Senate Bill Specifics Revealed

by Peter G. Miller
December 19th, 2007

What does the Senate version of FHA modernization actually say? Below is a summary from Sen. Christopher Dodd’s office.

Note that the Senate measure S. 2338 and the House bill (H.R. 3915) are not alike. There are significant differences regarding risk-based insurance premiums, downpayment requirements (1.5 percent versus as little as nothing down) and maximum loan amounts.

Here are the specifics of the Senate measure, as explained by Sen. Dodd’s office.

Homeownership Preservation
and Protection Act of 2007

Key Provisions

We are facing a crisis in the mortgage markets on a scale that has not been seen since the Great Depression: over 2 million homeowners face foreclosure at a loss of over $160 billion in hard-earned home equity.  The Conference of Mayors recently reported (November 26, 2007) that they expect a decline of $1.2 trillion in property values in 2008 because of the crisis.  Over one out of every 5 subprime loans is currently delinquent according to First American Loan Performance, an industry research firm.  These high default rates have frozen the subprime and jumbo mortgage markets and infected the capital markets to the point where central banks around the world have had to inject liquidity into the system.  One fundamental cause of these problems is abusive and predatory subprime mortgage lending.

The Homeownership Preservation and Protection Act of 2007
is designed to protect American homeowners, and prevent this disaster from happening again.  The legislation will:

  • Realign the interests of the mortgage industry with borrowers to insure the availability of mortgage capital on fair terms both for the creation and sustainability of homeownership;
  • Establish new lending standards to ensure that loans are affordable and fair, and provide for adequate remedies to make sure the standards are met;
  • Create a transparent set of rules for the mortgage industry so that capital can safely return to the market without bad lending practices driving out the good.


In discussion of the “Homeownership Preservation and Protection Act of 2007″ it is important to keep in mind that only about 10 percent of subprime mortgages in the past several years have been made to first time home buyers; a majority of subprime loans are refinances.  In other words, this market has not been primarily about creating a new set of homeowners. While maintaining access to subprime credit on fair terms is very important – and achieving more reliable access to credit is a primary goal of this legislation – what much of the subprime lending market has done over the past several years is to take the homes and home equity of American families and put it at risk unnecessarily.

Title I: High Cost Mortgages

Definition of “High Cost” Mortgage.  The legislation tightens the definition of a “high cost mortgage” for which certain consumer protections are triggered.  The new definition, which amends the “Home Ownership Equity Protection Act,” (HOEPA) is as follows:

  • first mortgages with APRs that exceed Treasury securities by eight (8) percentage points (with a range from 6 to 10%);
  • second mortgages with APRs that exceed Treasury securities by ten (10) percentage points (with a range of 8 to 12%); or
  • mortgages where total points and fees payable by the borrower are five percent (5%) of the total loan amount, or, for smaller loans of less than $20,000, the lesser of eight (8) percentage or $1,000.  The bill revises the definition of points and fees to include yield spread premiums and other charges.  It allows for up to two bona fide discount points outside of the 5% trigger.

The following key protections are triggered for high cost mortgages:

  • No financing of points and fees.  The bill prohibits a creditor from directly or indirectly financing any portion of the points, fees or prepayment penalties.  These limitations and prohibitions are designed to discourage lenders from “flipping” the mortgage in order to extract additional excessive fees.
  • Prohibition on prepayment penalties.  The bill prohibits the lender from imposing prepayment penalties for high cost loans.
  • Prohibition of Yield Spread Premiums (YSPs).  The bill prohibits YSPs for placing a borrower in a high cost loan that is more costly than that for which the borrower qualifies. Mortgage brokers, who have originated about 70 percent of subprime mortgages, receive higher compensation through YSPs for steering borrowers to these higher cost loans.  This bill will eliminate the incentive to “upsell” these borrowers.
  • Net Tangible Benefit. The originator must determine that a high-cost refinance loan provides a net tangible benefit to the borrower.
  • Prohibition on balloon payments.  The bill prohibits the use of balloon payments.
  • Limitation on single premium credit insurance.  The bill would prohibit the upfront payment or financing of credit life, credit disability or credit unemployment insurance on a single premium basis.  However, borrowers are free to purchase such insurance with the regular mortgage payment on a periodic basis, provided that it is a separate transaction that can be canceled at any time.

Title II – Subprime and Non-Traditional Mortgages

Definition of “Subprime Mortgage” and “Nontraditional Mortgage”: The legislation creates a new designation in the law for subprime and nontraditional mortgages.

  • Subprime mortgages.  Mortgages that have interest rates that are 3 percentage points higher than Treasury securities of comparable maturities for first mortgages and 5 percentage points for second mortgages.  This definition tracks the Federal Reserve Board’s definition of subprime lending for the purposes of the Home Mortgage Disclosure Act (HMDA) reporting.  In addition, the legislation includes an alternative measure that is designed to prevent capturing too many mortgages when the yield curve is unusually flat.

Title III – All Mortgages

All home loan borrowers get the following rights and protections:

  • All mortgage originators – lenders and brokers – owe a duty of good faith and fair dealing to borrowers.  The duty of good faith and fair dealing is widespread in state law with regards to the execution of contracts.  It would apply that duty to the making of a mortgage contract, which is a new, but reasonable application.
  • All mortgage originators have to make reasonable efforts to make an advantageous loan to the borrower, considering that borrowers circumstances.  For example, this requirement would prohibit a broker or lender from giving an adjustable rate mortgage with a high likelihood of escalating costs to an elderly person on a fixed income.
  • Mortgage brokers owe a fiduciary duty to their customers.  The bill designates mortgage brokers as fiduciaries of borrowers.  This means that brokers represent the borrower in the transaction.

Today, brokers typically sell their services by telling borrowers that they will do the shopping for the borrowers.  Indeed, the National Association of Mortgage Brokers (NAMB) made the claim on their web site (until they were questioned about it at a Senate Banking Committee hearing) that brokers serve as “mentors” to borrowers to help them through the complex process of getting a loan.  An industry publication, Inside B & C Lending, described mortgage brokers as being particularly adept at convincing borrowers that they were “trusted advisors” to the borrowers.  The bill would simply make the brokers live up to the role they often claim for themselves – that of a fiduciary.

  • Prohibit steering.  Mortgage originators are prohibited from steering borrowers to more costly loans than that for which the borrower qualifies.  This provision is designed to counteract the widespread problem of prime quality borrowers being steered into subprime loans.  This provision would require originators to notify borrowers that they qualify for higher quality loans, even if the originator does not offer those prime loans.

Over the past several years, there have been estimates that from 20 to 50 percent of subprime borrowers could have qualified for prime loans.  The Wall Street Journal (“Subprime Debacle Traps Even Very Credit-Worthy,” December 3, 2007) reported on a study it commissioned that found in 2006 that 61% of subprime loans went to “people with credit scores high enough to often qualify for conventional loans with far better terms.”   HMDA data repeatedly shows that minorities are given higher cost loans in disproportionate numbers.

  • Limitations on Yield-Spread Premiums.  Allows YSPs only in the case of no-cost loans.  (YSPs for high-cost, subprime, and nontraditional mortgages would be prohibited).  Where YSPs are paid, brokers may not receive any other compensation from any other source and prepayment penalties are prohibited.

As discussed above, mortgage brokers argue that YSPs are a way for cash-constrained borrowers to cover closing costs, including the broker fee.  However, independent research has consistently shown that mortgage brokers keep at least half or more of the YSPs for themselves.  For example, HUD research showed that no more than half of all YSPs went to offset closing costs.  Other research commissioned by Freddie Mac, showed that borrowers who paid a combination of direct fees and YSPs paid significantly more in fees than borrowers who got no-cost loans where a broker’s compensation came completely from the YSP.  Research also indicates that there is a significant racial component to YSPs.  Racial minorities pay even more in fees than similarly situated white borrowers.

  • Limit Low- and No-Documentation Loans.  The legislation requires adequate documentation for mortgage loans.  However, it gives the Federal Reserve the authority to make exceptions as deemed appropriate, presumably for prime loans.


  • Individual borrowers who get loans in violation of these provisions will be able to rescind (i.e. “unwind”) the loans.  Alternatively, at the choice of the borrower, the creditor or holder of the loan may cure the loan by making the borrower whole.
  • Actual damages.
  • Statutory damages up to $5,000 per loan, regardless of the number of violations per loan (up from $2,000 per loan in current law).
  • Makes mortgage brokers liable under TILA for violations of TILA.
  • No class liability for assignees.


Title IV – Good Faith and Fair Dealing In Appraisals

Requirements for Appraisers

  • Appraisers owe a duty of good faith and fair dealing to borrowers.
  • No lender may encourage or influence an appraiser to “hit” a certain value in connection with making a home loan.  In addition, a lender may not seek to influence an appraisers work, nor select an appraiser on the basis of an expectation that he or she will appraise a property at a high enough value to facilitate a home loan.

A crucial cause of the current mortgage meltdown has been inflated appraisals.  Many ethical appraisers complain that lenders will only use appraisers who consistently value properties at the levels necessary to allow the loan to close.  Appraisers who do not cooperate simply do not get hired.  This is particularly detrimental to the homeowner because it leads the homeowner to believe he or she has equity where little or none may exist.

  • Appraisers must obtain bonds equal to one percent of the value of the homes appraised. 

Remedies available to borrowers

  • Lenders must adjust outstanding mortgages where appraisals exceeded true market value by 10 percent or more.
  • When an appraisal exceeds market value by 10 percent (plus or minus 2 percent) or more, a borrower has a cause of action against the lender.  A consumer who is awarded remedies under this section shall collect from the appraiser’s bond.
  • Actual and statutory damages up to $5,000.


Title V – Good Faith and Fair Dealing in Home Loan Servicing

Requirements for mortgage servicers:

  • Mortgage Servicers owe a duty of good faith and fair dealing to borrowers.  James Montgomery, former Chairman of Great Western Financial Corporation, and a former director of Freddie Mac, said recently, “Servicers make money on foreclosure,” (American Banker, December 4, 2007).  This standard would prevent servicers from unfairly profiting from their servicing responsibilities.
  • Prompt crediting of payments.  Servicers must credit all payments on the day received.  Payments must first be credited to principal and interest due on the note.

Servicers can employ a scheme called “pyramiding,” by which they hold a payment until it is late, use a portion of the payment to cover the late fee, thereby causing the remaining payment to be insufficient.  When the next month’s payment is made, it is insufficient to cover the previous shortfall and the new payment, generating another penalty fee.  The legislation will require both prompt posting of payments and crediting of payments to principal and interest before being charged to late fees or other charges.

  • All fees must be reasonable and for services actually provided, and only if allowed by the mortgage contract.  In addition, an adequate notice and statement is required.
  • No force-placing of insurance without clear notice to the borrower.

Currently, some servicers claim that the borrower does not have insurance on the property and “force-places” such insurance on the loan.  Sometimes, that insurance is purchased from an affiliate; oftentimes the servicer is given a significant commission for doing so.  Many times, as was the case with the Fairbanks Capital case settled by the FTC in 2003, the borrowers already had insurance, but were charged for the additional insurance in any case.  As with the pyramiding problems, these extra charges could often result in the borrower being put into default.

  • Prior to initiating foreclosure, a servicer must attempt to implement loss mitigation.

Even in the dire circumstances existing in the mortgage market today, and despite the nearly universal calls for action from regulators, government officials, and consumer advocates, mortgage servicers have been extremely slow to offer meaningful alternatives to foreclosure for most borrowers.  In fact, according to Moody’s, only 1 percent of subprime ARM borrowers have received any loan modifications during the current crisis.  Furthermore, a new study shows how servicers use the foreclosure process to make additional fees from the troubled borrowers, even borrowers in bankruptcy.  These conclusions are consistent with practices uncovered by the FTC in its 2003 investigation of mortgage servicing practices of Fairbanks Capital, one of the largest subprime mortgage servicers at the time.  This provision will insure that adequate loss mitigation is offered to the borrower prior to foreclosure.

  • Require servicers to report their loss mitigation activities.

In order to see which servicers are meeting their requirements under this provision, the legislation will require public reporting of loss mitigation activities.  The lack of responsiveness in the current crisis indicates how important public accountability is to maximize the number of homes saved.


  • Actual and statutory damages (up to $5,000).


Title VI – Foreclosure Prevention Counseling

  • Require that borrowers be notified of availability of foreclosure prevention counseling both at closing and upon default.
  • Require servicers, with the consent of the borrower, to forward the borrower’s name to a HUD-authorized foreclosure counselor upon default.

It is widely agreed that reluctance by delinquent borrowers to respond to communications from the lender or servicer reduces the effectiveness of loss mitigation.  The legislation will help expedite contact with the borrower by having it come from a 3rd party counselor.

  • The servicer must reimburse the counselor for its work.
  • Once a borrower is working with an approved housing counselor, the servicer may not initiate foreclosure for 45 days to give the parties an opportunity to work out a mutually agreeable solution.


Title VII.  Give the FDIC and OCC UDAP Rulemaking Authority.

Currently, only the Federal Reserve may issue a regulation establishing standards for determining unfair or deceptive acts or practices (UDAP) for banks.  The Office of Thrift Supervision has the authority to do this for thrifts, and has indicated its intention of issuing such a rule.  This provision would give other banking regulators the same authority.  These regulators have requested this authority, and have indicated that they are willing to act.

Other Provisions

  • The Federal Reserve Board will be responsible for writing regulations to implement this Act.
  • The Act takes effect 6 months after date of enactment.
  • The legislation provides protections for renters in foreclosed homes.
  • The legislation authorizes additional appropriations to the FBI to fight mortgage fraud.
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10 Responses to “Senate Bill Specifics Revealed”

  1. S. Gaskill Says:

    I may be reading it wrong, but as I viewed this Bill under section 122 Implementation, that there was no 6 month wait for the Act to take effect. My read if I understood it correctly states immediate effect from the date of enactment. What am I missing. I have a lot of reverse mortgage clients that are just waiting for the increase in lending limits and are very anxious to know when it can be done. If it is going to be another 6 months after the legislature figures out how to mark up the bill and get it to the white house they want to know. Any help with this one would be appreciated.

    Thank you,
    S. Gaskill

  2. Dennis Says:

    S. Gaskill-

    The way I understand it, is that HUD, Lenders, etc. have 6 months to implement the bill. The loan limit increase would be a quick fix. But at this point the House bll and the Senate bill are far apart. They first need to agree on one bill, and part of that is a lending limit.

  3. S. Gaskill Says:

    Thank you for your response on the matter. This makes much more sense to me now. However I was under the impression that both bills agree that the lending limit for HECM’s needs to be pushed up to the GSE. Is that not true? I have tried to read my way through the legal jargon but sometimes get lost in the middle.

    Thank you,

  4. Dennis Says:

    The House bill is looking for $600,000+ (I can’t remember the exact number) for the lending limit and the Senate bill is at $417,000, the conforming limit. Chances are that they will end up at the $417,000….. but there still are other areas that are different. My guess is that it will be a while longer until we get a bill that is signed by the President.

  5. B.K. DAVIS Says:

    For California, $417,000 is too low. I am 87 and I owe $400,000, if I am unable to get a reverse mortgage, my home will be foreclosed.

  6. B.K. DAVIS Says:

    I am 87 years old and I owe $380,000 on my home.
    Unless the limit is increased. I will lose my home.
    I need help on this one.

  7. Scott D Says:

    Do you have any ideas as to the timeline for loan limit approval? My LO’s have considerable pipeline business waiting for this. Hopefully this will be the product enhancement to get the fence dwellers off and to make a move!


  8. Peter G. Miller Says:

    Scott –

    I am not sure that FHA reform is a done deal. Yes, bills have passed both houses of Congress, but the bills are significantly different. As well, President Bush does not seem enthusiastic about anything except what he wants.

  9. Peter G. Miller Says:

    BK –

    What is the fair market value of your property?



  10. Shelby L Clinard Says:

    Any Idea when this will become law. We are trapped in our house. Can’t sell because of Market & Ivan. We a 70 have a motorhome and planned to use proceeds from home to travel. Please get us some help.

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