A sweeping financial reform bill that would create a Consumer Financial Protection Bureau with jurisdiction over mortgages and other loans has been approved by the House of Representatives, but may face tougher sailing in the Senate.
The House voted 237-192 on Wednesday to approve HR 4173, the "Dodd-Frank Wall Street Reform and Consumer Protection Act," as the 2,323-page bill that emerged from a House-Senate conference committee this week has been dubbed. The vote was largely along party lines, with only three Republicans voting for the bill, and 19 Democrats opposed.
It remains to be seen whether the bill will be approved in the Senate, where Republicans are not outnumbered as heavily by Democrats. A Senate vote has been postponed until after the July 4 recess, in part because Senate Republicans object to a $19 billion bank fee added during the conference committee negotiations to offset the bill’s cost, the Washington Post reported today.
Although the new Consumer Financial Protection Bureau, to be housed at the Federal Reserve, will not oversee Realtors, lenders say the bill’s many provisions governing mortgage loan origination and securitization will increase costs and regulatory burdens for consumers and lenders.
Consumer groups, including the National Community Reinvestment Coalition, said that while industry groups succeeded in watering the bill down, it represents a start in reforming regulation of banks and the financial system.
Appraisers like aspects of the bill, including language — intended to protect them from coercion by lenders — that will replace the Home Valuation Code of Conduct, a controversial set of rules governing appraisals conducted for loans slated for purchase or guarantee by Fannie Mae and Freddie Mac.
According to a summary of the bill issued by the House Financial Services Committee, provisions of the bill pertaining to mortgage lending include requirements that lenders ensure a borrower’s ability to repay, and a ban on incentives for steering borrowers into more costly loans.
Those incentives include bonuses known as "yield-spread premiums" paid by lenders when mortgage brokers place borrowers in loans with higher interest rates than they might otherwise qualify for. Advocates of yield-spread premiums argue that they can help homebuyers cover their closing costs if the rebates go to borrowers and are not pocketed by mortgage brokers.
The bill would also prohibit prepayment penalties, which critics say have proved burdensome to borrowers who want to refinance unaffordable loans. Lenders and investors say prepayment penalties help lower interest rates paid by borrowers because they provide certainty to investors in mortgage-backed securities who fund most home loans.
If the bill becomes law, consumers would be able to sue lenders and mortgage brokers who don’t comply with the new standards, and recover up to three years of interest payments and damages plus attorneys fees. Borrowers would also have protection from foreclosure by lenders who violated the bill’s standards.
The bill would expand the pool of loans subject to stricter standards that currently apply to high-cost loans by lowering the interest rate and the points and fee triggers that define high-cost loans.
The bill would also beef up loan disclosures, requiring that lenders disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
In addition to a Consumer Financial Protection Bureau, the bill would create a Financial Stability Oversight Council that would be charged with heading off emerging risk throughout the entire financial system.
In a statement, the NCRC warned that the Consumer Financial Protection Bureau’s independence could be undermined by the fact that the Financial Stability Oversight Council will have the power to veto its decisions.
The Financial Stability Oversight Council will be chaired by the Treasury Secretary and include the Federal Reserve Board, U.S. Securities and Exchange Commission, the new Consumer Financial Protection Bureau and several other federal agencies.
"Only time will tell as to how much influence the banking regulators and others have over this new important agency," NCRC said. "We will be paying close attention to the implementation of the agency, to ensure it is set up in a way that maximizes its ability to protect consumers."
Lenders, who lobbied against many of the bill’s proposed restrictions, acknowledge obtaining compromises on some issues, but said many other concerns remain. The lending industry unsuccessfully lobbied for Congress to mandate that federal law preempts states from passing their own, stricter regulations (see story).
"Mortgage lending is going to change as a result of this legislation," the Mortgage Bankers Association said in a press release. "There will be increased costs associated and new regulatory burdens that will impact consumers and lenders."
The group intends to continue pushing "for improvements to ensure a balance is struck between ensuring a safe, robust U.S. financial system, protecting consumers and avoiding negative impacts on credit availability."
The Mortgage Bankers Association had also been concerned about risk-retention requirements intended to make sure loan originators still have some "skin in the game" after packaging loans for sale to investors (see story).
An earlier version of the bill, passed by the House in December, would have required that lenders or companies securitizing loans retain 5 percent of the credit risk of any loan they transfer or sell to investors.
The conference committee bill approved by the House includes language directing regulators to create an exemption from risk retention for qualified residential mortgages, an improvement from "what could have been much more harmful legislation," the MBA said.
The MBA was also pleased that the conference committee bill also added language requiring separate consideration of caps on points and fees for low-balance loans and loans in rural areas, and removed the "ability to repay" requirement for certain government-insured refinances.
A group representing appraisers, the Appraisal Institute, said it supported language in the bill that would create new appraisal independence standards under the Truth in Lending Act (TILA), requiring payment of "customary and reasonable fees" to appraisers.
The new appraisal independence standards would be enforced by the Consumer Financial Protection Bureau, and replace the Home Valuation Code of Conduct, rules adopted by Fannie Mae and Freddie Mac in May 2009.