The debate over regulatory reform is moving the Senate toward legislating mortgage underwriting standards as part of its massive financial services bill.
Senate Banking Committee chairman Chris Dodd, D-Conn., wants a new consumer protection agency to write the rules of mortgage banking to prevent unfair, deceptive and abusive lending practices. But Republican senators are pushing for underwriting standards, including a minimum 5% downpayment requirement.
"The [Dodd] bill does not address mortgage underwriting," said Rep. Bob Corker, R-Tenn. "We don't deal with the issue of bad loans being underwritten."
Meanwhile, Sen. Barbara Boxer, D-Calif., wants the Senate to restrict originator compensation that is financed through the mortgage interest rate.
Under the Boxer amendment, a loan officer or mortgage broker cannot roll their fees into the interest rate if they receive other fees from the transaction. Also, yield-spread premiums are not permitted if total points and fees exceed 2% of the loan amount.
The National Association of Mortgage Brokers is lobbying against the Boxer amendment, claiming it would unfairly harm LOs. "This amendment is an unwarranted attack on small business mortgage professionals, and NAMB is here to protect its members' livelihood," the trade group said.
Last week the Senate voted 93-5 to approve a bipartisan amendment that creates a new mechanism for managing the failure of large institutions without using taxpayer funds.
The fact that Sens. Dodd and Richard Shelby (Ala.) reached a compromise on "too big to fail" shows that the Senate is making progress toward passage of the 1,400-page bill, but so far there has been little compromise on consumer protection.
Late last week, the Senate voted down a substitute amendment by Shelby to curb the powers and independence of the Consumer Financial Protection Bureau proposed by Dodd. The new bureau housed at the Federal Reserve would have rule writing and enforcement authority over large depositories and nonbanks engaged in consumer finance.
Shelby's amendment to create a consumer protection division at the Federal Deposit Insurance Corp. appears to be going nowhere. (The FDIC unit would have primary and supervisory power over large nonbank mortgage originators.) The Senate rejected the Shelby substitute by a 61-38 vote.
Meanwhile, Sens. Corker and Johnny Isakson (Ga.) have teamed up to offer an amendment that calls for minimum underwriting standards and a study on risk retention. The minimum standards would be set by federal banking regulators-not the consumer protection bureau. The amendment instructs the regulators to set a minimum downpayment of at least 5%. The amendment also prohibits warehouse lenders and wholesalers from funding mortgages that don't meet the minimum standards.
