New Act Would Overhaul Lending, Deter Foreclosures

Posted on November 13th, 2007 by saman

The new Mortgage Reform and Anti-Predatory Lending Act approved just last week by the House Financial Services Committee, is now on its way to the floor for a yea or nay vote. The new legislation has two primary purposes: To revise mortgage-lending policies and to provide a way out of the current mortgage foreclosure crisis. However, many finance-industry professionals warn that the ramifications of passing this legislation will be a severe blow to both the housing and credit markets and that in the end, it will not really help low-income home buyers.

The Anti-Mortgage Lending Act contains a “federal duty of care” provision that that makes it mandatory for lenders to adhere to a series of complex regulations about the terms and conditions underlying their loans. Critics fear either the lenders or their employees who are required to adhere to it will not understand this requirement. As a case in point, lenders will be required to determine what types of loans are ‘appropriate’ for all applicants and then provide each with understandable explanations of their available loan options.

The new bill also establishes a federal cause of action for those lenders who do not comply with the code’s requirements. This, critics fear, will jump start large numbers of mortgage foreclosure lawsuits that will overload court dockets.

Lenders would also be responsible for making a reasonable determination of good faith based upon documented data that each applicant for a mortgage has the ability to repay it.

Critics simply ask how will the terms reasonable be defined and by who and how will good faith be determined?

The Anti-Mortgage Lending Act also wipes out some of the Uniform Commercial Code by erasing the idea of ‘a holder in due course.’ This takes place by allowing a borrower to sue all assignees of his loan for cancellation of the debt and repayment of the costs he incurred should the loan violate the statute’s lowest standards for the borrower’s reasonable ability to repay the loan.

Interestingly enough, the new bill has standards and requirements that borrowers can readily use as their defense against foreclosure. This means, according to the act’s critics, that no borrower can be foreclosed without a trial and thereby saturating the courts with new lawsuits. It would seem that this area alone would be sufficient to deter lenders from offering most mortgages.

Finally, the bill would state that lender who does foreclose would have to take the property back subject to any leases entered into before the foreclosure. The lender would have no say in approving or denying the lease even if the rent stipulated is below area averages for similar properties and the term is very long. This would permit borrowers in financial difficulty to prevent foreclosure by entering into very long-term leases that would prevent foreclosure.

There is no doubt that the sponsors of the Mortgage Reform and Ant-Predatory Lending Act conceived it with nothing but good intentions and concerns for the financially troubled. However critics seem to discern more bad results than good should this act become law.