Mortgage brokers urge fair new rules

Loan crisis prompts bills in Congress

October 05, 2007|By Jonathan Peterson | Jonathan Peterson,LOS ANGELES TIMES

WASHINGTON -- Mortgage brokers, under fire for steering borrowers into high-cost home loans, are a prime target of fair-lending legislation soon to be unveiled on Capitol Hill.

One proposal takes aim at the commissions brokers are paid when they sell mortgage loans at an interest rate higher than what the borrower could otherwise get. That measure is among an array of proposals designed to make various players in the loan process more accountable.

Bills being prepared in the House and Senate seek to make various players in the lending industry more accountable - including mortgage brokers.

Brokers are lobbying to prevent being singled out. They argue that banks and mortgage companies create the loans and set the ground rules for how brokers are paid. They also say that any federal legislation that requires brokers to be licensed should apply to staff loan officers at banks and mortgage companies, too.

"We're getting a lot of the blame, but there are a lot more players here," said Harry Dinham, past president of the National Association of Mortgage Brokers. "Everybody played a part in what's taken place. ... We're looking for genuine fairness here."

While lenders have resisted new regulation, the continuing mortgage mess has enhanced the credibility of consumer advocates. These activists have complained about predatory lending practices for years - especially in the subprime market for borrowers with imperfect credit, which is now at the eye of the foreclosure storm.

"The subprime meltdown and the Democratic control of Congress only put them [consumer advocates] in a better position," said Wright Andrews, a veteran lobbyist for mortgage lenders. "I don't see any way that legislation could pass that is not going to have a much tougher overall standard."

Brokers, who represent various lenders, are responsible for at least half of mortgage loans, according to their national association, and by some estimates significantly more. They traditionally have worked in a climate of little or no regulation and have not been the focus of past federal lending rules.

That is expected to change.

"If there's one consensus on both sides of the aisle, it's that mortgage broker oversight needs to be increased," said Howard Glaser, a mortgage industry consultant and former U.S. housing official.

Topping the list is the "yield-spread premium," the bonus brokers are paid when they sell loans with higher interest rates than a consumer qualifies for.

A draft of legislation that Rep. Barney Frank, a Massachusetts Democrat, might introduce this month explicitly bans such pay. Sen. Christopher J. Dodd, of Connecticut, recently said he planned to introduce legislation that would "prohibit brokers and lenders from steering homebuyers to a more costly loan."

Frank and Dodd are chairmen of the House and Senate banking panels.

Brokers have defended the incentive fiercely, contending that borrowers sometimes choose a higher interest rate for good reason - as a trade-off for lower closing costs, for example. A borrower who plans to sell the property quickly can often save money by reducing such upfront expenses.

Consumer activists, however, contend that most borrowers are unaware of the yield-spread premiums, and that the bounties paid to mortgage brokers usually come at the borrower's expense.

"It's going to be hard - despite the brokers' effort - to just get away with improved disclosure," said Andrews, the lobbyist. Also gaining support is the idea of creating a registry with the names of licensed brokers. Rather than resist such proposals, brokers' lobbyists have battled to make sure that the measures apply to others as well, such as loan officers in banks.

Jonathan Peterson writes for the Los Angeles Times.

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