Kanjorski Introduces Responsible Lending Act
Comprehensive, Bipartisan Bill on Subprime Lending
Protects Consumers from Problems Experienced in the Poconos

WASHINGTON -- Congressman Paul E. Kanjorski (D-PA), the most senior Democrat on the House Financial Services Capital Markets Subcommittee, today introduced the new Responsible Lending Act. The bipartisan bill responds to growing complaints about abusive mortgage lending practices and conflicting state laws, as well as the need to further enhance consumer education and protections.

"During the last four years, we have unfortunately learned about how unfair and deceptive practices have directly and profoundly affected hundreds, if not thousands, of homeowners in Northeastern Pennsylvania, particularly in Monroe County," said Congressman Kanjorski. "Questionable lending practices have caused far too many homeowners in the Poconos during the last decade to face foreclosure, run into difficulties with their mortgages, and experience problems in buying a home. These problems are real, and the bipartisan legislation we have introduced today addresses these matters in a comprehensive and effective manner."

By working to convene a congressional hearing of the House Financial Services Capital Markets Subcommittee at East Stroudsburg University in June 2004, Congressman Kanjorski brought national attention to the problems in Northeastern Pennsylvania's mortgage markets. At the hearing, key issues raised included faulty appraisals, improper lending practices, abusive mortgage servicing, and limited access to counseling assistance, among others.

Last year, Congressman Kanjorski began to work with Congressman Bob Ney (R-OH), Chairman of the House Financial Services Subcommittee on Housing and Community Development, to revise legislation to address many of these issues. Because of Congressman Kanjorski's input, this new bill would protect homeowners and homebuyers against many of the problems identified during the Poconos congressional hearing. The legislation also provides the most comprehensive, balanced, and effective set of legislative solutions that any Federal or State bill has ever offered for protecting mortgage borrowers from abusive, deceptive, and unfair lending practices.

Congressman Kanjorski noted, "Lawmakers should work on a bipartisan basis in Washington to find real solutions to the obstacles faced by honest, hardworking people who want to achieve the American Dream of owning a home. The investigations and prosecutions initiated by the office of the Pennsylvania Attorney General are working to address the foreclosure problems in the Poconos. I applaud these diligent efforts to resolve these matters using existing State law. The Congress must also act at the national level to prevent similar situations elsewhere in the future."

Hearings in the last Congress determined that the Federal law governing higher-cost mortgage lending needs to be updated and that the subprime finance industry is now a nationwide market constituting more than $500 billion in annual sales. The subprime marketplace allows people with less-than-perfect credit to purchase homes, establish better credit records, and join the economic mainstream. Also, a disproportionate share of the borrowers in the Poconos had subprime mortgage loans.

As introduced, the Responsible Lending Act would establish strong, uniform national standards to protect consumers from dubious lending practices, because the congressional hearings demonstrated that the confusing current patchwork of State laws in this area needs to be replaced with uniform national standards that provide strong and equal protections for all borrowers regardless of where they live or how their lender is organized or chartered. The Responsible Lending Act would also expand housing counseling programs and improve mortgage servicing practices. Additionally, the bill would strengthen mortgage broker licensing requirements and oversight, and enhance appraiser independence, education, and supervision.

"The new, bipartisan Responsible Lending Act responds specifically to many of the problems in the Poconos housing markets. The enactment of these proposed comprehensive reforms would ensure that homebuyers and homeowners are better protected in today's complex mortgage marketplace," observed Congressman Kanjorski.

Some of the bill's more noteworthy provisions aimed at protecting mortgage borrowers from those problems identified in Northeastern Pennsylvania would:

• Enhance appraiser independence and oversight
• Require escrow accounts and disclosures
• Ban steering consumers to more expensive mortgages
• Cover more loans with special consumer protections
• Strengthen repayment ability requirements
• Provide optional foreclosure prevention counseling assistance
• Update mortgage servicing standards
• Toughen penalties, increase the statute of limitations, and expedite resolutions
• Offer greater protections than existing state law

An attached background paper provides more details about these proposed improvements to national mortgage lending law.

Congressman Kanjorski concluded, "The new Responsible Lending Act contains numerous reforms that would help future homeowners in Pennsylvania and across America. This bipartisan legislation would not only ensure that all borrowers are treated fairly, but also preserve lenders' access to the capital markets so that they can make affordable mortgage credit more available and enable more borrowers to purchase and maintain homes. I look forward to working with my colleagues in the months ahead to enact this bill into law."

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Editor's Note: A two-page background paper on the Responsible Lending Act is attached.

Northeastern Pennsylvania and the Responsible Lending Act

The new, bipartisan Responsible Lending Act, introduced by Congressmen Paul E. Kanjorski (D-PA) and Bob Ney (R-OH) on March 15, 2005, makes many important, comprehensive changes to Federal law to protect mortgage borrowers and improve industry standards. It also responds to specific problems identified in Northeastern Pennsylvania's mortgage markets. Some of the bill's more noteworthy changes would:

Enhance Appraiser Independence and Oversight
Studies by Pennsylvania officials have determined that many of the foreclosures in Monroe County were on homes with inflated values. To help ensure that a home's worth is properly estimated at the time of sale and protect against appraiser intimidation, the legislation establishes a new Federal standard to protect the independence of these professionals. The State board overseeing appraisers was also criticized for its lack of responsiveness to investigating the problems in the Poconos housing markets and resolving problems with appropriate sanctions. As a result, the bill enhances the authorities and responsibilities of the Appraisal Subcommittee, the Federal entity that monitors all State appraisal regulators. The bill also improves appraiser licensing and educational standards.

Require Escrow Accounts and Disclosures
Investigations have determined that many homeowners in the Poconos had subprime loans and that many of these households encountered difficulties in paying their property taxes and home insurance bills. Unfortunately, this problem is national in scope as lenders or servicers are much less likely to establish escrow accounts for subprime borrowers. The bill therefore would require lenders or servicers to set up escrow accounts for most subprime borrowers so that they would not be caught short of funds for paying for property insurance and taxes. The legislation also puts in place new disclosures for all consumers who opt out of establishing escrow accounts.

Ban Steering Consumers to More Expensive Mortgages
Local reports suggest that some borrowers in Northeastern Pennsylvania were steered to loans with excessive interest rates, even though they would have qualified for loans with significantly lower interest rates. To address this problem, the bill would prohibit mortgage lenders and brokers from pushing borrowers to purchase more costly loans than for which they would otherwise qualify under a lender's underwriting and pricing guidelines.

Cover More Loans with Special Consumer Protections
The Home Ownership and Equity Protection Act (HOEPA) is the primary Federal law intended to protect mortgage borrowers from abusive lending practices. HOEPA currently applies only to the refinancing of mortgages that are considered higher cost, either because the annual interest rate exceeds the comparable Treasury note by 8% for a first-lien mortgage or because the cost of the "points and fees" associated with making the mortgage exceeds 8% of the total loan amount. Under the Responsible Lending Act, HOEPA's enhanced consumer protections would apply to those loans where the "points and fees" exceed 5%, as well as home purchase loans and home equity lines of credit. As a result, many more higher-cost mortgages would be covered by HOEPA's enhanced consumer protections. If these new standards had been in existence during the last decade, many of the families in the Poconos would have likely avoided unnecessary defaults and foreclosures, especially if their loans were higher-cost mortgages and they were first-time homebuyers.

Strengthen Repayment Ability Requirements
Some homeowners in the Poconos experienced financial difficulties because their incomes were not high enough to repay their existing debts and their new mortgage. In at least one known instance in Northeastern Pennsylvania, a homeowner's debt-to-income ratio exceeded 70 percent. With a high amount of monthly debt payments, homeowners have little money left over to pay for necessary expenses like food, utilities, clothing, and health care. To respond to these problems, the legislation adopts a strong debt-to-income test, generally limiting a debt-to-income ratio of no more than 50 percent on all consumer debt, including the new mortgage. It also adds a residual income test to help ensure that borrowers will have enough income left to pay basic ongoing living expenses after repaying such debts.

Provide Optional Foreclosure Prevention Counseling Assistance
When homeowners in the Poconos experienced trouble in paying their mortgages, they often had few trusted resources to turn to for assistance. The bill consequently creates a new voluntary consumer opt-in provision at the time a mortgage is established to help any mortgage borrower who later encounters repayment difficulties to obtain foreclosure prevention counseling.

Update Mortgage Servicing Standards
At the Poconos congressional hearing, one local witness testified about how some abusive mortgage servicing practices created financial problems for homeowners. Therefore, to better protect consumers the bill strengthens the Federal statute governing mortgage servicing by prohibiting a number of unfair practices and by increasing monetary penalties for violations of the law. Additionally, the bill requires two studies relating to mortgage servicing fraud.

Toughen Penalties, Increase the Statute of Limitations, and Expedite Resolutions
Many of the affected homeowners in the Poconos learned about their financial problems more than a year after signing the loan papers. To extend the amount of time consumers of higher-cost mortgages have to seek redress in the courts, the bill would double HOEPA's one-year statute of limitations to two years. The bill also includes provisions to encourage lenders to identify and correct errors in loan documents and to make borrowers whole more quickly, thereby avoiding the need for extensive litigation. The legislation also increases existing penalty levels for violations of real estate settlement and truth-in-lending laws, and creates new sanctions.

Offer Greater Protections than Existing State Law
The bill would additionally strengthen existing law in Pennsylvania by placing caps on the financing of points and fees included in a loan, prohibiting balloon payments on higher-cost mortgages, banning single premium credit insurance and related products, and requiring that consumers receive a reasonable tangible benefit when refinancing.

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