Story summarized from American Banker
Thursday,
March 29, 2007
WASHINGTON —Senator Charles
Schumer (NY-D) said on [March 28th] that he will introduce legislation
"very shortly" that will make unlawful several “alternative”
mortgage products and that will set up a national system for regulating all
mortgage brokers, including those not now under the federal regulatory umbrella.
At an economic policy hearing
with Federal Reserve Chairman Ben Bernanke, Sen. Schumer centered most of his
comments around his concern over problems in the subprime mortgage market. He
said there must be tighter federal regulation of nonbank lenders and he
advocated a legislative standard that would prevent banks from making loans that
are not suitable for borrowers.
At the hearing of the Joint
Economic Committee, which he heads, Sen. Schumer said:
I'm
planning on introducing a bill that would establish a national regulatory system
for all mortgage brokers, including those at nonbank companies, and establish a
suitability standard for borrowers so that they will never issue a loan that the
borrower cannot afford.
Banks are against a
“suitability” standard because they say it would increase lenders'
vulnerability to lawsuits since evaluating a loan's suitability is subjective.
Israel Klein, spokesman for
Sen. Schumer, said his bill would also end prepayment penalties, stated-income
or low-documentation loans, and "pick a payment" options.
Sen. Schumer is also a member
of the Senate Banking Committee, and said in an interview with American Banker
after the hearing that he has discussed his upcoming bill with that
committee’s Chairman, Chris Dodd (D- Conn.), but would not speculate on
whether Dodd would support it. Sen. Dodd has said that he is preparing a bill to
restrict abusive lending but that getting such legislation enacted will not be
easy. He said in an e-mail to American Banker that he…
…will
not rule out any tool at his disposal as chairman, including legislation, to
attack this problem.
Sen. Schumer said the bill he
is preparing "has to go beyond" an anti-predatory-lending bill.
Lenders, he said, would "find ways to take advantage [of borrowers] even if
it goes beyond the terms of the loans."
He also said that regulating
banks isn’t enough, that nonbank lenders must be brought under federal
supervision:
You
can't just regulate the banks. There was good reason to regulate the banking
system. Now so much of the activity can be thrown over to nonbanks … and it
hurts the people who are regulated, hurts the people who buy the mortgages, so
you need some kind of change.
During the hearing Sen.
Schumer sought the Fed chairman Bernanke's support for more federal oversight:
This
is a terrible instance where a lack of oversight has led to a Wild West
mentality among unscrupulous lenders and, frankly, the exploitation of large
numbers of financially unsophisticated borrowers.
He queried Bernanke as to
whether a recently proposed regulatory guidance that would require hybrid
adjustable-rate mortgages to be underwritten at the fully indexed and fully
amortized rate would…
…be
enough, considering you don't even regulate the nonbank lenders who have issued
the vast majority of subprime loans in the past two years…
Schumer said states haven’t
enforced existing standards and asked whether the Fed—or another federal
agency—should have oversight over mortgage lenders:
Do
you need the ability to regulate them, or some other federal agency?
Bernanke didn’t reply to the
question directly, saying that the Fed lacks jurisdiction over nonbank lenders
and is even uncertain of the degree of its jurisdiction over some bank
subsidiaries:
The
Federal Reserve has no authority to enforce those regulations; therefore, it
falls to the states. From the Federal Reserve's point of view, where we need
more clarity is on our authority to regulate nonbank subsidiaries of banks and
bank holding companies. There is some uncertainty about our authorities there,
particularly on some consumer issues, and I've asked our staff to do a complete
review of our powers.
Schumer continued:
It
seems to me it makes no sense to say, 'We're regulating the bank subprime area,'
when it will just shift over to the nonbank. Do you agree with that?
Bernanke:
I agree with that. I think
that alternative ways to enforce the rules are required.
The Fed chief said that a
national anti-predatory-lending standard is "worth looking at," but he
warned against expanding lender liability so broadly that it would leave the
secondary market liable for problems with the loans it purchases.
Vice chairman of the House
Joint Economic Committee, Rep. Carolyn Maloney, asked why the Fed hasn’t
exercised the authority given to it by the Home Equity and Ownership Protection
Act—to define unfair and deceptive practices for all lenders. Bernanke said
that the Fed is considering this, but he repeated warnings that crafting new
lending standards is complicated and if not done carefully could result in a
credit crunch.
Any rule, he said, should be
"extremely precise [to avoid] killing the market" because private
prerogatives lead to "so much legal uncertainty" for lenders.
Bernanke also tried to allay
fears that problems in the subprime market will spill over into the housing
market at large. The Fed, he said, is keeping a close eye on the issue and has
not seen any indication of related trouble in the overall market.
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