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House passes tough subprime lending law

A House bill aimed at protecting borrowers from abusive home loans faces a tougher future in the Senate amid opposition by the mortgage industry and criticism from the White House.
/ Source: The Associated Press

A House bill aimed at protecting borrowers from abusive home loans faces a tougher future in the Senate amid opposition by the mortgage industry and criticism from the White House.

The bill, passed Thursday evening by a 291-127 vote, garnered support from 64 House Republicans. No Democrats were opposed.

Many other Republicans, though, echoed banking industry criticisms, calling the bill an overreaction to the mortgage market’s woes and warning of a flood of lawsuits if it becomes law.

They also said the mortgage market has already pulled back from lax lending practices common during the tail end of the housing boom.

“Have no doubt, this bill will limit credit availability and options for thousands of Americans who want to grab their share of the American dream of homeownership.,” Kieran Quinn, chairman of the Mortgage Bankers Association, said in a statement. The American Bankers Association said it has “serious concerns” with the bill, arguing that it would add more regulations for banks.

The bill would ban lenders from making loans that borrowers can’t repay, create a nationwide licensing system for mortgage brokers and make Wall Street banks that package mortgage securities into investments liable for violations of lending laws.

Sen. Christopher Dodd, the Connecticut Democrat and presidential candidate who heads the Senate Banking Committee, is planning to introduce a similar bill in the coming days but is likely to face a tougher time putting together a measure that can pass the Senate. The White House is critical of the bill but has not promised a veto.

Proponents of the changes say the current mortgage market tumult could have been averted had stronger federal laws been on the books years ago.

Democrats and consumer advocates say many subprime loans made to people with weak credit were essentially predatory: containing confusing terms, generating high fees for mortgage lenders and forcing low-income borrowers into loans they can’t repay.

“The mortgages we’re talking about have nothing to do with home ownership,” said Rep. Brad Miller, D-N.C., one of the bill’s authors.

Nearly 2.3 million subprime mortgages are projected to reset at higher rates — and often dramatically higher monthly payments — through the end of next year. Many fear those loans will result in foreclosures that will drag down property values.

Financial markets around the world have been rocky for much of the year amid worries about the growing scope of losses in investments tied to U.S. home loans. Bear Stearns Cos. and Britain’s HSBC Holdings PLC and Barclays Group PLC were the latest major banks to predict losses in the billions.

Many Republicans were critical of the bill’s provision to increase banks’ liability, with Rep Ed Royce, R-Calif., calling it a “trial lawyer’s dream.”

The bill make will it harder for borrowers to replace problem loans with new ones, said Patrick McHenry, R-N.C., arguing that it “will do nothing to fix the current mortgage crisis we’re facing.”

Consumer groups, however, were disappointed at modifications made to attract the support of moderate Republicans after intense lobbying by industry groups.

The Washington-based National Community Reinvestment Coalition said the bill doesn’t do enough to make banks that package mortgage securities — and the institutional investors who buy them —legally responsible for fraud committed by lenders.

“What’s the point of having a bill that just doesn’t get at the main perpetrator?” asked John Taylor, the group’s chief executive.

Meanwhile, Sen. Tom Coburn, R-Okla., on Thursday blocked an effort by Senate Majority Leader Harry Reid, D-Nev., to get quick approval of a bill to expand authority for the Federal Housing Administration, a Depression-era agency that insures loans made to low-income borrowers.

A similar bill, backed by the Bush administration, passed the House in September.

It would permit the agency to insure loans at large as $417,000 — about $54,000 more than the current limit. The government estimates it could enable more than 200,000 homeowners whose loans are excluded from federal backing to come under the agency’s umbrella.

More informationRead the bill number is H.R. 3915.