Sen. Chuck Schumer of New York is drafting a predatory lending bill that would create suitability standards for mortgage lending and a national regulatory system for all mortgage brokers. The suitability standard will ensure that mortgage lenders and brokers "never issue a loan that the borrower cannot afford," Schumer said.
The bill would also create a suitability standard for borrowers and prohibit pre-payment penalties, according to a statement released by Federal Reserve Chairman Ben Bernanke's office. At the Joint Economic Committee hearing, Bernanke argued that the Fed hasn't been asleep at the wheel on sub-prime mortgages, telling Congress that nontraditional mortgage guidance from the Fed "has been in the air for some time."
Nationally, 1.8 million Americans are at risk over the next two years as their monthly payments rise under the terms of these sub-prime loans. The senator based his analysis on mortgage data from the U.S. census, federal banking regulators and the Joint Economic Committee.
Schumer is offering legislation to regulate all mortgage brokers, outlaw loans in which borrowers aren't properly informed of escalating payments and create a New York task force to try to help affected homeowners restructure their loans and keep their houses.
"The sub-prime market is the Wild West of mortgage loans and it's time we bring a sheriff to town," Schumer said. "The first step is making sure that borrowers are protected ... from loans that promise them the world and instead give them a mountain of debt."
Sub-prime lending has come to the forefront of discussion lately because of an increased number of foreclosures among people with those mortgages. Several sub-prime mortgage companies have also gone out of business.
Sen. Hillary Rodham Clinton recently called the sub-prime market "broken" and said the Federal Housing Administration should issue more mortgages at lower rates to working-class families so they don't have to seek sub-prime loans.
The problem was underscored when the Mortgage Bankers Association said that the number of new foreclosures reported during the fourth quarter of 2006 reached the highest level in 40 years. Foreclosures and delinquency rates were the highest for sub-prime loans.
U.S. Treasury Secretary Henry Paulson said that his department will gather federal and state banking regulators to discuss the sub-prime issue.
"As we think about the lessons learned, we need to think about the regulatory structure," Paulson said. "Also, we need to think through the consumer protection area in terms of looking at issues like predatory lending and fraud."
Barbara Roberts, broker/owner at Prudential Fox Properties in Oneonta, N.Y., said she advises clients to be pre-approved from a traditional lender before making an offer on a house and before looking for houses. That pre-approval lets people know how much house they can afford.
Potential buyers should also ask about the terms of the mortgage and what the payments are going to be in three to five years. Some of the liar loans bring people in by promising a low payment, which later balloons.
Schumer emphasized that he is not talking about local, traditional mortgage lenders. Also, not all sub-prime lenders are unscrupulous. If no loans were made to people with less-than-perfect credit histories, homeownership would be impossible for millions of Americans. But there is also no doubt that the problem of defaults in the sub-prime market is worsening.
"Congress must respond to the emerging crisis in the sub-prime market," Schumer said. "When so many mortgage brokers are able to deceive our most vulnerable families into loans that they can never afford without batting an eye, the system is broken."
Schumer said his efforts are focused on what happens before people get to the point of facing foreclosure. The New York senator, who chairs the Senate Banking Subcommittee on Housing, said he will be introducing the bill very shortly.
For more information, visit www.house.gov/jec.