Perriello Helps to Stop Abusive and Predatory Lending Practices

Press Release

Today, Congressman Tom Perriello joined a bipartisan majority in the House of Representatives to pass H.R. 1728, the Mortgage Reform & Anti-Predatory Lending Act, which would curb abusive and predatory lending - a major factor in the nation's highest home foreclosure rate in 25 years. The number of foreclosed homes in Virginia's 5th District has grown more than ten-fold since November of 2007.

"This is another big victory for accountability in Washington. This bill holds consumers accountable who lie about their incomes to qualify for a mortgage, holds lenders accountable who rely on predatory practices to turn a profit, and slams the door shut on speculators," said Perriello. "If Congress had passed these measures ten years ago, we may not be in today's financial mess. This is why I came to Congress: to clean up the mistakes that Washington and Wall Street made that have put responsible homeowners at risk."

The final bill that passed today included an amendment by Perriello to include energy-efficient mortgages in the new Office of Housing Counseling created by the legislation. This provision would allow consumers to get increased access to information about energy-efficient mortgages, which finance the cost of adding energy efficiency features to new or existing housing.

HIGHLIGHTS OF THE BILL

Requires lenders to ensure a borrower's ability to repay. The bill establishes a simple federal standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold. Lenders would have to determine that a borrower has a "reasonable ability to repay," based on income, credit history, indebtedness and other factors. For refinancing, the bill will require that all loans provide a net tangible benefit to the consumer, barring "junk" lending driven by fees rather than solid economics. Some lending had gotten away from these commonsense basics during the real estate boom, giving rise to risky, exotic mortgages and practices such as "no documentation " loans.

Prohibits unfair lending practices. The bill prohibits the financial incentives for subprime loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as "yield spread premiums" that lenders pay to brokers to inflate the cost of loans. Many homeowners in the current mortgage crisis received were steered into more expensive loans than they qualified for. The bill limits the prepayment penalties charged to borrowers who wish to get out of their loans and refinance on more affordable terms.

Brings accountability to the secondary market for home loans. Under the bill, participants in the huge secondary mortgage market would for the first time be liable under federal law for ensuring responsible lending. The bill permits consumers to obtain redress directly from firms involved in "securitizing" mortgages, unless the securitizer provided the borrower with a loan that meets the basic ability to repay and net tangible benefit standards. In recent years, home loans increasingly were sliced and diced by firms that bundle and resell mortgages to investors, making it difficult to track who was ultimately responsible for ensuring the soundness of loans.

Holds Creditors Responsible for the Loans they Originate. To fully encourage responsible underwriting, the bill mandates strong new federal rules to require creditors to retain an economic interest in a material portion (at least 5 percent) of the credit risk of each loan that the creditor transfers, sells, or conveys to a third party. Federal banking agencies would have the authority to make exceptions to the bill's risk retention provisions, including form and amount.

Imposes Penalties for Irresponsible Lending. Under the measure, lenders and the secondary mortgage market who don't comply with these standards (ability to pay and net tangible benefit) would be held accountable by consumers for rescission of the loan and the consumer's costs for rescission, including attorney's fees. They would also have the option to rework a loan to conform to the bill's standards within 90 days of receiving notice from the consumer.

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