Mortgage Reform and Anti-Predatory Lending Act of 2009

Earlier this month the Houses of Representatives passed HR 1728, the "Mortgage Reform and Anti-Predatory Lending Act", a revival of HR 3915 which was passed by the last Congress but never taken up by the Senate.

Like HR 3915, HR 1728 contains “repayment ability” and “borrower benefit standards” provisions, “prepayment penalty” and “yield spread premium” restrictions, and imposes responsibilities on secondary market participants.

Also like HR 3915, HR 1728 establishes a "duty of care" for mortgage originators, prohibits "steering" borrowers to products that are not in borrower’s "interest", and requires mortgage originator’s licensing and registration. This duty of care includes standards regarding determination of a borrower's repayment ability and, for refinances, determination of a “net tangible benefit” and “qualified safe harbors” from which "qualified mortgages" meeting certain stringent requirements are exempted.

Unlike HR 3915, HR 1728 requires loan originators to retain a portion of the mortgages as a means of sharing credit risk with subsequent purchasers/”securitizers” (i.e., one transferring, conveying, or assigning residential mortgage loans including to any securitization vehicle).
HR 1728 also amends the Home Ownership and Equity Protection Act by significantly expanding both "high-cost mortgage’s" definition and afforded protections, creating safeguards for escrow accounts and lender/forced placed insurance, and amending the Real Estate Settlement Procedures Act to require faster consumer inquiry responses, increased penalties, and prompt payment crediting.

HR 1728 fortifies appraiser requirements by establishing stronger appraiser independence standards backed both by tough enforcement provisions and more stringent appraiser licensing and education standards.

If enacted in its current - - or an even a vaguely similar - - draft, HR 1728 could quell the credit markets at a time when liquidity is desperately needed.

Further, it is unclear whether originators would make - - and whether key current secondary market players like Fannie Mae and Freddie Mac would buy - - non "qualified safe harbor mortgages" and, if so, whether depository institutions and private mortgage companies will retain the requisite recourse when selling or securitizing the loans.