Congress moved closer to approval of the Mortgage Reform and Anti-Predatory Lending Act, a new law to regulate the mortgage industry. The proposed mortgage reform legislation is intended to help better protect consumers from mortgage fraud and predatory lending practices.

The real estate crisis precipitated a nationwide economic meltdown and was initially sparked by loose mortgage lending. As a result, the federal government has been crafting new mortgage reform measures. The House of Representatives passed the proposed legislation-known as the Mortgage Reform and Anti-Predatory Lending Act-and will likely be passed by the full Congress before the end of the year. Areas of special focus within the bill are curbing predatory lending practices, appraisal fraud, and lack of disclosure regarding mortgages sold to unwary homeowners.

Mortgage fraud, appraisal fraud

The proposal requires lenders to finance mortgages that clearly have financial benefits for homeowners, and prohibits or restricts negative amortization and prepayment penalties. Tenants would be given some additional protection in the event that their landlord's property goes into foreclosure, and mandatory disclosures in monthly mortgage statements would be required. Stronger standards would be applied to the home appraisal process, so that lenders, real estate agents, and homeowners cannot unduly pressure appraisers to influence valuations. Appraisal fraud is typically tied to mortgage fraud, because when mortgage companies want to engage in predatory lending, they often require cooperation from appraisers to help buyers and sellers reach target prices connected to the funding of those fraudulent loans.

The bill would further amend the existing Truth-in-Lending Act to ensure that mortgage companies make timely payments of items like property taxes and hazard insurance. In some mortgage fraud schemes, mortgage lenders simply pocket the money instead of setting it aside in a reserve escrow account. The new rules hope to put a stop to that.

Legislative tug of war

Several significant changes have been made to the hotly-debated legislation since it was first proposed, as mortgage industry heavyweights engage in a tug of war with consumer protection advocates. One change written into the bill will let borrowers file lawsuits against parties who package and resell mortgages on the secondary market as mortgage-backed securities. Those entities include hedge funds, Wall Street investment firms, and agencies like Fannie Mae and Freddie Mac. The new version of the bill would also require that lenders who resell mortgages retain at least a 5 percent stake in any high-risk loans, and it offers extra consumer protections regarding adjustable-rate mortgages.

The Mortgage Banker's Association argues that some of the new rules will financially burden lenders, who will be forced to pass costs on to borrowers, insist on tighter credit, and offer fewer choices and options on mortgage products. On the other side of the aisle, consumer protection groups say the bill doesn't go far enough, and should also empower state governments to interpret federal rules to create their own stringent versions of mortgage reform at the local level.

Published on June 15, 2009