As was expected, the House Committee on Financial Services did approve H.R. 3915, which means that it will be sent for a vote from the full House of Representatives.
Two pieces of good news in that the surety bond/net worth requirements were removed and the committee did amend the restriction of Yield Spread, so that it is allowable on prime loans.
Committee chair Barney Frank (MA) and Representative Gary Miller (CA) commented that they would continue to work together toward addressing the YSP issue and the ability of consumers to finance origination fees and costs.
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Original Proposed Solutions to the Problems Facing the Mortgage Industry
There are many proposals currently being floated in Congress that call for major changes in the way mortgage loans are originated. One of the most comprehensive proposals is House Resolution 3915 The Mortgage Reform and Predatory Lending Act of 2007.
Although many of these proposals (including HR 3915) contain numerous consumer protections, they also contain clauses that are very harmful to both the mortgage industry and homeownership in general.
The plan we are proposing consists of three simple guidelines that are practical, cost-effective and easy to implement:
Guideline #1 - The government should require state licensure, federal registration and private certification of all mortgage originators, including brokers and bank loan officers.
- State Licensure – states should mandate that all loan originators (including brokers and bank loan officers) obtain a license to originate loans in that state.
- Federal registration – the federal government should mandate that all states share licensing information in a federal registry. This will enable the states to have easy access to information about criminal background checks, adverse actions and other steps already taken regarding an individual’s license in other states.
- Private certification – brokers and bank loan officers
should be required to be certified and meet minimum education and ethical standards in order for the loans they originate to be purchased by secondary market investors. Certification programs should require testing, ethical standards and annual continuing education.
Guideline #2 – If a mortgage originator doesn’t adhere to the standards set forth by their certification(s), they will be subject to penalties and lose their license to originate loans.
In order to be effective, a certification needs to have teeth. Rules are useless unless there is also a method in place to enforce the rules. Certification programs should terminate members based on violations and report violations to the proper state authorities. Depending on the nature of the violation, the states should impose penalties and/or revoke the originator’s license to originate loans. These adverse actions can then be automatically reported to other states through the federal registry resulting in violators being precluded from simply setting up shop in another state and repeating their unscrupulous behavior.
Guideline #3 - Require mortgage banks and secondary market investors to incur penalties and legal liability unless the loans they originate / purchase are originated by mortgage originators who are certified.
This would eliminate the fears and concerns of many financial institutions, banks and secondary
market investors. They would only face legal liability if they fall back into their old ways and start buying loans recklessly from originators who are neither qualified to give consumers the right mortgage advice nor committed to high ethical standards of practice. Beware of Danger:
None of the legislative proposals currently being considered are as straightforward as the proposal outlined in this policy statement. While some proposals have similar elements, there are many proposals that actually contain some very dangerous and harmful elements like the following:
Elimination of Yield Spread Premiums (YSPs)
Mortgage brokers make their living through commissions they earn from the wholesale lenders to whom they broker loans. These commissions are called yield spread premiums (YSPs) and are in most cases fully consistent with the commission schedules that are used by bank loan officers.
However, brokers tend to have more latitude than bank loan officers in pricing their loans. This can be very beneficial to consumers as brokers can sometimes be more flexible than bankers in terms of pricing out various point and interest rate scenarios on many loan programs.
One loan program that would be virtually outlawed under this proposal would be the no-cost refinance where the broker uses their YSP to pay the borrower’s closing costs. The very clause that is intended to protect consumers would result in harming them and increasing their refinancing costs.
Fiduciary Responsibility, Suitability Standards and/or “Net Tangible Benefit” Requirements
Proposals that call for requiring a federal fiduciary standard for mortgage originators or a “net tangible benefit” requirement for mortgage loans are impractical for the most part and will result in costly and unnecessary litigation within the mortgage industry. Secondary market investors would refuse to buy and securitize loans, bankers would refuse to issue loans, and brokers would refuse to originate loans – all out of fear that the consumer will come back and say, “You shouldn’t have sold me the loan in the first place.”
Furthermore, a federally-mandated standard would put the government firmly in the driver’s seat when determining which loans are suitable for consumers. It would be much better to allow consumers to make their own personal financial choices without government interference. Rather than imposing a federally-mandated “net tangible benefit” requirement with no practical way of enforcement, a better solution would be to implement the three guidelines proposed in this policy statement.
Legislating Underwriting Guidelines
Proposals that call for federally-mandated underwriting guidelines will greatly limit market-based innovation and snuff out many of the financial choices available to consumers. One of the greatest benefits of living in the US is the myriad choices we have when it comes to investments, homeownership, lifestyle, etc.
Government-decreed lending guidelines are not consistent with the personal freedoms inherent in the American way of life. Rather than jumping into the mortgage business, governments should simply require the industry to act in a responsible manner by implementing the three guidelines proposed in this policy statement.
Conclusion:
The three guidelines proposed in this policy statement are a roadmap to solving the problems being faced in today’s mortgage industry. The CMPS® community already consists of over 4,600 participants working together in this regard through certification, training, testing, continuing education and enforcement of the CMPS® code of ethics.
The mortgage planning process embraced by CMPS® professionals requires mortgage originators to work diligently in providing borrowers with a list of mortgage options and a comparison of the financial costs and benefits associated with these options. For more information on the mortgage planning process, please reference the attached article entitled Mortgage Planning Process.
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NOTE:
To receive a copy of the Mortgage Planning Process article that accompanied the original proposal, please send your request to: Samuel_AT_PIMTG.com (replace "_AT_" with "@").
To receive a copy of the Mortgage Planning Process article that accompanied the original proposal, please send your request to: Samuel_AT_PIMTG.com (replace "_AT_" with "@").
