U.S. Senators Bob Corker, R-Tenn., Judd Gregg, R-N.H., George LeMieux, R-Fla., Tom Coburn, R-Okla., and Scott Brown, R-Mass., today introduced the Homeowner Responsibility Amendment, no. 3955, which would direct federal regulators to establish minimum loan underwriting standards and eliminate the arbitrary five percent risk retention standard in the Dodd bill.
"At the core of the financial crisis were home loans that should never have been written because the borrowers could not repay them. To correct this glaring vulnerability in our financial system, our amendment would direct federal banking regulators to establish minimum loan underwriting standards, setting an appropriate down payment and requiring verification of the borrower's ability to pay for the life of the loan," said Senator Corker. "Creating a strong foundation for home mortgages will help consumers and businesses and strengthen the overall financial system."
Senator Gregg stated, "During the recent financial crisis, lax underwriting standards played a huge role in bringing the mortgage market, and ultimately our economy, to its knees. Ironically, missing from the Dodd bill is any sort of attempt to strengthen underwriting standards to ensure a similar disaster cannot occur again. Our amendment directs the regulators to set appropriate standards, including a 5% down payment for home loans, to ensure that when people take out a loan to buy a house that they actually have the capability to pay that loan back. Such a requirement will go a long way toward preventing foreclosures and bankruptcies nationwide, as well as prevent the American taxpayer from having to rescue our financial system for reckless lending practices in the future."
"One major cause of the financial crisis was mortgage brokers giving loans to people who had no means to repay the debt. When loans failed, the underwriters felt no financial pain because they had already sold the entire mortgage off their books. Companies that loan money to risky borrowers need to assume some level of risk if that loan goes bad," said Senator LeMieux. "What melted the markets in 2008 was a lack of "skin in the game' for those who were approving very risky loans and selling them before they failed. This amendment takes care of that."
"Congress can regulate the financial industry all it wants but financial reform will fail if underwriting standards are weak. The best way to keep toxic loans out of the system is to not approve them in the first place. Weak standards help no one other politicians who want to claim they are helping families buy homes. The recent crisis shows that everyone loses when standards are weak. Families who obtain loans they can't afford get hurt, while other families watch home values decline and the economy unravel," said Senator Coburn.
"I am pleased to cosponsor Senator Corker's common-sense amendment. At the heart of this financial crisis was a lot of very bad underwriting. For years, millions of home loans were given to people who would never be able to repay them. Establishing better mortgage underwriting standards and requiring further study of these issues will help ensure that we avoid future housing bubbles and protect financial consumers from the predatory lenders that left so many lives in shambles," said Senator Scott Brown.
A copy of the Homeowner Responsibility Amendment to the Dodd financial regulatory reform bill, S. 3217, is attached. Under the amendment:
* Federal banking regulators -- FDIC (Federal Deposit Insurance Corporation), Federal Reserve, and COC (Comptroller of the Currency) -- would establish minimum criteria, including:
o A five percent minimum down payment;
o Credit enhancement/private mortgage insurance (PMI) if the borrower doesn't have an 80 percent loan-to-value (LTV) ratio;
o Fully documented income, including credit history and employment history; and
o A method for determining the borrower's ability to repay, including consideration of their debt-to-income (DTI) ratio.
* Regulators would update the standards in no less than five years.
* Regulators would be allowed to exempt nonprofit organizations that meet certain criteria on a case-by-case basis,
o Requiring a review of the exemptions every two years, and
o Prohibiting exemptions going to organizations that are prohibited from receiving federal funding.
* The Government Accountability Office (GAO) would conduct a study of Federal Housing Administration (FHA) underwriting standards and report back with statutory recommendations.
* The arbitrary five percent risk retention standard in the current bill would be replaced with a Federal Reserve Board study/report to Congress on the impact of risk retention on capital markets.
"Additionally, the arbitrary five percent risk retention standard in the Dodd bill will greatly limit the availability of consumer credit and put many small and mid-sized lenders out of business," Corker added. "Its impact on securitizers who retain servicing rights could further devastate credit availability, jobs and local economies. To prevent these unintended consequences, our amendment would strike the retention requirements in the current bill, and instead direct the Federal Reserve Board to study the impact of risk retention on capital markets and report back to Congress with their recommendations. Risk retention can be accomplished through several different means, and it is important that Congress fully understand those approaches before legislating a provision that could significantly harm capital formation."