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Testimony on Reform of Sub-Prime Lending

WASHINGTON (CN) - The Congressional Committee on Financial Services heard testimony last week from mortgage brokers, workers from the financial market and minority groups on the Mortgage Reform and Anti-Predatory Lending Act, which imposes heavy regulations on sub-prime mortgage lenders. All agreed increased regulation is necessary but some questioned whether the bill goes too far.

"An appropriate balance must be struck between safeguarding the consumer and making sure consumers have access to mortgages at a reasonable cost," said President of the National Association of Realtors Charles McMillan.

The bill distinguishes between mortgage originators and mortgage lenders. A mortgage originator is defined as "any person who assists a consumer in obtaining or applying to obtain a residential mortgage loan." And a mortgage lender is the one who has ultimately invested in the loan.

This distinction is important in the recent economic downturn, where mortgage originators hammered out a mortgage deal, but quickly sold the mortgage to other investors.

Currently, most of the liability of a loan is on lenders, but new rules will place some of this liability on mortgage originators.

If the bill passes, mortgage originators will have new regulations. Under the rules, they must verify that when a debtor refinances, or when a new loan is issued, the new loan will be significantly better for the borrower. Brokers would also have to verify that the borrower will be able to repay the loan.

Mortgage brokers would be penalized if they do not obtain and supply an appraisal of the property they are financing, or if they attempt to influence the appraiser.

"Studies indicated that up to 90 percent of appraisers have been asked to hit a targeted value, while 70 percent of appraisers feared that if they did not meet that target, their business would be harmed," said President of the National Association of Realtors Charles McMillan, who represents more than 1.2 million realtors.

With correct appraisals, buyers are more likely to get an appropriate loan for the value of the home they want to buy.

The bill would also define a "qualified mortgage" only as a 30-year, non-variable rate mortgage, striking a chord of controversy, particularly among lenders and realtors.

Chair of the National Association of Mortgage Brokers Denise Leonard represents more than 70,000 mortgage broker professionals. He said increased regulation was indeed necessary, but told the committee that the financial meltdown was the fault of opportunistic mortgage lenders, negligent rating agencies, and unregulated credit default swaps combined.

The entire recession, he said, cannot be blamed on mortgage brokers.

He hinted that regulations should not be vengeful or overbearing. "Overcorrection in some areas has already made the situation worse," he said.

Vice President of the National Association for the Advancement of Colored People Hilary Shelton, disagreed, and said the legislation doesn't go far enough. For example, he said the bill should take a step further in banning compensation to brokers based on the terms of the loan.

Shelton said predatory loans are not new to racial minorities in the U.S., and implied that legislation is long overdue. "African American and Latino borrowers are more than 30 percent more likely to have higher rate loans than Caucasian borrowers, even after accounting for differences in risk," said Shelton, citing a 2006 study by the Center for Responsible Lending.

McMillan had his own concerns that realtors would be held to the same standards as brokers because realtors fall under the general definition of a mortgage originator. He asked that realtors, who do sometimes assist buyers in finding a mortgage, be excluded from the rule.

Securities Industry and Financial Markets President Timothy Ryan Jr. warned that "the availability of subprime credit has evaporated," and worried that too many restrictions would hurt other loans.

Ryan also expressed the widespread concern that "qualified mortgages" is defined too narrowly because it only refers to 30-year, non-adjustable rate loans. "15 year loans rarely, if ever, have been associated with abusive lending. Legitimate forms of responsible lending will be impaired by their non-qualified status," he argued.

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