." State laws are the strongest tools consumers have to save their homes from foreclosure, he said.
In his prepared testimony, Calhoun said HR 1728 won’t stop Wall Street investors from providing the financing for risky loans, because it would prohibit borrowers from filing class-action suits and limit the ability of consumers to seek recourse against the owners of their loans unless they were in foreclosure.
Calhoun also complained that as written, the bill would not eliminate "perverse incentives" that encouraged loan originators to push risky products on consumers. He called for more powerful anti-steering prohibitions and a tighter ban on yield-spread premiums.
One of the most effective steps lawmakers could take would be to ban prepayment penalties altogether, allowing consumers to refinance at will if they are able to find a better mortgage, Calhoun said.
The next stop for HR 1728 is a Tuesday markup session, during which the committee will make changes to the bill based on input received at the hearing.
A previous version of the bill, HR 3915, passed the House in 2007 but was opposed by the Bush administration and not taken up in the Senate.
In introducing HR 1728 in March, Rep. Brad Miller, D-N.C., said the foreclosure crisis has "wreaked havoc" on the economy and that "the industry’s arguments for watering the bill down are not at all convincing" (see story).
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