ABA Calls for Modifications to Mortgage Legislation in Testimony to Congress

Washington — The American Bankers Association today called for modifications of proposed mortgage legislation so that banks’ traditional loans to creditworthy borrowers are not curtailed. ABA also pledged to work with Congress to avoid unintended consequences.

"Any regulation or legislation should promote a return to universal and conservative underwriting practices like those maintained at most banks," said G. Gary Berner, executive vice president of First Niagara Bank, Lockport, N.Y., in testimony before the House Financial Services Committee. "Conservative practices must be codified and promoted for all lenders at the same time. At a minimum, legislation must ensure that nonbank lenders comply with the same duties of care as federally regulated banks."

Berner also said that "care must be taken to ensure that the outcome of any legislation does not restrict housing credit. Such unintended consequences will prolong the recession and limit the potential for a strong recovery."

"The fallout of the mortgage markets has been very troubling to the banking industry," Berner said. "It has been primarily the actions of loosely regulated nonbank lenders that have caused tremendous damage for consumers and for the lending industry."

In considering any new legislation, Berner said it is "critical to recognize the significant changes that are already underway in the mortgage industry that will provide much greater protections to consumers." He said further changes, including those in the proposed legislation, "have the potential to impair economic recovery further and should be considered carefully."

ABA has embraced the approach of the Federal Reserve’s amendments to regulations to curb subprime excesses and will continue to work with the Fed and other regulators to help ensure that only the intended results are achieved, Berner said.

"Congress may choose to go beyond these changes, but we feel it is important to understand the cumulative effect of the recent regulatory changes and changes in the marketplace before enacting further restrictions," he added. The regulations take effect Oct. 1, except for the escrow requirements, which are effective next year.

Berner expressed particular concern about the need to expand the legislation’s narrow safe harbor for lenders so that it includes all durations of fixed-rate mortgages and all "garden variety" adjustable rate mortgages. He also urged making the safe harbor irrebuttable for insured depository institutions making the safest loans. A rebuttable safe harbor should be available for all lenders for certain loans.

ABA expressed concerns about the bill’s risk retention provision. Berner said the requirement "will have many repercussions across the industry, which would require the restructuring of much of the securitization market and likely would also require significant accounting changes." He added that the availability of credit could be curtailed by requiring significant increases in capital requirements in the loan origination process.

To maintain consistency and avoid confusion over delegating authority to issue regulations about unfair and deceptive practices, ABA recommended deleting the provision or at least synchronizing the requirements with similar existing authorities.

For a copy of Berner’s full testimony click here

The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation’s banking industry and strengthen America’s economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry’s $13.3 trillion in assets and employ over 2 million men and women.