WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
November 16, 2007
House Approves Mortgage Reform Legislation
Prior to adjourning for the two-week Thanksgiving recess, the House approved mortgage reform legislation by a vote of 291-127. The Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R.3915) requires mortgage lenders to only make loans the borrower has a “reasonable” ability to repay and establishes national underwriting standards. The bill also includes limited liability for securitizers. In a letter to House Financial Services Chairman Barney Frank (D-MA) and Ranking Member Spencer Bachus (R-AL), SIFMA and the American Securitization Forum (ASF) expressed appreciation for the deliberative and participatory manner in which H.R.3915 was crafted. SIFMA and the ASF said while a number of their concerns were addressed, others remained and they could not support the bill.
The Senate approved the Terrorism Risk Insurance Program Reauthorization Act by unanimous consent. The bill would extend the Terrorism Risk Insurance Act (TRIA) program for seven years. TRIA is currently scheduled to expire at the end of the year. The House previously passed a bill to extend TRIA for fifteen years.
The Senate also approved the Identity Theft Enforcement and Restitution Act (S.2168) by unanimous consent. The bill, introduced by Senate Judiciary Chairman Patrick Leahy (D-VT) and Ranking Member Arlen Specter (R-PA), would allow victims of identity theft to seek restitution for the loss of time and money spent restoring credit and remedying the harms of identity theft.
The Senate Banking Committee held a hearing on sovereign wealth funds.
Securities and Exchange Commission (SEC) Chairman Christopher Cox testified before the Senate Banking Committee on the SEC’s proxy rule proposals.
The SIFMA Washington Weekly will resume publication when Congress returns the week of December 3.
House Approves Mortgage Reform Bill
The House approved mortgage reform legislation this week by a vote of 291-127. The Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R.3915) establishes a federal duty of care; prohibits steering; calls for licensing and registration of mortgage originators, including brokers and bank loan officers; and establishes a minimum standard for all mortgages requiring lenders to consider a borrower’s “reasonable ability” to repay a loan and to ensure that refinanced loans provide borrowers a “net tangible benefit.” Under the bill, for loans that do not meet the minimum standards, a consumer has an individual cause of action against assignees and securitizers for rescission of the loan and the consumer’s costs for rescission if the assignee/securitizer does not meet certain requirements. The limited liability provisions for assignees/securitizers would preempt related state laws. Prior to approving H.R.3915, the House approved by voice vote a manager’s amendment offered by House Financial Services Committee Chairman Barney Frank (D-MA) and Ranking Member Spencer Bachus (R-AL), which makes a number of technical and conforming changes to the bill. The manager’s amendment also 1) clarifies the definition of loan originator; 2) narrows the scope of the preemption provision to make it clear that states cannot use or adopt state laws against securitizers/assignees for violations of the national standards or to impose remedies outside of the Federal remedy established in the bill and makes it clear that actions for fraud, misrepresentation, deception, false advertising or civil rights laws are not preempted; 3) clarifies the registration requirements for the Nationwide Mortgage Licensing System and Registry; 4) allows consumers to obtain a cure from assignee or securitizer if creditors or other assignees cease to exist or go bankrupt; 5) clarifies the incentive compensation provision and 6) adds a monthly disclosure requirement for mortgages.
In addition to the manager’s amendment, the House considered seventeen other amendments.
- An amendment offered by Rep. Paul Kanjorski (D-PA), Rep. Judy Biggert (R-IL) and others, which would add language from the Escrow, Appraisal and Mortgage Servicing Improvements Act (H.R.3837), was adopted by voice vote.
- Rep. Carolyn Maloney (D-NY) offered an amendment requiring a borrower to receive the option of a mortgage without a prepayment penalty if the borrower is offered an option with a prepayment penalty. The amendment was adopted by voice vote.
- An amendment offered by Rep. Brad Miller (D-NC) and Rep. Mel Watt (D-NC), to increase damages of a mortgage originator for violating the provisions of Title I to the greater of actual damages or three times the amount of compensation was defeated 169-250.
- An amendment offered by Rep. Tom Price (R-GA) to exempt prime loans from provisions of the bill was defeated 172-249.
- A Miller/Watt amendment which would have required assignees to cure the loan to avoid being liable for rescission was defeated by voice vote.
- An amendment offered by Rep. Adam Putnam (R-FL) to direct the GAO to conduct a study to determine the effects H.R.3915 will have on the availability and affordability of credit for homebuyers and mortgage lending was adopted by voice vote.
- Rep. Watt offered and withdrew an amendment that would have changed the irrebuttable presumption under Section 203 to a rebuttable presumption for all mortgages that allow a borrower to defer payment of principal or interest.
- An amendment offered by Rep. Jeb Hensarling (R-TX) would remove the civil liability of a lender and cancel the right of rescission for a borrower in instances when a borrower knowingly lied on their mortgage loan application. The amendment was adopted by voice vote after being amended to include the requirement that the obligor must have had actual knowledge of the false material information.
- Rep. Greg Meeks (D-NY) offered an amendment providing that the National Mortgage Licensing System and Registry should not directly or indirectly offer educational courses for pre-licensure or continuing education for mortgage originators. The amendment was adopted by voice vote.
- An amendment offered by Rep. Ginny Brown-Waite (R-FL), which would exclude loans insured by the Federal Housing Administration from provisions of the bill, was adopted by voice vote.
- An amendment offered by Rep. Scott Garrett (R-NJ) that would strike the rebuttable presumption under Section 203 was defeated 188-229.
- Chairman Frank, Rep. Miller and Rep. Watt offered and withdrew an amendment that would have authorized regulators to impose penalties in an amount equal to the sum of $1 million plus at least $25,000 per loan for pattern and practice violations of creditors, assignees and securitizers.
- An amendment offered by Rep. Al Green (D-TX) that clarifies that educational requirements include instructions on fraud, consumer protection and fair lending issues was approved by voice vote.
- Rep. Patrick McHenry (R-NC) offered an amendment that would strike Title III of the bill. The amendment was defeated 168-244.
- Rep. Chris Van Hollen (D-MD) offered and withdrew an amendment that would require in the case of a residential mortgage loan, closing costs may not exceed by more than 10 percent any estimate of closing costs disclosed to the consumer prior to the closing. Chairman Frank and Ranking Member Bachus promised to work with Van Hollen on the issue as the process moves forward.
- An amendment offered by Rep. Betty Sutton (D-OH) would require loan creditors or servicers to provide a written notice to consumers with hybrid adjustable rate mortgages six months before their interest rates are due to reset. The amendment was adopted by voice vote.
In a letter to House Financial Services Committee Chairman Barney Frank (D-MA) and Ranking Member Spencer Bachus (R-AL) prior to House consideration of H.R.3915, SIFMA and the American Securitization Forum (ASF) offered appreciation for their serious and thoughtful efforts and deliberative and participatory manner in crafting H.R.3915. SIFMA and the ASF said the bill as reported “tried to balance important reforms with maintaining the availability of mortgage credit to expand homeownership.” SIFMA and ASF said while several of their concerns have been addressed, others remain and they could not support the bill. SIFMA and ASF appreciated the inclusion of a uniform standard for the secondary market in the bill and called for preemption for the other titles of the bill. The organizations expressed concern with the narrow scope of loan products which would be eligible for the safe harbor under H.R.3915; and expressed concern with the expansion of loans under the scope of the Home Ownership and Equity Protection Act (HOEPA) as part of Title III of the bill. SIFMA and ASF said there should not be an outright prohibition on mandatory arbitration and called for language to be clarified so that it is not construed or interpreted as prohibiting non-judicial foreclosure in accordance with applicable state laws. SIFMA and the ASF urged opposition to amendments offered by Rep. Brad Miller (D-NC) and Rep. Mel Watt (D-NC) which would increase the potential damages of a mortgage originator for violating the provisions of Title I; would require assignees to have policies and procedures in place and to cure the loan to avoid being liable for rescission; and would change the irrebuttable presumption under Section 203 to a rebuttable presumption for all mortgages that allow a borrower to defer payment of principal or interest. SIFMA and the ASF said if the Miller/Watt amendments were adopted, they would oppose H.R.3915.
In a Statement of Administration Policy (SAP) this week, the administration said it supports efforts to improve oversight of the mortgage origination process and to prevent predatory lending. The administration said while it appreciates several goals of H.R.3915, it has concerns with the bill as drafted. Specifically, the administration does not support the specific underwriting standards, assignee liability provisions and the subjective obligations for mortgage originators included in H.R.3915.Senate Approves TRIA Extension Bill
The Senate approved legislation to extend the terrorism risk insurance program for seven years by unanimous consent. The Terrorism Risk Insurance Act (TRIA) is currently scheduled to expire at the end of the year. The Terrorism Risk Insurance Program Reauthorization Act would keep the threshold at which the government is obligated to help pay for losses from terrorist attacks at $100 million. The bill does not expand the program to include group life insurance nor does it require insurers to “make available” coverage for nuclear, biological, chemical or radiological attacks. The TRIA extension bill also requires Treasury to submit a report and issue regulations regarding the allocation of pro rata payments for insured losses if such losses exceed $100 billion. The Senate Banking Committee approved the bill 20-1 on October 17. The Senate bill must now be reconciled with legislation approved by the House in September. The House approved a fifteen-year extension (H.R.2761) by a vote of 312-110. H.R.2761 would lower the threshold to $50 million and would require insurers to “make available” coverage for nuclear, biological, chemical and radiological attacks. H.R.2761 would also expand TRIA to include group life insurance.
Senate Approves Identity Theft Bill
The Senate approved the Identity Theft Enforcement and Restitution Act (S.2168) by unanimous consent. Under S.2168, victims of identity theft have the ability to seek restitution for the loss of time and money spent restoring credit and remedying the harms of identity theft. The bill also ensures that identity thieves who impersonate businesses in order to steal sensitive personal data can be prosecuted under federal identity theft laws and ensures those who steal personal information from a computer even if the victim’s computer is located in the same state as the thief’s computer are prosecuted. S.2168 makes it a felony to employ spyware or keyloggers to damage ten or more computers regardless of the aggregate amount of damage caused; and makes it a crime to threaten to steal or release information from a computer. The bill was approved by the Senate Judiciary Committee in November by voice vote.
Banking Committee Examines Sovereign Wealth Funds
David McCormick, Under Secretary for International Affairs, Treasury Department, told members of the Senate Banking Committee that sovereign wealth funds bring many benefits to the economic system, yet also raise potential concerns. Specifically, he said foreign investment in the United States, including from sovereign wealth funds, strengthens our economy, improves productivity, creates good jobs and spurs healthy competition; and sovereign wealth funds have the potential to promote financial stability. Under Secretary McCormick said among the concerns are sovereign wealth funds could promote a new wave of investment protectionism, which would be harmful to the economy; transactions involving sovereign wealth funds may raise legitimate national security concerns; and sovereign wealth funds may raise concerns related to financial stability, because they represent large, concentrated and often nontransparent positions in certain markets and asset classes. The Treasury Department has proposed that the International Monetary Fund (IMF), with support from the World Bank, develop best practices for sovereign wealth funds, building on existing best practices for foreign exchange reserve management; and has proposed that the Organization for Economic Cooperation and Development (OECD) identify best practices for countries that receive foreign government-controlled investment.
Sen. Evan Bayh (D-IN), who chaired the hearing, said we must do what we can to attract investment in the United States, while insulating against the risk of foreign government influence on our economy. Senate Banking Committee Ranking Member Richard Shelby (R-AL) expressed concern with the amount of sovereign wealth fund investment in U.S. oil and gas companies. Sen. Jim Webb (D-VA) expressed concern with the national security implications of the expansion of sovereign wealth funds--he said he sees a major difference between individual foreign investment and investments made by a foreign government. Under Secretary McCormick said the Treasury Department is in the process of implementing the Foreign Investment and National Security Act (FINSA) to improve the CFIUS process to ensure protection against national security concerns. McCormick said the government is monitoring sovereign wealth fund investment and will take action if the funds use their investments to undermine U.S. national security.
Members of Senate Banking Committee Express Concern with SEC’s Plan to Adopt Proxy Rules
During a hearing this week, members of the Senate Banking Committee urged the Securities and Exchange Commission (SEC) not to adopt a new rule in the next few weeks governing proxy access for the 2008 proxy season. Sen. Jack Reed (D-RI), Sen. Robert Menendez (D-NJ) and Sen. Chuck Hagel (R-NE) cautioned the SEC against taking action while not at full capacity. SEC Chairman Christopher Cox said the SEC should adopt a rule for the 2008 proxy season to create certainty and then go back to the drawing board to address proxy access again early next year. He said without a temporary rule in 2007 for the 2008 proxy season, current law—because of uncertainty created by the ruling of the U.S. Court of Appeals for the Second Circuit in the American Federation of State, County and Municipal Employees v. American International Group (AFSCME v. AIG) case—gives investors room to nominate directors without making disclosures that are otherwise required. Chairman Cox said the SEC is not bound to either proposal it approved earlier this summer—one proposal would allow companies to exclude shareholder proposals from the annual proxy; the second proposal would give shareholders a way to nominate corporate directors if they own at least five percent of a company’s stock and meet other certain conditions.
Bills Introduced This Week
Rep. Michael Castle (R-DE) introduced legislation (H.R.4178) to amend the Truth in Lending Act to remove an impediment to troubled debt restructuring on the part of holders of residential mortgage loans. The bill is similar to an amendment Rep. Castle offered during House Financial Services Committee consideration of the Mortgage Reform and Anti-Predatory Lending Act (H.R.3915). The bill would insulate any creditor, assignee, securitizer or other holder of a residential mortgage from litigation by an investor or any other third party, or regulatory or enforcement action by any Federal or State agency for a period of six months following the date of enactment, if the residential mortgage is subject to a “qualified loan modification or workout plan” as defined in the bill. The House Financial Services Committee is expected to hold a hearing on the bill on December 6.
The Real Estate Transparency Act of 2007 (S.2343), introduced by Sen. Jack Reed (D-RI), would replace the current Good Faith Estimate with an early written settlement statement of all of the costs to be charged to that person at or before settlement of the loan. The early written settlement would be in the same form as the final settlement statement. S.2343 also requires the final settlement statement be provided to the borrower at least one business day before settlement. Under the bill, mortgage originators would be required to provide borrowers with a written agreement itemizing all of the fees they may charge the borrower and would be subject to statutory damages for violations of the disclosure provisions.
House Judiciary Committee Chairman John Conyers (D-MI) and Ranking Member Lamar Smith (R-TX) introduced the Privacy and Cybercrime Enforcement Act of 2007 (H.R.4175). The bill requires companies to notify law enforcement agencies about data security breaches involving sensitive data, such as Social Security Numbers (SSNs) and credit card information. H.R.4175 also increases penalties against cybercrime violations.
Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) introduced legislation (S.2369) that would prohibit the Patent and Trademark Office from granting patents for common tax strategies and tax planning inventions. The bill defines tax planning inventions as “a plan, strategy, technique, scheme, process or system designed to reduce, minimize, avoid or defer a taxpayer’s tax liability.” Tax preparation software to assist practioners and taxpayers prepare tax or information returns are exempt from the bill.