U.S. lawmaker plans law to curtail risky mortgages

U.S. Representative Barney Frank (D-MA), chairman of the House Financial Services Committee, holds a field hearing entitled ''Seeking Solutions: Finding Credit for Small and Mid-Size Businesses in Massachusetts'' in Boston, Massachusetts March 23, 2009.

CAMBRIDGE, Massachusetts (Reuters) - A powerful U.S. lawmaker said on Monday he is preparing a broad package of legislation that would promote stability in the mortgage market by limiting future subprime lending, and would also take on executive compensation and limit systemic risk.

U.S. Rep. Barney Frank, who chairs the House Financial Services Committee, said on Monday he expects to hold hearings on this bill by the end of April.

"We will bring a bill out in April that will stop people from getting loans in the future that they cannot repay," said Frank, whose committee is spearheading the United States' efforts to battle the banking crisis. "It is important that we say you can't securitize 100 percent of anything."

Frank aims for the package to become law by the end of the year.

The Massachusetts Democrat said he did not propose to eliminate mortgage securitization -- essentially selling a loan to investors -- but said that allowing lenders to securitize the full value of a loan encouraged overly risky lending practices.

"We start with restricting securitization, not to the point where it stops," Frank said in a speech at Harvard University in Cambridge, just outside Boston.

His bill would limit the securitization of subprime mortgages, but Frank said his eventual goal would be to apply the no-100-percent securitization rule across the financial industry.

TO TAKE ON BONUSES

It will also take on the issue of executive bonuses in an effort to ensure that financial industry officials do not take excessive risks.

The aim is to do away with a culture in which, he said, "If you take a big risk and it pays off, you make money and if you take a big risk and it costs the company money, you break even."

He also said that U.S. regulators need to have the authority to wind down non-bank financial institutions, to avoid a repeat of the kind of market turmoil that accompanied the crises at Lehman Brothers and American International Group.

"No institution anywhere in the financial system ought to be able to get so indebted that it threatens our financial stability," Frank said.

His committee is also planning to limit credit card issuers' ability to impose penalty interest rates.

"We will have a bill that will be coming out that will say they cannot raise your interest rate retroactively on any money you already owe them, that if you make a payment of money you owe that they cannot allocate it to that part of your debt that has the lowest interest rate," Frank said.

The subprime mortgage business -- loans to less-creditworthy borrowers -- went into a sharp downturn three years ago, setting off the current world financial crisis. While activity in that business has largely ground to a halt, Frank said he is pushing legislation to restrict it in the future out of a presumption the market will return someday.

"It won't be dead forever," Frank said of subprime lending. "It would be a grave mistake to think it's never going to come back again."

(Reporting by Scott Malone; editing by Carol Bishopric, Gary Hill)