Financial reform bill will include provisions to help home buyers
WASHINGTON — Though the Wall Street and banking features of the financial industry reform bill taking shape on Capitol Hill have drawn most of the attention, home buyers and mortgage applicants should be the major winners.
Not only will the zero-down, funny-money loans and slipshod underwriting that triggered the housing bust be virtually eliminated, but so will the "steering" practices that paid fees to loan officers for directing borrowers into poisonous mortgages.
Conferees from the House and Senate are negotiating the differences between their bills, with a vote expected early next month. Here's a quick overview of what's likely to affect housing and mortgage finance:
• Some form of new consumer-protection agency — armed with broad powers to rein in bad mortgage products and predatory lending practices — is now a certainty. The House bill creates an independent federal entity; the Senate bill creates a consumer financial product safety "bureau" housed inside the Federal Reserve. Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman, says he expects the conference to approve his stand-alone concept. Either way, regulators and investigators will be watching out for scams and gimmicks in the home loan industry.
• Uniform minimum standards for mortgages and underwriting practices will be set. Lenders will be motivated to offer fully documented, verified-income mortgages with down payments sufficient to ensure that borrowers have a stake in the deal. Lenders will also be required to determine that applicants can afford to repay the mortgage debt, insurance and taxes on time.
• Prepayment penalties on nontraditional loans that are not fully documented, fixed rate and carry standard amortization schedules will be prohibited. This would prevent, for example, the sort of "gotcha" adjustable-rate mortgages of the boom years, where consumers found themselves trapped into fast-rising payments and heavy penalties if they tried to refinance early. Prepayment penalties would be permitted on income-verified standard loans, but lenders would be required to offer alternative financing without penalties for early payoffs.
• There would be a mandatory provision of credit scores when mortgage applicants are turned down. Though this appears only in the Senate version, it has a strong chance of ending up in the final bill in some form. Since lenders often place great weight on credit scores in their decisions, the idea here is to provide unsuccessful applicants with the actual credit score that contributed to the loan rejection. Along with the score, lenders would also be required to provide the name and contact information of the score provider — typically a credit reporting agency — plus brief descriptions of the negative information that led to the low score. Consumers now have the right under federal law to free credit reports when they are rejected for a loan, but they don't get free credit scores.
• Restrictions would be set on mandatory arbitration clauses in contracts for mortgage and other credit. Both the House and Senate bills contain provisions on this. The House bill empowers the Consumer Financial Protection Agency to restrict lenders' use of mandatory arbitration requirements if it finds them to be harmful to borrowers. The Senate version requires the consumer agency to conduct a study of mandatory arbitration clauses before taking action to restrict them.
• Improvements in real estate appraisals. The House bill gives the new consumer protection agency oversight on home mortgage appraisals and the power to create rules and standards to guarantee "appraiser independence" from pressures by lenders, realty agents and others. It also requires that once the new rules are adopted, the controversial "Home Valuation Code of Conduct" mandated last year by Fannie Mae and Freddie Mac be terminated. The code has been criticized for encouraging lowball appraisals and the use of inexperienced appraisers. The Senate bill does not have appraisal provisions, but a bipartisan push is under way to persuade conferees to adopt the House version.
Contact Ken Harney at firstname.lastname@example.org.