The financial reform bill passed by the Senate Thursday would exempt lower-risk, single-family mortgages from additional risk-retention requirements aimed at ensuring that mortgage lenders keep some "skin in the game" when they package loans for sale to investors.

The Mortgage Bankers Association welcomed the Senate’s approach on that issue, saying it would help facilitate a quicker recovery of housing markets.

The financial reform bill passed by the House of Representatives in December, HR 4173, would require that lenders or companies securitizing loans retain 5 percent of the credit risk of any loan they transfer or sell to investors.

But the House bill would allow "an appropriate agency" to reduce the amount of risk retention or exempt lenders altogether when they make loans regarded as less risky.

Regulators would have the authority to exempt loans that meet certain interest rate thresholds, are fully amortizing, or are included in securitizations in which third-party purchasers provide due diligence and retain first-loss position.

As Congress reconciles the differences between the House and Senate bills, it’s important that the final language on risk retention "does not discourage prudent, responsible lending," the MBA said in a statement.

"Unless improvements are made during the Senate-House negotiations, this bill will likely bring regulations that will only further constrain credit for borrowers, make real estate purchases more expensive, and drag out the ongoing turmoil in the real estate markets," the MBA said.

The Senate approved an amended version of the House’s financial reform bill Thursday in a 59-39 vote, with four Republicans and two independents joining 53 Democrats in favor of the bill.

Although there are many differences in the House and Senate versions of HR 4173, both bills would create a new consumer financial protection regulator tasked with overseeing loans and other financial products offered to consumers.

The Senate bill would create a Bureau of Consumer Financial Protection within the Federal Reserve, while the House bill would establish an independent agency.

Both bills would require that commissions paid to mortgage brokers and loan officers be tied to the amount of the loan, and ban additional incentives for steering borrowers into loans with higher interest rates or risky features. The bills would also limit prepayment penalties when borrowers choose to refinance or pay off a loan early.

Although the MBA said it was pleased that the Senate bill "appreciates the critical role that strong underwriting plays, and gives greater guidance to the regulators tasked with writing the new risk retention rules," the bill "could further be improved by creating one consistent standard for the purpose of regulating residential mortgages."

If Congress insists on risk retention, setting credit criteria and restricting certain loan products and features, lawmakers "should use one consistent standard that works across the board to identify what is and what is not subject to the new rules," the MBA said.

The American Bankers Association warned that the Senate’s financial reform bill is "loaded down with provisions that will greatly undermine traditional banks’ ability to provide credit and help create jobs in their communities."

But the Center for Responsible Lending lauded the bill, saying it would "go far to helping restore trust." The group urged lawmakers to "resist Wall Street’s efforts to water down the bills’ strong provisions," foremost among them the creation of "a strong consumer financial protection agency with power to establish common-sense lending rules."


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