Sen. Dodd proposes mortgage reform bill
WASHINGTON (Reuters) - The chairman of the Senate Banking Committee unveiled legislation on Wednesday that would prohibit mortgage brokers and lenders from steering borrowers to high-cost loans.
The reform measure is meant to curb some of the excesses of the recent housing boom, which has caused a spike of loan delinquencies and foreclosures, according to Sen. Christopher Dodd, a Connecticut Democrat.
The legislation "will put an end to the practices that have forced thousands of Americans into foreclosure and put thousands more in danger of losing their homes," Dodd, a contender for the Democratic nomination for the presidential election in November 2008, said in a statement.
In recent weeks, financial markets have been rocked by fears that weakness in the home lending sector will spread to other parts of the economy.
On Wednesday, leaders of the home building industry met with senior officials at the Federal Reserve to discuss the crisis. In mid-August, the Fed made an emergency cut to its discount lending rate to calm markets fearful that credit standards were tightening.
Robert Toll, the chief of Toll Brothers Inc builders, said that many potential home buyers were staying out of the market because of fears over home prices.
"I think it's confidence in the consumer, who has a fear that if they buy today they are catching a falling knife and that they are going to be sorry because they could have bought for less tomorrow," he said in an interview on CNBC.
Dodd said subprime borrowers who won a loan despite their damaged credit have been among the most hard-hit by recent market turmoil. His legislation would require subprime mortgage lenders to hold annual costs like taxes and insurance in escrow and have proof that the borrower has the ability to make payments.
The plan would create new standards for mortgage servicers by eliminating some of the costs and fees they impose for tardy payments. Mortgage servicers are often hired by the lender to make collections on a loan.
The legislation would also put a greater number of costly loans under regulations of the Homeownership and Equity Protection Act, which protects borrowers from predatory lenders. Dodd has previously chastised banking regulators for being unwilling to fully enforce HOEPA as many unsafe subprime loans were being offered.
Dodd's legislation would hold lenders responsible when home appraisers give a faulty value of the property or when mortgage brokers push borrowers into costly loans.
Several consumer and community groups on Wednesday endorsed Dodd's legislation as a good step to protect borrowers who are due to see their payments climb as the early, teaser interest rates expire.
"The announcement comes at a critical time, with nearly two million families facing foreclosure as pools of adjustable-rate mortgages reset in the coming months," said John Taylor, President and CEO of the National Community Reinvestment Coalition.
Several lawmakers have proposed measures to reform the home loan system but this is the first explicit plan from Dodd who, as chairman of the Banking Committee, will have a large role shaping any mortgage legislation.
The proposal does not offer a specific dollar amount in borrower aid.
