Upcoming Congressional Scrutiny May Target Mortgage Brokers

In recent statements, Senate Banking Chairman Christopher Dodd, D-Conn., and Sen. Charles Schumer, D-N.Y., have pointed the finger at mortgage brokers as a primary culprit of the mortgage crisis. Both have noted that while the industry was responsible for originating as much as 70 percent of subprime loans in recent years, it had little oversight from state regulators, thus contributing to a marketplace that allowed as many as 2 million borrowers to be placed into loans they could not afford to repay.

As such, mortgage brokers face their biggest challenge in coming months as the Senate begins work on legislation to curb predatory lending.

Meanwhile, House Financial Services Chairman Barney Frank, D-Mass., included a measure by Rep. Spencer Bachus, R-Ala., creating a uniform licensing system for brokers that would place them into a national registry to weed out bad actors. But the language would include licensing and registration for bank employees who originate mortgages – a provision opposed by the banks, which argue that they are already supervised sufficiently at state and federal levels.

The House bill attempted to ban the use of yield spread premiums in which mortgage brokers receive fees from lenders for issuing a loan with a higher interest rate than the minimum rate the borrower could have received. Critics call the practice a kickback that hurts consumers; brokers say it provides borrowers flexibility to pay closing costs that they might not be able to afford. In the end, the House amendment allows brokers to offer YSPs for zero point and no-cost loans, but they could not receive extra compensation for steering consumers into higher-rate loans.

Consumer groups warned that it could open a large loophole for the brokers, but Frank said he would try to clarify the issue in a later conference with the Senate. The overall bill passed by a strong 291-127 vote, due in part to the provision.

But the mortgage brokers now face their toughest test in the Senate. In two separate hearings in the past year, both Dodd and Schumer have lambasted National Association of Mortgage Brokers officials for their policy views. The senators have also sponsored anti-predatory lending legislation that would place some major constraints on the brokers, such as requiring them to have fiduciary responsibility for their customers and banning YSPs on all loans with limited exceptions.