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Mortgage Practices Face Congressional Spotlight

With subprime home mortgage lenders in the headlines for roiling financial markets and foreclosing on a record number of homes, industry leaders are bracing for fallout from Democrats in Congress.

The new majorities in both chambers are moving to crack down on what they call predatory lending practices. Late last week, Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) praised federal regulators for meeting his request to extend certain protections to subprime borrowers. And Rep. Carolyn Maloney (D-N.Y.), who chairs the Financial Services subcommittee on financial institutions and consumer credit, on Tuesday set a March 27 hearing to start probing the issue.

The scrutiny comes at a rough time for subprime lenders, reeling from a collapse in demand for their loans as default rates have climbed. Freddie Mac, the mortgage-backing giant, last week announced it would stop buying subprime home mortgages. Meanwhile, Fremont General Corp., a leading lender, said it will quit making the loans, and New Century Financial Corp., another industry leader, revealed it is under federal scrutiny for accounting irregularities.

Nevertheless, the industry’s Washington, D.C., advocates maintain the loans — for which payments start cheap then rise sharply after two or three years — have helped spur homeownership rates among poorer borrowers. They are urging lawmakers to proceed cautiously. And despite the rash of bad press, even consumer advocates who have stepped up pressure on the companies here agree that Congress is likely to oblige.

The House is widely expected to move first. Maloney said her subcommittee will conduct “multiple hearings” to study the issue and determine what to do next. “If legislation turns out to be the best remedy, our committee will take charge,” she said in a statement.

Committee members Reps. Brad Miller and Mel Watt, both North Carolina Democrats, will provide one starting point by reintroducing a bill they first dropped in 2004 to create a federal standard they say cracks down on abusive practices while preserving low-income borrowers’ access to credit.

Several people close to the issue said it could be summer or late fall before a measure reaches the House floor. A spokesman for Financial Services Chairman Barney Frank (D-Mass.) declined to discuss timing for action.

In the meantime, lobbyists for the banks that issue the loans are busy hashing out what, precisely, they could swallow if Democrats impose new restrictions on the industry.

An e-mail that circulated last week among banking lobbyists working the issue said, “What we are working on creating is a comprehensive industry plan to address the concerns created in foreclosures and the pressure being brought by consumer groups and congress [sic].” The memo goes on to lay out about a dozen areas of concern, reporting varying degrees of agreement among industry players.

Others close to the process said lobbyists leading the charge for the lenders are drafting legislative language to serve as an industry mark.

“Various of us have certainly been talking about ideas that you could use to address any of these issues,” said Wright Andrews, executive director of the Coalition for Fair and Affordable Lending, which represents subprime lenders. “We’re trying to get as much consensus as possible.” Earlier this year, Andrews filed to organize his group, previously an informal coalition, as a 501(c)(6), the tax code designation for a trade association.

Meanwhile, Dodd spokesman Marvin Fast said the Senator “has put the industry on notice that they have a responsibility to clean up these practices.”

“If not, Sen. Dodd has stated he stands ready to look at legislative means to fix these problems,” he said.

Economic analysts estimate that foreclosures on subprime loans more than doubled last year over rates in 2005, and consumer advocates predict they are on pace to reach one in five of all loans issued over the last two years. Organized into a loose collective called the DC Financial Services Coalition, groups including the Consumer Federation of America, the Center for Responsible Lending, ACORN and the National Council of La Raza are pressing for a better underwriting standard for brokers, to extend to them liability for the products they sell.

They also want to limit “pre-payment” penalties, assessed to some borrowers when they sell their homes in the first few years after purchasing. And they want lawmakers to examine the fees lenders assess, and whether lenders should maintain responsibility for loans even after they’ve sold them in the secondary market.

But advocates acknowledge privately that mortgage interests maintain strong ties on both sides of the aisle, and they likely will have to allow some concessions to the industry if they hope to move a bill. Prime among them is a measure to pre-empt state laws with a federal standard.

Consumer groups agonize such a provision could leave borrowers worse off in states that have already adopted tough restrictions on subprime lenders. But mortgage lenders argue the measure is necessary to replace a needlessly costly and complex patchwork of state and local regulation.

Both sides agree that with such a technical subject at hand, the legislative effort will turn on detail. “Our attitude at present is to work with [Frank] to facilitate creation of a bill that protects consumers without harming them in the marketplace,” said Kurt Pfotenhauer, a top lobbyist for the Mortgage Bankers Association. “It just isn’t clear yet where the trade-offs are.”

Andrews acknowledged there have been trouble spots for the industry recently, but with “chaos in the marketplace” he said he hopes lawmakers will let the dust settle before taking it on.

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