Two mortgage industry groups have weighed in on the new
mortgage regulations proposed earlier this week by the Federal Reserve Board
of Governors (FRB.)
The first, a major critic of regulatory efforts to end predatory lending, was
critical of the proposed regulatory changes announced by the FRB on Tuesday.
The other, The Mortgage Bankers Association (MBA) released
favorable comments about a couple of aspects of the rules, albeit praising faintly.
Calling the proposed rules "another missed opportunity for the agency to rein
in practices that have hurt millions of American families," the Center
for Responsible Lending criticized the FRB for failing to eliminate
the root causes of the looming foreclosure crisis, instead endorsing rules that
"are riddled with loopholes" permitting "many dangerous subprime lending practices
The Center, in a press release specifically criticized the FRB's regulations
in the following areas:
Prepayment penalties. The Fed appeared to restrict prepayment penalties
only by way of a requirement that they must expire at least 60 days before an
interest rate reset, allowing borrowers to seek an affordable refinance before
their payments increase. The Center stated that, "Rather than banning this 'exit
tax' on all subprime loans, the FRB only limits penalties slightly on adjustable-rate
mortgages, and otherwise allows prepayment penalties to remain effective for
five full years, with no limit on their size."
Yield-spread premiums. The Fed's proposed rule leaves yield-spread premiums
intact by simply requiring written disclosure of these incentives to mortgage
brokers to sign up borrowers for higher interest loans when they might qualify
for a less expensive loan. Unscrupulous lenders can easily bury these disclosures
among the myriad disclosures and paperwork already required.
Ability to repay. Here we quote the Center's statement
in its entirety.
"The current mortgage crisis is largely due to lenders making loans to families
without ensuring that the borrowers can afford them. The FRB is proposing rules
they have previously issued in regulatory guidance to depository lenders, but
they have made this rule virtually meaningless for most subprime lenders since
the rule will not be enforceable. Victims will be required to show that the
lender made unaffordable loans not only to him or her, but also in a "pattern
or practice" to other borrowers-a standard of proof that makes it very difficult
to win a case even when violations have been flagrant. The FRB acknowledged
this very point in a report to Congress in 1998, when it said: "As a practical
matter, because individual consumers cannot easily obtain evidence about other
loan transactions, it would be very difficult for them to prove that a creditor
has engaged in a 'pattern or practice' of making loans without regard to homeowners'
income and repayment ability." Further, even this weak standard does not apply
to non-traditional loans such as payment option ARMs.
The Center was more kind to other aspects of the proposed regulations.
Verification of income. The Center stated that the new rules represent
a step forward by addressing the lack of income documentation that has caused
significant payment problems on subprime loans, but this should have been extended
to non-traditional mortgages when a borrower could easily provide proof of income.
Escrow of taxes and insurance. The center applauded a requirement to
force lenders to escrow taxes and insurance rather than taking those annual
payments off of the table as a visible component of monthly homeowner expenses.
However, the Center expressed concern that the escrow rule would not also apply
to non-traditional mortgages such as payment option ARMs. It also feels that
the fact that there is a one year opt out will reduce the rule's effectiveness.
The Mortgage Bankers Association praised the FRB's action saying that
the proposed rules "strive to strike the balance between ridding the marketplace
of abusive lending practices, while still preserving credit opportunities for
MBA concentrated on the disclosure portion of the rules saying that it had
long supported better and timelier disclosures to consumers but that it was
concerned that some of the restrictions in the proposals may unnecessarily limit
credit options for borrowers.
Both organizations expressed their determination to testify about the regulations
during the required 90-day comment period before the Federal Reserve Board of
Governors votes a second time.