NEW YORK (CNNMoney.com) -- Bar mortgage brokers from getting bonuses to sign up borrowers for more costly loans. Force lenders to verify whether consumers are able to repay loans.
Those are just two popular provisions in a mortgage reform bill being debated Wednesday at a House Financial Services Committee hearing. But there are a few major sticking points.
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| Representative Barney Frank (D - Mass.) |
The first is "assignee liability," which would let consumers sue lenders and big banks that securitize - that is, bundle and resell - loans.
Borrowers could have their loan rescinded and their costs repaid if the loan doesn't meet the standards set out in the bill.
Those standards include the lender making sufficient effort to ensure the borrower can afford the loan and that a refinancing provides "a net tangible benefit" to the consumer.
For example, a refinancing should not put the borrower into a negatively amortizing loan, which is a loan where the balance owed grows over time despite the borrower making payments.
Consumer groups, however, do not think the bill goes far enough in holding securitizers liable. "The limited remedies in the bill do not give Wall Street adequate incentives to police themselves," said 11 leading consumer advocacy groups in a combined statement.
The financial services industry and others who do not favor assignee liability, contend it will harm the market for trading mortgages.
"Players in the secondary market will reject purchase of loans that expose them to liability and the credit crunch will spread even further. Won't lenders be forced to raise rates for everyong to price in this risk?" said Rep. Ed Royce (R-Calif.) in his opening statement at Wednesday's hearing.
But there may be room for compromise. The bill provides that lenders and securitizers can avoid liability if they fix the problem loan within 90 days of the consumer complaint or if they have a policy against buying questionable loans and have warranties from the original lender that say the loan is up to snuff.
"Companies do treat warranties and representations seriously. ... This gives securitizers a financial incentive to ensure that they've not purchased illegal or predatory loans," said Jaret Seiberg, a financial services analyst at policy research firm Stanford Group.
The provision will also put securitizers in a position to police nonbank lenders, who were not regulated as stringently as the federally regulated mortgage providers and were big sources of punitive subprime loans.
The bill also prohibits class action suits against securitizers. Essentially, that means "if you act in good faith you can't be sued out of business," Seiberg said. "As long as that's the case, it's probably something the industry can live with."
State standards
More controversial than assignee liability is the issue of whether the federal standards laid out in Frank's bill would set only a floor for state regulators.
Consumer advocates like that approach because states would be able to impose stricter regulations if they wanted.
But the financial services industry favors uniform standards in all states.
"Without a uniform national standard, this legislation could only serve to foster more confusion in the marketplace," the Mortgage Bankers Association said in a statement.
National banks and federal thrifts are already exempt from states' consumer laws. They must adhere to a federal standard. But nonbank lenders and brokers are subject to state laws.
In September, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) outlined elements of a mortgage reform bill he planned to introduce. Like Frank, Dodd includes provisions to prohibit financial incentives to push consumers into more expensive loans and requires lenders to verify consumer's ability to repay a loan.
But Dodd made no mention of any provision that would let consumers sue to get out of a punitive loan.
While Seiberg thinks Frank has a reasonable chance of passing his reform bill in the House, he doesn't think such a comprehensive measure will pass the Senate. "I think a narrower bill will garner more support," Seiberg said. Assignee liability faces more resistance in the Senate, he said, and could "end up on the cutting room floor." 
