Sparse oversight in the mortgage industry is likely to have played a role in the current mortgage crisis. Mortgage fraud and predatory lending are now a hot topic on Capitol Hill.
Lawmakers are once again trying to gallop in on their white horses to patch up the mortgage industry with regulations. The latest weapon being used against the evils of mortgage fraud is known as H.R. 1728, Mortgage Reform and Anti-Predatory Lending Act.
Accountability lacking in mortgage lending
On May 7, 2009, the House of Representatives passed a new mortgage reform bill known as H.R. 1728. While it still faces debate in the Senate, it's already making waves among lenders and brokers. The primary function of the proposed legislation is to modify the Truth-in-Lending Act to make mortgage brokers and lenders more accountable for the loans that they make. One of the more radical measures used to accomplish this is a requirement that lenders retain a 5 percent interest in the loans that they sell. Brokers and lenders will also be expected to prove the loans that they make are viable.
While there's no exact data on the topic, it's generally accepted that mortgage fraud and predatory lending played huge roles in the current mortgage crisis. It's hard to disagree when stories surface of homeless people getting approved for mortgages; a year ago, the New York State Commission of Investigation uncovered that very situation. That particular homeowner, who formerly lived in a shelter, was earning $10 per hour when she was approved for a $470,000 mortgage.
Laundry list of dos and don'ts
Legislators, therefore, are searching for the right mix of provisions to keep travesties like that from ever happening again. Provisions written into the Mortgage Reform and Anti-Predatory Lending Act prohibit the following aggressive lending practices:
- Negative amortization, certain prepayment penalties, and single premium credit insurance
- High-cost mortgages that contain balloon payments and provisions that allow for the acceleration of repayment
- Making loans without regard for the borrower's ability to repay
- Mandatory arbitration (doesn't include reverse mortgages)
- Advising borrowers to default on one loan so that a high-cost mortgage can be made to refinance the debt
- Structuring high-cost mortgages as another type of loan, simply to avoid legal restrictions placed on high-cost mortgages
H.R. 1728 also specifies disclosures for monthly mortgage statements and requires lenders to provide six months' notice prior to rate resets on hybrid adjustable-rate mortgages. The bill would also authorize the Department of Housing and Urban Development (HUD) to establish a counseling office that would provide guidance to both homeowners and renters.
With the Mortgage Reform and Anti-Predatory Lending Act, legislators are attempting to tackle mortgage fraud from all angles. It's a sad state of affairs, though, when lenders and brokers must be legally banned from making mortgages that aren't viable. This is why Congress has called in the white horses.