A bill that would increase federal oversight of mortgage brokers and a separate proposal to provide $300 million to nonprofit groups that help troubled borrowers is the “first major legislation to deal with the subprime foreclosure crisis as a weakening U.S. housing market threatens the overall economy,” says author Sen. Charles Schumer, D-N.Y.
Schumer said he introduced the plan to increase oversight of mortgage brokers and step up outreach to borrowers in order to implement recommendations of a Congressional report released last month. The report, “Sheltering Neighborhoods from the Subprime Foreclosure Storm,” was produced by the Joint Economic Committee.
Schumer’s initiative, which has the support of Senators Sherrod Brown, D-Ohio, and Bob Casey, D-Pa., includes a bill that would extend federal enforcement of the Truth in Lending Act to all mortgage brokers and non-bank loan originators.
The bill, The Borrower’s Protection Act of 2007, would impose suitability standards for assessing a borrower’s ability to repay a mortgage, and hold lenders accountable for the actions of brokers and appraisers.
Schumer’s bill would establish a fiduciary duty for mortgage brokers and originators and create a “faith and fair dealing” standard for all originators. Originators would be required to underwrite loans at the fully indexed rate and create escrow accounts for subprime loans to pay taxes and insurance.
The legislation would also prohibit mortgage brokers from “steering” — counseling borrowers to accept rates, charges and principal amount or prepayment terms that are not suitable for them. Lenders would be held responsible for policing their brokers and appraisers, and originators would be prohibited from influencing the appraisal process.
Schumer also proposed that Congress appropriate $300 million through the Department of Housing and Urban Development to fund nonprofit groups that provide counseling and outreach to troubled borrowers.
The money, which would go to HUD-certified organizations with proven track records in foreclosure prevention and intervention, would help the groups cope with growing caseloads, he said.
“To be successful, these programs require one-on-one counseling with the homeowner and negotiations with a variety of stakeholders — making them very resource-intensive,” Schumer’s office said in a press release. “The rising wave of subprime foreclosures has caused existing programs to become overwhelmed by requests for assistance, and they are struggling to give homeowners in trouble the assistance they require in order to successfully workout a suitable payment plan with the lenders.”
Schumer, Brown and Casey are urging lenders that belong to industry groups such as the Mortgage Bankers Association to provide matching funds at a ratio of $2 for each $1 in federal spending on foreclosure prevention.
The Mortgage Bankers Association praised Schumer’s proposal to provide assistance to nonprofit groups that assist borrowers, noting that lenders have been funding such efforts for years. But as it has in the past, the group said increased federal regulation of mortgage brokers and originators would be bad for consumers.
“The legislative remedies that Sen. Schumer presents today will have the unfortunate effect of limiting choice and restricting mortgage credit to the neediest borrowers, thereby hurting those people it is ostensibly designed to help,” MBA Chairman John Robbins said in a statement.