by: Prof. Mark S. Scarberry
Pepperdine University School of Law; Malibu, Calif.
ABI Robert M. Zinman Resident Scholar; Alexandria, Va.
Representative Miller (D–N.C.) introduced H.R. 3915 on Oct. 22, 2007 on his own behalf and on behalf of Representatives Watt (D–N.C.) and Frank (D–Mass.). The bill would enact the Mortgage Reform and Anti-Predatory Lending Act of 2007 (MRAPLA). MRAPLA includes three titles, each of which deals with residential mortgages. The provisions of MRAPLA are complex, and not all of them can be addressed in this short summary. This introduction notes some of the more important provisions of Titles I, II and III. Particular provisions of Titles I and II are considered further in the next two sections of this summary.
Title I of MRAPLA would add definitions to §103 of the Truth in Lending Act (15 U.S.C. §1602) (TILA) and insert a new §129A in TILA. Section 129A would regulate “mortgage originators,” requiring that they be licensed and registered. It also would impose on them a detailed “duty of care” and prohibit them from “steering any consumer to a residential mortgage loan that is not in the consumer’s interest.” Finally, it would give borrowers a cause of action for damages against mortgage originators who violated the provisions of §129A or regulations prescribed under it.
Title II of MRAPLA would add a new §129B to TILA. Section 129B would set minimum standards for making of mortgage loans, requiring that the lender determine (1) that the borrower “has a reasonable ability to repay the loan,” and (2) in the case of a refinancing, that “the refinanced loan will provide a net tangible benefit to the consumer.” Violation of these provisions would give rise to a cause of action for damages against the mortgagee (the “creditor”) under TILA §130 (15 U.S.C. §1640). A violation also would potentially give rise to a right of rescission against the mortgagee under TILA §125 (15 U.S.C. §1635) if the mortgage were not a residential mortgage transaction (that is, per 15 U.S.C. §§1602(w) and 1635(e), if the mortgage was neither a purchase-money mortgage nor an initial-construction mortgage). An assignee of the mortgage, including a “securitizer,” could also be liable in some cases and to some extent; such assignee could also possibly be subject to the mortgagor’s rescission rights. Title II would double civil penalties, seem to extend TILA statutes of limitation in various ways (including apparently overruling Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998)), prohibit certain pre-payment penalties, make arbitration clauses unenforceable and, in some cases, protect bona fide tenants against the effects of a foreclosure. The tenant-protection provision would override a basic principle of state mortgage law, perhaps to the substantial detriment of mortgagees.
Title III deals with high-cost mortgages. The Home Ownership and Equity Protection Act of 1994 (Subtitle B of Title I of the Riegle Community Development and Regulatory Improvement Act of 1994, P.L. 103-325) amended TILA in various ways, including the addition of §129 (15 U.S.C. §1639), dealing with certain high-cost mortgages as defined in TILA §103(aa) (15 U.S.C. §1602(aa)), which does not use the term “high-cost mortgage.” Title III of MRAPLA would expand the definition in §103(aa) and define such mortgages as high-cost mortgages. Under MRAPLA, (1) purchase-money mortgages and open-end credit plans no longer would be excluded from the §103(aa) definition; (2) the Federal Reserve’s current Regulation Z interest rate trigger for high-cost mortgage status (12 C.F.R. §226.32(a)(1)(i)) would be codified; (3) the points-and-fees trigger would be modified; and (4) a third trigger would be created for mortgages that include certain pre-payment penalties (somewhat paradoxically, in that in many instances it now is—and in even more instances under MRAPLA it would be—a violation of TILA for a high-cost mortgage to include a pre-payment penalty provision).
With regard to high-cost mortgages, Title III of MRAPLA would amend TILA §129 to prohibit provisions for balloon payments, to provide detailed rules governing the prohibition on “engag[ing] in a pattern or practice” of making such high-cost mortgage loans “without regard to the consumers’ repayment ability,” and (going further than existing law) to prohibit the making of any such mortgage “unless a reasonable creditor would believe … that the consumer … will be able to make the scheduled payments,” based on specified factors not including the consumer’s equity in the home.
Further Analysis of Title I of MRAPLA—Some Additional Key Points
The definition of the term mortgage originator that §101 of MRAPLA would add as TILA §103(cc)(2) is quite broad. Taken literally, a consumer’s financial advisor, financial manager or attorney who helped the consumer to obtain or to apply for a residential mortgage loan, or who negotiated terms of such a loan on behalf of the consumer, would be a mortgage originator. As a result, such a person would have to obtain a state or federal license as a mortgage originator, register as a mortgage originator and either maintain a minimum net worth of $100,000 or obtain a $100,000 surety bond. This scenario is not unrealistic, given the assistance that high-income consumers often seek from financial advisors, financial managers and attorneys.
MRAPLA §101’s definition of the term securitizer, on the other hand, is somewhat narrow. It includes assignees that pool mortgage loans “for the purpose of issuing or selling instruments representing interests in such pools.” It is not clear that the term “interests” would extend beyond equity interests to include security interests; thus a special purpose vehicle (SPV) that did not sell equity interests in the loans, but instead issued bonds secured by the loans, might not be a securitizer. Further, an SPV that simply issued unsecured debt—backed up, of course, by the value of the mortgages owned by the SPV—would seem clearly not to be a securitizer. The importance of the narrowness of the definition is limited because the provisions of MRAPLA generally would apply the same to assignees and to securitizers. Note, however, that the protection for investors in MRAPLA §204 (to be codified as TILA §129(d)(6)) appears to extend only to “purchaser[s] of … instrument[s] representing an interest in such pool” of mortgages. To the extent that the holder of the ownership of the pool of mortgages is not entitled to such protection, the value of the debt instruments issued by the owner may be affected and the holders of such debt instruments may not themselves be protected by the proposed TILA §129(d)(6).
MRAPLA §102 provides a detailed standard for the duty of care it imposes on mortgage originators. To the extent that a consumer’s financial advisor, financial manager or lawyer is treated as a mortgage originator, some of the standards (such as diligently working to present the consumer with a range of residential mortgage loan products for which the consumer qualifies and certifying to the mortgagee that the mortgage originator has fulfilled all requirements applicable to the originator) seem at best out of place. One key duty, however, that would be of great help to consumers dealing with mortgage brokers is the duty to state whether “the mortgage originator is or is not acting as an agent for the consumer.”
MRAPLA §103 (to be codified as TILA §129A(b)(1)) would prohibit mortgage originators from receiving incentive compensation from the mortgagee based on the terms of the mortgage. Thus brokers could not be paid a yield-spread premium based on the interest rate, and thus their incentive to steer consumers to higher-interest rate mortgages would be reduced. However, this provision would not, it seems, prevent a lender whose interest rates were above the average from offering higher fixed rebates to brokers than are offered by other lenders so that brokers would have an incentive to steer consumers to the higher-interest rate lender. MRAPLA’s addition of TILA §129A(b)(2) would allow regulations to be prescribed to deal with that problem and other “steering” problems.
Section 104 of MRAPLA would motivate mortgage brokers to push for prompt creation of state laws licensing mortgage originators. If a state failed to create such laws, then the Secretary of Housing and Urban Development would have to set up such a licensing system for the state, and the HUD regulations would require a mortgage originator to act solely in the best interest of the consumer. See provision of MRAPLA §104, which would be codified as TILA §129A(c)(1)(C).
Section 105 of MRAPLA (which would be codified as TILA §129A(e)) provides for mortgage originators that violate the provisions of the new TILA §129A to be liable for up to three times what they stood to get out of the transaction, plus attorneys’ fees.
Further Analysis of Title II of MRAPLA—Some Additional Key Points
By enacting TILA §129B(a)(1), MRAPLA §201 would seem to impose a far-reaching obligation on lenders to determine that their borrowers are able to repay a mortgage before making the mortgage loan: “[N]o creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that … the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance, and assessments.” If the lender knows that the consumer is getting another loan (e.g., a second mortgage for part of the purchase price of the home), then the lender’s determination must take into account both loans. At first it appears that lenders would have to obtain detailed financial information from each borrower, no matter how creditworthy the lender may believe the borrower to be. See MRAPLA §201 (which would enact TILA §129b(a)(3)).
In addition, MRAPLA §202 (which would enact TILA §129B(b)) could have a very surprising effect. No refinancing would be permitted absent a reasonable and good faith determination by the lender that the refinancing would “provide a net tangible benefit to the consumer.” TILA §129B(b)(2) seems to provide that only cash-out refinancings (in which the newly-advanced principal exceeds the prior debt and the costs of refinancing) provide a net tangible benefit. The proposed statute would seem to prohibit a refinancing that would substantially lower the interest rate being paid by the consumer or otherwise provide the consumer with more favorable terms than the terms of the mortgage which was to be paid off in the refinancing, unless the new loan was enough larger than the old one to cover costs and provide cash out to the consumer. Of course, a consumer might willingly pay costs out of pocket to obtain a lower-interest rate mortgage; the consumer might not want a larger mortgage, and the value of the home might not be sufficient to justify a larger mortgage.
It appears, however, that if the new mortgage is a qualified mortgage, as defined in MRAPLA §203 (which would enact TILA §129B(c)), then there would be an irrebuttable presumption that the lender had appropriately determined that the consumer was able to pay the loan and that the refinancing would provide a net tangible benefit to the consumer. Note that TILA §129B(c)(3)(B)) would define a first lien mortgage as a qualified mortgage if its APR were no more than three points over the yield on treasury securities with comparable maturities and no more than 175 basis points over another specified mortgage rate, apparently based on recent conventional mortgage rates. (For mortgages that are not secured by a first lien, the permitted differentials would be higher, 5 percent and 375 basis points, respectively.) MRAPLA §203 would enact detailed provisions for determining whether mortgages are qualified mortgages (or, as noted below, qualified safe harbor mortgages).
Many mortgages would be qualified mortgages, and most refinancings that would lower a consumer’s mortgage interest rate presumably would be qualified mortgages. Thus many of the potential difficulties noted above might be avoided. Assignees also would be protected from liability if the mortgage were a qualified mortgage or even a qualified safe harbor mortgage (though the original mortgagee would not be fully protected if the mortgage were only a qualified safe harbor mortgage). See MRAPLA §203. Note also that §206 of MRAPLA would prohibit prepayment penalties on mortgages that were not qualified mortgages.
Even good faith assignees could be liable—potentially being subject to a rescission action and liable to pay the consumer’s attorneys’ fees—if they take mortgages that are neither qualified mortgages nor qualified safe-harbor mortgages, and if it turned out that the lender did not make the appropriate determinations. They could, however, qualify for protection from liability under the complex cure and due diligence provisions of MRAPLA §204, and class actions against them would be prohibited.
Finally, it should be noted that MRAPLA §208 (which would amend TILA §130(e)) apparently would legislatively overrule Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998). Beach held that after rescission rights expired at the end of a three-year period, they could not be used (by way of recoupment) against a holder of the mortgage who was foreclosing. TILA §130(e), as amended by MRAPLA, apparently would allow rescission rights to be used to prevent foreclosures regardless of how much time had passed.
The House Committee on Financial Services, chaired by Rep. Frank, held a hearing on H.R. 3915 on Oct. 24, 2007. Witnesses included the federal banking regulators, advocates for low-income homeowners and industry representatives. Some of the regulators expressed support for reforms in the way mortgages are originated, securitized and supervised, addressing concerns that loans be made with consideration of the borrower’s ability to repay. There was even support from regulators for the concept of liability on the secondary market as a means of protection against abusive practices. However, any secondary market liability should be limited and clearly defined, they testified. Some of the regulators expressed concern that the bill could create an excessive regulatory burden and impose standards that would be difficult to implement. They also noted that caution was needed to make sure that consumers were not harmed by inflexible underwriting standards or negative effects on the secondary market that could reduce credit availability. Click [HERE] for access to the archived webcast of the hearing and for the available written testimony.
The Wall Street Journal lead editorial of Oct. 24, 2007 commented on the legislation. Click [HERE] to read the editorial, “Mortgage Meltdown.”