Democratic lawmakers are drafting bills that would impose new restrictions on mortgage lenders and loan servicers. The bills would ban yield-spread premiums and prepayment penalties on higher-priced loans, and increase liability for mortgage brokers and investors who buy securities backed by mortgage loans.
Sen. Christopher Dodd — a presidential hopeful and chairman of the Senate Banking Committee — released details of a proposed bill Wednesday that has the endorsement of groups including the NAACP, the AARP, and the Center for Responsible Lending.
The bill proposed by Dodd, D-Conn., would expand the Homeownership and Equity Protection Act (HOEPA) to cover more loans, and create good faith and fair dealing requirements for lenders and brokers.
Rep. Barney Frank, D-Mass., is reportedly proposing similar measures in a draft bill now being circulated, and wants to see investors who buy mortgage loans made liable for practices defined as predatory.
Consumer groups including the Center for Responsible Lending have called for lowering the thresholds that trigger HOEPA requirements, which include prohibitions on balloon payments, prepayment penalties and negative amortization on higher-priced loans.
Some lenders have said expanding HOEPA could worsen the current liquidity crunch in secondary mortgage markets by giving borrowers more rights to sue Wall Street investors who buy securities backed by mortgage loans.
For now, HOEPA applies to first-lien loans with an annual percentage rate (APR) that exceeds by more than 8 percent the rate on Treasury securities of comparable maturity, and second-lien loans with APRs more than 10 percent higher. Loans for which total fees and points exceed $547 or 8 percent of the total loan amount are also subject to HOEPA.
Dodd said lenders and brokers have learned to avoid HOEPA by offering loans with rates and fees just below the trigger points. The bill would tighten the triggers and make them more comprehensive, and include yield-spread premiums in calculating whether a loan triggers HOEPA requirements.
Dodd’s bill would also impose a number of new restrictions on loans that don’t fall under HOEPA, but are more costly than prime loans. Those restrictions would include:
- A ban on prepayment penalties and yield-spread premiums.
- Prohibitions on “steering” borrowers to higher-cost mortgages.
- Required escrow accounts for taxes and insurance.
- Analysis of the borrower’s ability to repay at fully indexed rate.
- Documentation of income, except in unusual circumstances.
The restrictions would apply to higher-priced loans that meet a definition similar to that used in the collection of data under the Home Mortgage Disclosure Act (HMDA), Dodd’s office said.
Under HMDA, first-lien loans are considered “higher-priced” under HMDA if the APR exceeds 3 percent of the rate for Treasury securities of comparable maturity. The threshold for second or junior loans is 5 percent.
Lenders and brokers of all types of mortgage loans would be required to follow “good faith and fair dealing” requirements, with a fiduciary duty toward borrowers. Lenders who pay brokers through yield spread premiums would be liable for the brokers actions.
The bill would also require good faith and fair dealing by loan servicers, limiting the amount and timing of fees servicers could charge other than interest or late fees.