Congress is planning legislation that targets players in the lending meltdown. Independent agents are a major focus.
WASHINGTON -- Mortgage brokers, under fire for steering borrowers into high-cost home loans, are a prime target of fair-lending legislation soon to be unveiled on Capitol Hill.
One proposal takes aim at the commissions that brokers are paid when they sell mortgage loans at an interest rate higher than what the borrower could otherwise get. That measure is among an array of proposals designed to make various players in the loan process more accountable.
Congressional Democrats escalated the political debate Wednesday, calling on President Bush to appoint a czar to coordinate federal efforts to stop foreclosures.
Democrats also demanded that Fannie Mae and Freddie Mac -- the giant, federally chartered mortgage finance companies -- be authorized to buy more mortgages, a move that would provide capital to help strapped borrowers refinance.
"This is a national crisis," Senate Majority Leader Harry Reid (D-Nev.) said. The Democratic initiative, he maintained, was not an attempt to bail out speculators. Rather, "it deals with people who bought homes and want to keep their homes."
Meanwhile, bills now being prepared in the House and Senate seek to make various players in the lending industry more accountable -- including mortgage brokers, the independent loan agents many borrowers turn to in hopes of getting the best rate on a mortgage from a bank or finance company.
Brokers are lobbying hard to avoid being singled out, arguing that banks and mortgage companies create the loans and set the ground rules for how brokers are paid. They also say that any federal legislation that requires brokers to be licensed should apply to staff loan officers at banks and mortgage companies too. "We're getting a lot of the blame, but there are a lot more players here," said Harry Dinham, past president of the National Assn. of Mortgage Brokers. "Everybody played a part in what's taken place. . . . We're looking for genuine fairness here."
Although lenders have strongly resisted new regulation, the ongoing mortgage mess has enhanced the credibility of consumer advocates. These activists have complained about predatory lending practices for years -- especially in the sub-prime market for borrowers with imperfect credit.
"The sub-prime meltdown and the Democratic control of Congress only put them [consumer advocates] in a better position," said Wright Andrews, a veteran lobbyist for mortgage lenders. "I don't see any way that legislation could pass that is not going to have a much tougher overall standard."
Brokers, who represent various lenders, are responsible for at least half of the mortgage loans, according to their national association, and by some estimates significantly more. They have traditionally worked in a climate of little or no regulation and have not been the focus of past federal lending rules.
That is expected to change.
"If there's one consensus on both sides of the aisle, it's that mortgage broker oversight needs to be increased," said Howard Glaser, a mortgage industry consultant and former U.S. housing official.
Topping the list is the "yield spread premium," the bonus that brokers are paid when they sell loans with higher interest rates than a consumer qualifies for. A draft of legislation that Rep. Barney Frank (D-Mass.) may introduce this month explicitly bans such pay. Sen. Christopher J. Dodd (D-Conn.) recently said that he planned to introduce legislation that also would "prohibit brokers and lenders from steering home buyers to a more costly loan."
Frank and Dodd are chairmen of the banking panels in the House and Senate.
Brokers have fiercely defended the incentive, contending that borrowers sometimes choose a higher interest rate for good reason -- as a trade-off for lower closing costs, for example.
A borrower who plans to sell the property quickly can often save money by reducing such upfront expenses.
Consumer activists, however, contend that most borrowers are unaware of the yield spread premiums, and that the bounties paid to mortgage brokers usually come at the borrower's expense.
"It's going to be hard -- despite the broker's effort -- to just get away with improved disclosure," Andrews said.
Also gaining support is the idea of creating a registry with the names of licensed brokers. Rather than resist such proposals, brokers' lobbyists have battled to make sure that the measures apply to others as well, such as loan officers at banks.
The registry is touted by supporters as a way to help combat fraud by helping consumers know that they are dealing with legitimate professionals who have met basic standards. "Everybody should be included -- not just brokers," said Ed Smith Jr., chief executive of Plaza Financial Group, a San Diego mortgage brokerage. "I think it should be a level playing field, whether they work at banks or whether they work at a Countrywide."
It remains uncertain how Congress is prepared to treat Wall Street, which in effect joined the mortgage business by bundling loans into big packages and selling them as securities. Some consumer advocates worry that any new safety net for consumers will remain porous unless investment firms are held accountable.
"Ultimately, the success of the legislation will be highly dependent on the ability to have appropriate accountability up and down the mortgage chain," said Allen J. Fishbein, director of housing and credit policy at the Consumer Federation of America.
The issue is expected to heat up this month. Frank has signaled a desire to get a broad-based lending bill through his Committee on Financial Services by the end of this month, which could set the stage for a House vote before Thanksgiving. The outcome in the Senate is far less certain.
Few doubt that well-heeled lenders could mount a powerful counterattack designed to water down proposed new mandates. "The mortgage industry could kill this legislation," Fishbein said. "They have in the past, and they could do it in the future."
But for all that, the tenor of debate has changed, and more bad news about foreclosures plays into the hands of those who seek major change. "The impact circle of this crisis is expanding," said Michael D. Calhoun, president of the Center for Responsible Lending, alluding to the fallout from foreclosures that affects neighborhoods, investors and the broader economy.
The result, he said, is that many politicians have a new motivation to make sure such an episode does not repeat itself. "Sometimes we come back from a meeting on Capitol Hill and say, 'What a difference a year makes,' " he said.
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