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Bill in Congress Takes Aim at Lenders

Barney Frank's bill would allow embattled homeowners to sue their mortgage lenders

By Truman Lewis
ConsumerAffairs.com

October 23, 2007

Meanwhile, a report finds more consumers are turning to Chapter 13 bankruptcies to try to stay in their homes.

Introduced by Rep. Barney Frank (D-MA), the chairman of the House Financial Services Committee, the measure would enable borrowers to sue if they claimed they were knowingly sold a mortgage they could not realistically be expected to repay.

“The people who package mortgages and sell them into the secondary market were a major cause of the single biggest world financial crisis since the Asian crisis and it’s unthinkable that we would leave that undisturbed,” Frank said.

The bill would also prohibit mortgage brokers and bankers from steering borrowers towards more expensive loans in order to collect a bigger commission. It would also outlaw prepayment penalties on subprime loans and set limits on prepayment penalties on other mortages.

The financial services industry immediately attacked the bill, which Frank said would define "what loans should and should not be made nationally."

Frank said the bill's goal is to "diminish predatory lending while continuing to support a rigorous mortgage market.

"It creates a national standard for giving mortgages, originating mortgages, which will cover every mortgage originator," he said. But the legislation would "foster more confusion in the marketplace," said Kurt Pfotenhauer at the Mortgage Bankers Association.

Frank's measure would mark the first time that Congress has tried to legislate which mortgages are suitable and which ones are too risky.

It comes as more than two million homeowners who took out subprime loans in the last two years are facing sharp jumps when their introductory low interest rates expire, potentially leading to an sharp increase in foreclosures, which are already at near-record levels in much of the country.

Bankruptcies rising

Meanwhile, the American Bankruptcy Institute reports that more consumers are turning to bankruptcy in an attempt to stave off foreclosure and remain in their homes.

Consumer bankruptcy filings increased almost 23% from a year earlier, the institute report. It said that overall consumer bankruptcy filings were up nearly 45 percent during the first nine months of this year.

The institute's report found that an increasing number of consumers are filing Chapter 13 bankruptcies, which staves off foreclosure proceedings while the homeowner works out a plan to pay off mortgage debt and other obligations over time.

Traditionally, most consumers have filed for Chapter 7 bankruptcies, which generally forgives most debt but requires consumers to forfeit all of their assets, including their homes.

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