The House Financial Services Committee has passed legislation that would enact major changes to the mortgage lending industry, including establishing national minimum lending standards and making companies that back risky mortgages liable for damages when things go sour.

But a critical part of the legislation, which blocks states from imposing penalties on mortgage securitizers, is being criticized by consumer advocates who say it lets holders of bad loans off the hook.

The committee passed the Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R. 3915) 45-19 after a daylong, often contentious hearing that included numerous attempts to pass amendments that would change the bill's enforcement provisions, and incorporating elements from other pieces of legislation dealing with predatory lending and foreclosure.

The bill goes to the full House for a vote as early as next week.

Rep. Brad Miller (D-NC), one of the bill's co-authors along with Rep. Mel Watt (D-NC) and Committee chairman Barney Frank (D-MA), said the measure would "be the most significant consumer legislation in more than a dozen years."

"Thousands of middle-class homeowners could be saved from foreclosures should the bill become law," Miller said.

The bill's provisions include:

Establishing a nationwide mortgage licensing system and registry, where lenders would provide personal histories and background information, and be tested and educated to ensure they meet the minimum standards necessary to be credentialed as brokers.

Prohibiting "steering" consumers into loans they may not be qualified to pay back, into subprime loans when they may qualify for prime loans, or using any type of predatory tactic that exploits the borrower's race, ethnicity, or gender.

Creating national mortgage origination standards that require creditors to assess at the time of origination that the borrower can repay the loan, or if it is in their economic interest to refinance. The standards would follow both Federal law and the model of North Carolina's mortgage protection laws, considered to be among the strongest in the nation.

Prohibiting excessive feesor practices that may lead consumers to foreclosure, as well as certain prepayment penalties, and forcing consumers into mandatory binding arbitration.

Shell Game

One important aspect of the legislation is determining who should be held liable for loans that go bad.

Under H.R. 3915, consumers have the right to seek redress against loan "securitizers," unless the securitizer can prove that they acted with due diligence to modify the terms of the loan or could prove that a bad loan was made in violation of their policies.

The bill also prohibits state laws penalizing loan securitizers if they exceed a federal standard designed for liability, but does not prohibit states from adding additional penalties to creditors of loans. Consumer advocates such as Alan White say that the prohibition "simply camouflages the fact that the bill immunizes most subprime mortgage assignees from any liability. Consumers with loans from bankrupt lenders will be out of luck."

Writing in the Credit Slips blog, White, a Valparaiso University professor of law, said: "For most subprime mortgages, trusts, which are nothing more than pools of mortgage loans, are the entities that are the legal owners of the mortgage, and the only entity with any assets or ability to provide consumer redress. This is particularly true when the original lender has filed bankruptcy, as in the case of New Century and countless others."

Committee chairman Frank had originally called for much tougher penalties against investors who put money in subprime or deceptive loans.

Observers said that pressure from opponents of the bill, such as the Mortgage Bankers' Association and some House Republicans, may have contributed to the current bill's weaker provisions for consumer redress.