Mortgage bill focuses on ability to repay
WASHINGTON (Reuters) - Lenders would have to make efforts to determine a borrower's ability to repay a mortgage before making a loan under a bill being drafted by the U.S. House Financial Services Committee.
Defaults on U.S. subprime mortgages to borrowers with poor credit records rattled global credit markets in August.
The measure seeks to better match loans to a borrower's financial circumstances and would establish federal standards for state-licensed mortgage companies, according to a draft obtained by Reuters.
Lawmakers and federal banking regulators say many subprime lenders failed to check income data during the mortgage application process.
Lenders would have to determine that a borrower has a reasonable ability to repay the loan and pay related taxes, insurance and other charges, according to the draft bill.
Because many mortgage products have low initial repayment rates, the ability to repay these types of loans would include a calculation that amortizes payments over the life of the mortgage.
Lenders would also have to take into account a borrower's credit history, employment, current income, debt-to-income ratio and other financial obligations.
A spokesman for the House Financial Services Committee, Steven Adamske, said panel staff have spoken with regulators, consumer groups and the industry to tackle predatory lending practices.
He said the committee hopes to introduce a final bill "soon," accompanied by hearings, and then a markup meeting to consider possible changes.
A source familiar with the matter said the committee, led by Massachusetts Democratic Rep. Barney Frank, hopes to complete work on the bill in the next few weeks.
U.S. home foreclosures have risen sharply this year as many loans to subprime borrowers have reset at higher interest rates after low promotional rates expired.
To protect borrowers against refinancing fraud, the draft bill requires a lender to determine that the refinanced loan provides a "net tangible benefit" to the borrower.
A refinanced loan that costs more than the current mortgage, inclusive of points, fees and other charges, would not be a net tangible benefit, according to the measure.
The bill's proposals reflect previous commitments by Frank to protect consumers from being lured into loans they cannot afford while generating upfront fees for lenders and brokers.
The proposed bill would not apply to mortgages held by a borrower with a debt-to-income ratio of 50 percent or less, made with income documentation, and meeting other conditions.
