House Tackles Subprime Meltdown, Amends Truth In Lending Act

The House this week voted 291-127 to pass the Mortgage Reform and Anti-Predatory Lending Act, Congress’ first major attempt to prevent a recurrence of the ongoing subprime meltdown. The bill, supported by every Democrat and 64 Republicans, stabs at the heart of the meltdown by:

  • Establishing a national licensing and registration system for mortgage lenders;
  • Establishing the Office of Housing Counseling within HUD to help borrowers avoid foreclosure;
  • Banning loans that a borrower cannot reasonably repay;
  • Banning lenders from steering borrowers towards loans with predatory characteristics;
  • Making banks that securitize mortgages liable for violating lending laws.

The mortgage lobby spent several weeks trying to derail the bill as it percolated in Committee. Even some consumer advocates oppose the bill in its current form because it preempts strong consumer protections from the states with a uniform federal standard.

The mortgage lobby has already shifted its focus towards killing companion legislation stalled in the Senate. Senate Banking Chairman Chris Dodd (D-CT) has released only a vague sketch of his chamber’s response to the subprime meltdown, saying that his legislation will meet two requirements:

[First], it must establish strong standards against abusive practices such as prepayment penalties, steering, and other problems. Second, it must provide for strong enforcement to ensure that those standards are met. My bill…will meet both requirements and help protect homeowners from predatory lending.

Still unknown, how he plans to achieve objectives one through two.

The White House has issued a Statement of Administrative Policy objecting to several provisions of the House bill, but has restrained itself from issuing a veto threat.

House Votes to Rein in Certain Mortgage Lending Practices [AP]
H.R. 3915 – Mortgage Reform and Anti-Predatory Lending Act of 2007 [THOMAS]
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(AP Photo/Kim Johnson Flodin)

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  1. howie_in_az says:

    “Banning loans that a borrower cannot reasonably repay;”

    I still don’t see how any lender in their right mind could conceivably loan money to someone that lacks the means to repay it.

  2. CumaeanSibyl says:

    @howie_in_az: I think they did it because they knew they could sell the loans to someone else, in those packages, so it didn’t really matter to them if the buyer was capable of repaying it — it wouldn’t be their problem.

    Personal responsibility goes out the window when your lenders are lying to you.

  3. nhoj1962 says:

    @ CUMAEANSIBYL

    “Personal responsibility goes out the window when your lenders are lying to you”, WTF?

    I hope I never do business with you, or anyone who shares your opinion.

    By your statement, you imply that you have even a slight belief in personal responsibility. So I ask you, how can you possibly say a lender lying to the mortgagee absolves the mortgagee of personal responsibility?

    And who lied? The personally responsible moron who sought a loan they didn’t understand or didn’t realize they couldn’t afford, or the lender who agreed to loan the money? Ever hear “a fool and his money are soon parted”? Why do you assume the lender lied to the fool?

    If you truly believed, at all, in personal responsibility, you never would have posted such an asinine comment. More so, since you don’t cite a single example of a predatory [or sincere] lender lying. Might as well clamp down on Moms nationwide. They’ve been telling us all our lives we can be whatever we want to be.

    Something the “low hanging fruit” in America need to understand is that a credit card, a car loan, a mortgage, etc. can mean a few things.
    1) You are a smart, fiscally responsible person who has the money to pay for this stuff up front, but have wisely invested in something that pays more than the cost of borrowing.

    2) You are a smart, fiscally responsible person who has figured out there are tax advantages to the type of credit you sought.

    3) You can’t afford to pay for what you want right now, and are taking a risk that you will be able to.

  4. Televiper says:

    @nhoj1962: I think you totally misinterpreted what CUMAEANSIBYL said. He/she meant the concept of “personal responsibility” in general.

  5. Televiper says:

    @howie_in_az: There’s always going to be a considerable number of people who will seek out other means. Meanwhile they can profit on rate hikes and various other penalties. If that doesn’t work out they can move on to the borrower’s co-signers or foreclose, or sell the debt off to a collections agency. They’re probably the people with the least at stake.

  6. CumaeanSibyl says:

    @Televiper: Yes, thank you. I didn’t realize what I said was so ambiguous.

    If you’ve been paying attention, nhoj1962, there have been several stores on this very website about lenders who have conspired to offer unfavorable terms and lied to customers, even to the point of lying in their written contracts. The mortgage industry has been systematically inflating home appraisals, steering people into higher-interest loans than those they qualify for, and fudging the numbers at every opportunity to convince people that they can afford a bigger house than they have money for. If I go to multiple lenders, and they all do this, and I make the mistake of believing them, then you know what? It absolutely is NOT my fault when I find myself in default. Why? Because THEY LIED TO ME.

    I’m not interested in having an argument about personal responsibility in the abstract. It’s been done to death here, and everybody’s already agreed that people should not buy things for which they haven’t got the money, and we’re done with that subject. We’re really done. I was hoping to head that discussion off at the pass, actually, by pointing out that all the precautions, research, and fiscal responsibility in the world don’t matter for consumers when the industry has gone rotten from the inside out. How is a person supposed to be responsible when he’s surrounded by liars?

  7. Shaggy says:

    @ Cumaeansibyl: Amen!

  8. gibbersome says:

    I’m not advocating throwing individual responsibility out the window, but the fact of the matter is that irresponsible lending has led us to the brink of a national economic crisis. Easier to regulate several dozen companies than hundreds of millions of individuals.

  9. ceejeemcbeegee is not here says:

    @CumaeanSibyl: Word. If you go to buy a used car, and the dealer, the mechanic, the kelly blue book, the vehicle history report all LIE, then it doesn’t matter how much personal responsibility you envoke, you are a victim of deceptive practices.

  10. mac-phisto says:

    @howie_in_az: it’s actually very easy. it’s called a 2/28 80/20 piggyback with a 2-yr prepay. it works like this:
    lender (2 days before closing) – well, i know we got a mortgage commitment for a 30yr fixed from bank A, but they pulled their financing.
    borrower – wha???
    lender – no worries, we actually got you approved at a better rate. it’s not a fixed rate, it’s an ARM, but don’t worry about it. you’ll have a fixed payment for 2 years & then after 2 years of on-time payments, we’ll refi you into a fixed rate no problem. the way the market’s going, you’ll not only get a better fixed rate in a couple years, but you’ll have equity to boot. i mean, we could probably still get you into a fixed, but you’d need another $5000 or so in closing costs & you might need another 5% down. any chance you can come up with that in 4 days?

    the 2/28 was a popular vessel over the past 8 or so years. brokers were choosing the loans b/c they were easy to qualify & awash with bonuses (compared to a trad. 30 year), plus they virtually guaranteed repeat business when the reset came. lenders liked the loans b/c they expanded the pool of borrowers & came loaded with high fees.

    this is good legislation – it should work to prevent a situation like we’re in now in the future (until the robber barons find a way around it). my concern is the few million americans that need assistance to avert foreclosure…most of them will not qualify for lending under these rules. if nothing is done, the market will be flooded with a tsunami of foreclosures over the next 4 years.

  11. nhoj1962 says:

    You are all, at the least, making it sound like you agree that almost every party in the home lending business is guilty of collusion and lying.

    @CumaeanSibyl, I happen to be an every day reader of this site, and do pay attention. I have read the several stories you refer to. Granted, this site couldn’t possibly expose every single bad mortgage lender, but you yourself suggested I might not have been paying attention to “several” stories.

    Extending the “several” exposed on Consumerist to the total number nationwide, would likely not even come close to the threshold of “The mortgage industry has been systematically inflating home appraisals, steering people into higher-interest loans than those they qualify for, and fudging the numbers at every opportunity to convince people that they can afford a bigger house than they have money for.”

    You flat out accuse “the mortgage industry” of being corrupt, which is laughable. The mortgage industry didn’t systematically inflate home appraisals. Home appraisals are based on market conditions,. Those appraisals were driven up by common people buying; first homes they probably couldn’t afford in the first place, “investment” second homes, or speculating on housing as if it was a bull stock market and they could get out quick. Some of those common people could only afford the debt if conditions remained ideal for the mortgagee and the market remained very loose.

    They still need to be personally responsible as much as a drinker whose friends say, stick around for one more before driving home, you’re not that drunk [appraisers], I’ll by your last round [lenders]. And then the drinker goes out and crashes.

    From my experience with online mortgage ads, spam email and five friends either in the mortgage or home building industry, during the period of historically low rates, the mortgage industry was about stealing market share from each other by undercutting the other’s rates, not “steering people into higher interest loans than they qualify for” as you claim.

    Your last point, about “fudging the numbers at every opportunity to convince people that they can afford a bigger house than they have money for” might be the only one I find some basis of truth in, and only among the predatory lenders. A very minute portion of “the mortgage industry” you accuse of systematic abuse or outright fraud.

    At the height of the low interest mortgage boom here in Chicago, activists and aldermen in low-income neighborhoods screamed at lenders who were “steering” [to use your word] mortgage candidates they were concerned about, to free HUD and non-profit credit counselors who could explain the risks of ARMs and interest only mortgages to less than credit worthy, or at credit risk potential mortgagees. Hardly the practices of a “mortgage industry” out to systematically defraud people.

    So, yes, I do have real issues with ANYONE, even someone taken in by a predatory lender, feeling no personal responsibility. Which is exactly what you suggested they feel. No personal responsibility.

    Even if I believed for a minute, your dubious accusation that an entire industry conspired to defraud everyone, the number of people who bought or re-financed during the low interest boom and are not on dooms doorstep or been foreclosed upon proves your your claims to be nothing more than hyperbole.

    I will reiterate, I hope I never have to conduct business with any of you who felt my first comment about anyone with a bad mortgage still having personal responsibility being invalid.

  12. Libelous1 says:

    The bill includes “Banning loans that a borrower cannot reasonably repay;”???? That is the stupidest, most short-sighted provision I have ever heard of. Talk about a plaintiff attorney’s dream come true: “Can’t repay your loan? That darn bank violated the law because it should have seen that you could not reasonably repay it.” The inevitable result of such a bill is that only rich people, or high-income people with stellar credit, will get mortgages. Any measure that attempts to make the bank liable for a loan that defaults is absurd … the bank already has to factor into the risk of default that the loan will not be repaid adn teh collateral won’t cover it. now the bank also has to factor in that the loan won’t be repaid AND the loser borrower will get to keep teh house as damages, AND the bank will have to pay punitive damages, AND teh bank will have to pay attorneys fees? Why bother. Only exceedingly low risk borrowers will get loans. This bill will NEVER pass the Senate, at least in this form. If it does, it will kill the mortgage industry and all consumers with less than perfect credit and very high incomes.

  13. brainswarm says:

    @Libelous1
    That’s why the word “reasonable” is in there. It’s reasonable for a borrower to make repay his debt, and if he acts responsibly, and still can’t repay, it might be the fault of the bank. However, it is not reasonable for a borrower to take out loans to the limit of his ability to repay, head off to Vegas for a weekend of gambling, cocaine and strippers, and come back with an empty checking account and then turn around and say “You shouldn’t have loaned me so much money.”

  14. thetango says:

    @Libelous1: Banning loans that a borrower cannot reasonably repay;”???? That is the stupidest, most short-sighted provision I have ever heard of. Talk about a plaintiff attorney’s dream come true: “Can’t repay your loan? That darn bank violated the law because it should have seen that you could not reasonably repay it.”

    LIBELOUS1, interesting comment but I think the spirit of the law here is that a bank cannot give someone a loan that the bank knows will never be affordable for a customer.

    I don’t think the law is talking about the case where someone loses their job and is unable to pay — I think the law is designed to prevent someone making $50K/year and getting a $1M ARM. Some fraudulent lenders did pull stunts like this…

    (Personal note: I qualified for a $1M loan. My wife and I make $200K+/year, so in some sense we could have paid for the loan … but we would never have gone out, gone on vacation, had a child, bought a new car, etc.. Was the bank out-of-their-collective-minds when they offered me that loan? Yes, you bet they were. Would it have been “fraudulent”? That’s tough to say — at the end of the day _I_ was the one who had to sign the loan agreement. I settled on an affordable house BTW ;) )

    I’ve also read of cases where people took risky loans (ARMs!) because the bank essentially promised them that getting a fixed low-rate loan in a few years wouldn’t be a problem. Offering that advice to a customer which the bank _knew_ wouldn’t be able to pay the higher rate when the ARM reset is, without question, the bank’s fault.

    “Only exceedingly low risk borrowers will get loans.”

    Something I’ll never understand — why is getting a bank loan a right? If you’re high-risk/sub-prime, then you probably shouldn’t be getting a big loan …

  15. mac-phisto says:

    @thetango: maybe getting a loan isn’t a “right”, but here’s something to think about: delinquency rates among subprime loans are <15%. this number will get larger in the future (as resets hit & borrowers fold b/c of a lack of lending options).

    my point is, for every 7 people paying on-time in subprime, there is 1 that is delinquent & this number is growing higher b/c of a change in the marketplace. at the peak, delinquency rates, even among subprime, were even lower.

    it’s also important to realize what subprime is: it’s defined as anything not prime. prime is 20% down or more AND perfect credit AND documented ability to repay AND borrowing in a conforming GSE loan <$417,000. if you don’t meet ANY of these requirements, technically, you’re subprime (at least according to today’s standards).

    syphon the market down to those “low-risk” borrowers & a load of people that could afford a home won’t be qualifying for one.

  16. Rusted says:

    The last post said” for every 7 people paying on-time in subprime, there is 1 that is delinquent”, so in a sense that could be saying, for every subprime loan in default, seven people are still paying their loans. I like the glass half full anyway.

    Personal Responsibility. I hear a lot about that. Strangely enough, out in the real world, the great grand majority of people I ever met were responsible people. It seems that the irresponsible people are few but loud. Also, most of the people I know either have thirty year fixed, or like me, no mortgage at all. Someone tried to sell me on a subprime but I never bit and just did the equity refugee bit. Too cold in Northern Virginia anyway.

    Only one guy I ever met that wasn’t fiscally responsible. He was in trouble with his banks, the IRS, you name it. But he did it to himself, just had to have the good life right now.

    The subprime mess will fix itself over time. The investors who get burned over this will learn a valuable lesson. To try to fix this with legislation or interest rate adjustments will just make it last longer. Some people will refinance their ARM into fixed, some won’t and over time it will correct itself and we can go onto the next crisis, like unlicensed pink flamingos…..

  17. stuckonsmart says:

    A couple of points:

    Firstly, where did this CRAZY notion that everyone, including outright deadbeats are ENTITLED to own a home come from? When I bought my first home, there was a VERY SIMPLE QUALIFIER calculation — if the cost of OWNING the house (principal, interest, insurance, taxes, utilities) was going to exceed 28% of your income — YOU DID NOT QUALIFY — PERIOD. Your only option was to continue to rent until you DID qualify and/or you accumulated a down-payment that rigorous lending institutions would accept. Notice I said RIGOROUS. Sound business practice was in place and rarely if ever were they deviated from.

    BUT — then the secondary market brought about the GREED factor in institutions and the notion that it’s somebody else’s problem if these people don’t qualify. I am aware of all too many realtors, mortgage brokers, lenders, etc. that take the position — 1) let me do the deal and get my piece 2) then offload it so if it fails it doesn’t come back on me. I get to make a quick buck and it’s NOT MY PROBLEM when it collapses.

    I tried to get ONE WORD (date of DISCOVERY versus date of OCCURRENCE) changed in Regulation Z — Truth in Lending legislation in the mid 80’s — and the Chairman of the Senate Banking Committee — said doing so would throw the financial industry into chaos.

    So in reply to NHOJ1962 — yes it would appear that “almost every party in the home lending business is guilty of collusion and lying” — and the regulators are in on the game also!

  18. jefino says:

    “Banning loans that a borrower cannot reasonably repay;”

    I feel this is extremely important. I work in the servicing part of the subprime industry, and i have seen first hand on how lenders give loans to people that just dont have the means. The fault is of the companies themselves for offering such poor products designed to decieve the consumer, knowing well that they cannot afford it. If someone is put into a arm, they are qualified at the low rate, but what about when it goes up? Typically it goes up 2-3% the first increase which means several hundred dollars. And also considering, the first 2-4 years of a mortgage, are the hardest times for a borrower as they get use to the payments.

    But with all that aside, the lenders came up with products such as a No Document mortgage. Basically what that means if you had a credit score over 720(which isnt hard to do), the bank will give you $1.5 million without requiring proof of income. Yes this product exsists. Yes, borrowers should of held more constraint before signing the dotted line, so they are partially to blame, but the companies themselves are mostly to blame in my opinion since they come up with products that make no sense. The worst product in my opinion is the 80/20 interest only ARM loan. The borrer may as well dig their own grave with products like those.

  19. Libelous1 says:

    “cannot reasonably repay”
    well, the outcome will be dependent, of course, on what is meant by “reasonably.” And word in a law usually means that it will be decided by a “jury of your peers,” meaning typically, twelve people without jobs and who cannot get a mortgage. Perfect — if you’re a plantiff’s lawyer. all loans include some measure of risk. how do you define what is too much, such that it becomes unreasonable risk? stupid people and their money will soon be parted. in this case the stupid people are both the lender AND the borrower. But this law will not keep people in their homes. Not at all — instead, it will (ultimately) prevent such people from ever getting one in the first place. I have no sympathy for the lenders, but I also have no sympathy for the borrowers. But for subprime lending, they would own no home. So why do we care if they are now getting kicked out of homes they never could afford and shouldn’t have bought in the first place? I for one do not care. But what I do care about is Congress putting more costs on banks, which means they will have to charge more fees and higher interest to recover their legal losses through “unreasonable loan” lawsuits that will ABSOLUTELY flow from this ridiculous bill — if it passes. Fraud is one thing. However, using “unreasonable” as the standard is bewildering.

  20. CumaeanSibyl says:

    @nhoj1962: “The mortgage industry didn’t systematically inflate home appraisals.”

    Psst — yes they did.

  21. Sam Glover says:

    This bill does not “stab at the heart of the meltdown.” It is an industry-friendly bill that preempts stronger state laws and lets the true culprits off the hook.

    A right without a remedy is no right at all.

    Without any remedies, this bill is just platitudes. For more, see CL&P’s coverage: [pubcit.typepad.com]

  22. Red_Eye says:

    @consumerist: “Even some consumer advocates oppose the bill in its current form because it preempts strong consumer protections from the states with a uniform federal standard.”

    Yeah how dare they preempt those strong consumer protections that protected everyone so well!

  23. finite_elephant says:

    “reasonable to repay”

    I have to imagine that they aren’t going to leave this up to case law to determine what constitutes reasonable. One federal agency or other will step in and come up with a formula/procedure to determine ability to pay and every loan originator that complies will know they are safe. Hopefully it’ll eliminate the “ninja” loans and have enough teeth to make fraud on the part of the originators really, really unattractive.

  24. hollerhither says:

    @CumaeanSibyl:
    “I’m not interested in having an argument about personal responsibility in the abstract. It’s been done to death here…”

    Hear, hear!!!

    NHOJ1962, you seem to be too worked up for the topic at hand — so I agree, would be unwise to do any business together.

  25. Bunklung says:

    It’s interesting how polarized the comments are. You either think it’s the evil industry or the serious lack of personal responsibility. I got news for you people…

    It’s both.

  26. CumaeanSibyl says:

    @Bunklung: Well, of course, but it’s kind of useless to roll out the umpteenth version of “people spend more money than they have.” I feel as though that’s a universal condition, you know? Nothing new. And yet, every time there’s a credit-card or mortgage story, somebody starts in on it like they’re the first person in the world to notice.

    Now, watching giant corporations get caught with their pants down — that’s entertainment. And it’s worth knowing. I don’t care if my neighbor has $50K of credit-card debt, but I do care whether or not a bank I might do business with has been lying, cheating, or making stupid decisions based on stupider policies. It matters a lot more to my life.