Legislative bull's eye: Mortgage lenders, brokers

NEW YORK (CNNMoney.com) -- The subprime crisis has put lawmakers under pressure to do something not only to help homeowners who could lose their homes but also to nail the guys who created the mess.

While there's lots of blame to go around, lawmakers are likely to focus on how to rein in lenders, brokers, appraisers and, not insignificantly, mortgage investors.

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) last week proposed a predatory lending bill.

That bill is geared toward permanently expanding mortgage borrower protections and weeding out unscrupulous lenders.

Among other things, Dodd's bill would:

• Require lenders to assess borrowers' ability to pay the mortgage even after a rate reset if they're signing up for an adjustable-rate loan.
• Require lenders to verify subprime borrowers' income with documentation. Earlier this year, the Federal Reserve
• Prohibit pre-payment penalties and yield spread premiums (YSP) in subprime loans. A pre-payment penalty is the fee some lenders charge if you end up paying off your mortgage early, including if you choose to refinance. It sometimes can be as high as six months' worth of mortgage payments. A YSP is the difference between the the lowest interest rate a borrower qualifies for, and the actual rate he gets. A broker's fee may be based on it.
• Prohibit steering borrowers to more expensive loans when they qualify for lower cost ones.
• Hold lenders liable for appraisals and for brokers' actions when the broker is paid based on yield spread premiums.

Jaret Seiberg, a financial services analyst at policy research firm Stanford Group, said Barney Frank (D-Mass.), chairman of the House Financial Services Committee, is also expected to propose a reform bill with somewhat similar provisions.

In addition, Seiberg said, Frank also may include provisions that address mortgage securitizers (those who bundle and sell loans as securities). They would be held liable if they buy loans that violate the bill's provisions unless they can show they took steps to avoid buying predatory or deceptive loans. (What readers are saying about government's responses to real estate problems)

"This [provision] is intended to force securitizers to police nonbank lenders," Seiberg wrote in research note.

Many also argue that the robust appetite on Wall Street for mortgage-backed securities encouraged subprime growth, because banks didn't have to keep such risky loans on their books and could just sell them to investors as part of bundled packages.

Seiberg noted, however, that liability provisions are what could prove to be the major sticking point in any mortgage reform legislation.

Right now, the Dodd proposals are likely to serve as a template for any Senate bill, Seiberg wrote. And, he added, "if delinquencies and foreclosures rise appreciably in the coming months, the bill could get much worse for mortgage lenders."