Subprime fallout: US passes lending reforms

WASHINGTON, DC – In the wake of the subprime crisis, the House Committee on Financial Services has passed The Mortgage Reform and Anti-predatory Lending Act of 2007. The legislation creates a licensing system for mortgage loan originators, attaches limited liability to securitisation, creates new borrowing standards and increases customer protection – including the establishment of an Office for Housing Counselling.

The new licensing system for residential mortgage loan originators comes in response to public outcry over the irresponsible commission-based lending practices that sparked the subprime crisis. It means all lenders and individual employees responsible for issuing mortgages will now be registered.

The US government will create a Nationwide Mortgage Licensing System and Registry (NMLSR) that, together with federal banking agencies, will gather information from licence applicants – including results of written tests, personal histories and fingerprints. Any state that falls short of the standards will be subject to a backup licensing system from the Department of Housing and Urban Development (HUD).

New mortgage origination minimum standards tighten rules regarding a lender’s responsibility to provide the correct loans in an effort to eliminate predatory practices, and to increase disclosure and transparency to consumers and regulators, with a particular emphasis on the subprime sector.

The new standards also cover securitisation liability, adding responsibility to carry out due diligence to ensure loans conform to standards and assess the potential for damages to consumers.

Consumer protection for high-cost mortgages will expand, with APR and fee-trigger percentages lowered from 10% to 8% and 8% to 5% respectively. Requirements of pre-loan counselling have been introduced, while the financing of points and fees are prohibited. So are excessive fees for payoff information, modifications or late payments, as are practices increasing the risk of foreclosure – such as balloon payments, call provisions and encouraging a borrower to default.

An Office for Housing Counselling will also to be created within the HUD to provide counsel regarding home ownership and rental housing.

The Office will provide technical help and funding to state and local governments, and non-profit organisations, in setting up consumer education programmes. It will also require the certification of consumer computer programs for evaluating loan proposals, and limits the authorised appropriation for national public service multimedia campaigns for homeownership counselling services to $3 million until 2010.

The Office for Housing Counselling will also study and report to Congress on the root causes of the default and foreclosure of home loans.