Points and fees - Point and fee triggers appear similar for HR 1182 and HR 1295. For most loans, both bills would apply additional protections when points and fees exceed 5 percent of the loan amount. HR 1295 would not consider charges paid to affiliates of the lender when calculating points and fees. In addition, it does not consider indirect compensation received by the lender. HR 1295 would also exclude yield-spread premiums and other indirect compensation received by mortgage brokers. HR 1295 would exclude prepayment penalties in more cases while calculating points and fees. Finally, HR 1295 would exclude discount points when calculating points and fees in more cases than HR 1182. NCRC recommends that the definition of points and fees not weaken existing federal law but expands upon that law to insure the strongest consumer protections.
Steering - NCRC's data analysis and fair lending testing reveals that steering is a significant problem in subprime lending, and must be addressed in any bill. HR 1295 contains a provision that strives to outlaw steering or making a high cost loan to a borrower who can qualify for a prime loan. This is critically important as NCRC's reports discussed above document the widespread occurrence of steering on a national level and the tremendous amount of wealth stripping that results. We recommend, however, that the current language in HR 1295 be tightened up to avoid any loopholes to the stripping provision. The bill currently allows a lender to make a high cost loan to a borrower creditworthy for a prime loan if the borrower "voluntarily" agreed to the high cost loan. "Voluntary" agreements to high cost loans are exceedingly difficult to document and thus can be claimed on most cases of steering.
Prepayment Penalties - One of the first NCRC CRF cases involved a prepayment penalty that almost prevented a pre-foreclosure sale. In this case, not only was the original homeowner victimized, but all the usual stakeholders in a housing transaction (the buyer and real estate agent) also suffered harm. This example illustrates the damage that onerous prepayment penalties pose to the functioning of the housing market in minority and low- and moderate-income neighborhoods. HR 1295 would prohibit prepayment penalties on all loans after 3 years, but many if not most subprime loans have prepayment penalties occurring in the time period between two and three years. Congress should carefully consider stringent limits to prepayment penalties between two and three years.
Financing Points and Fees - NCRC's CRF program reinforces the need to prohibit or limit financing points and fees so that loans do not become unaffordable. HR 1295 allows points and fees to be financed into mortgages of $40,000 or more if the points and fees do not exceed 5 percent of the loan amount. Considering that prime loans often do not have fees exceeding one percent of the loan amount, the limits in HR 1295 are on the high side. NCRC would support a prohibition on the financing of points and fees into high cost mortgages. In addition the predatory lending bills last year prohibited the financing of points and fees beyond 3 percent of the loan amount.
Repayment Ability - Both bills stipulate that monthly debts, including mortgage payments, cannot exceed 50 percent of income, but the bills differ regarding allowing a consumer to affirm his or her income. The difference in required documentation is important. As NCRC's CRF program illustrates, "self-verification" procedures or stated income loans facilitate fraud and unaffordable loans since unscrupulous lenders will fabricate borrower incomes and then have unsuspecting borrowers sign the loan documents.
Single Premium Credit Insurance - HR 1295 bans the financing of single premium credit insurance (SPCI) and debt cancellation or suspension agreements on high cost loans, but does not include SPCI in the definition of points and fees. This is problematic because if SPCI is not included in the fee trigger for a high cost loan, we are concerned that a backdoor has been created for SPCI to return. As the NCRC CRF program shows, this product is much less expensive when paid for on a monthly basis then when financed into the loan amount. More importantly, major subprime lenders have themselves discontinued single premium insurance products. Prohibiting these products on all loans would best protect consumers and insure that an industry best practice remains intact.
Flipping - HR 1295 applies protections against flipping for high cost loans, but HR 1295 also establishes a tangible benefit test that is less stringent than a tangible net benefit test. HR 1295 also includes a series of safe harbors or exemptions that have the potential for enabling abusive refinancings. Under the current language of HR 1295, the NCRC CRF case example above could be construed to be permissible since the refinance loan offered a tangible benefit of cash for various needs, but was clearly not a tangible net benefit to the borrower, considering that the high fees rendered the loan beyond the borrower's repayment ability. Any flipping language in a federal bill must be air tight and supported by a strong definition of a high cost loan.
Pre-Loan Counseling - NCRC supports pre-loan counseling modeled after the successful counseling requirement in the North Carolina anti-predatory lending law. In that state, a consumer is required to receive counseling by a counseling agency approved by public housing departments before a lender can issue a high cost loan to a borrower. A pre-loan counseling requirement is somewhat analogous to a home inspection conducted by an inspector of a customer's choice before the customer purchases a home. Home inspections have not burdened the real estate market and provide needed protections to consumers. Perhaps, a review by an independent third party should apply to all loans if the lending industry is concerned about singling out subprime loans. This would then make pre-loan counseling a regular and accepted procedure just like home inspections.
Mandatory Arbitration - HR 1295 prohibits mandatory arbitration clauses in high cost loans, but does allow arbitration if the consumer "voluntarily" agrees to arbitration. The concept of a voluntary agreement is worrisome in that it may favor the lender since a consumer may have difficulty asserting that he or she did not voluntarily agree to an arbitration procedure. Again predatory lending is about fraudulent and deceptive practices. More importantly, Congress should codify the best practices established by lenders, such as Countrywide, which no longer issue loans with mandatory arbitration.
Limits on Liability for Secondary Market -Currently, under federal law, a financial institution that purchases a high cost loan from a lender or broker is liable for all claims and defenses arising from violations of law. We have concerns that HR 1295 goes too far in limiting liability. Borrowers cannot raise defensive claims, for example, unless they can demonstrate that a purchaser of a loan had knowledge of or exhibited reckless indifference to violations of the bill. Damages are also limited unless a purchaser had knowledge of or exhibited reckless indifference to violations. The standards of actual knowledge or reckless indifference are very hard for borrowers to prove in court. Applying liability for purchasers of loans is critical because a significant amount of subprime lending is conducted by brokers and mortgage companies who sell their loans to investors and financial institutions. Borrowers often have no recourse if the purchasers of loans have no liability. We should not weaken existing federal law given that lenders are currently operating under this standard. Any changes must require making consumers whole for their losses.
Reporting to Credit Bureaus - HR 1295 requires lenders making high cost mortgages to report monthly borrower payment history to credit bureaus. This is a vital protection. Several years ago, former Comptroller of the Currency, John Hawke, raised alarms concerning lenders holding customers captive by not reporting their credit history. Comptroller Hawke pointed out correctly that consumers would have no way of proving their creditworthiness for lower cost loans if the credit bureaus did not have current information of their payment history due to lenders' withholding payment information. A requirement to report to credit bureaus will protect homeowner wealth by enabling borrowers to lower their interest payments and thus build up their equity faster.
Mortgage Servicers - HR 1295 applies needed protections against abuse by servicers of mortgages including force placement of insurance and failure to correct errors relating to payments. HR 1295 requires establishing escrows for payment of taxes and hazard insurance for high cost loans. NCRC's CRF cases include a number of instances where borrowers had trouble with unaffordable loans because they did not realize that their subprime loans did not have escrows. The CRF cases clearly demonstrate a need for this provision. Appraisal Fraud - HR 1295 applies protections regarding appraisals for high cost mortgages, including physical inspections of the property and two appraisals in the case of two sales within 180 days of each other to protect against property flipping. The bill also prohibits lender influencing or intimidating appraisers. This provision is encouraging and we believe that it can be strengthened to address critical funding and staffing shortages of state regulatory agencies. In addition, the Appraisal Subcommittee of the Federal Financial Institutions Examination Council must be provided with meaningful oversight and enforcement powers regarding state regulatory boards.
Certification of Brokers and Mortgage Lenders Making Subprime Loans - HR 1994, the Predatory Mortgage Lending Practices Reduction Act, establishes certification requirements for mortgage brokers and lenders making subprime loans. This is an important step for establishing ethical conduct by lenders and reducing the amount of predatory lending. A national registry of brokers and lenders should be established that show which brokers and lenders are certified and which ones have lost certification. Many states have this type of registry revealing the current status of licensing for home improvement contractors; it is time to establish transparency for lenders and brokers.