WASHINGTON — Seeking to prevent a repeat of the current mortgage crisis, the House approved Thursday a sweeping set of protections for home-loan borrowers.
The legislation, which would fill in a perceived gap in regulation, is intended to end some of the practices blamed for recent excesses in the lending and housing markets, especially the marketing of loans to people who couldn't afford them.
"This is an important and urgent and critical bill," said Rep. David Scott (D-Ga.), reflecting a growing political appetite for responding to the continuing mortgage debacle.
The bill would bar a lender from making a loan unless the borrower had a reasonable ability to repay it, would make clear that federal standards apply to all lenders, including mortgage brokers, and would require licensing and registration for brokers and bank loan officers.
The Democratic-sponsored bill was approved 291 to 127. It gained substantial Republican support, though most of the opposition also came from that party. The measure is opposed by the White House and much of the mortgage industry, which argue that the bill would limit the availability of credit for worthy borrowers.
Calling the legislation "the first step toward reforms for the future," Rep. Carolyn B. Maloney (D-N.Y.) said it struck a proper balance by protecting consumers without restricting the availability of credit.
But Kieran P. Quinn, chairman of the Mortgage Bankers Assn., said the legislation overreached.
"Have no doubt: This bill will limit credit availability and options for thousands of Americans who want to grab their share of the American dream of homeownership," Quinn said in a statement after the vote. "It will eliminate tools that millions of Americans have used to become successful long-term homeowners."
House opponents of the measure said lenders would be hesitant to make loans for fear of running afoul of regulators or getting sued by borrowers.
Rep. Ed Royce (R-Fullerton) said the bill relied too heavily on words such as "appropriate" and "ability to repay" that could be interpreted in various ways.
"This kind of murky language would invite litigation from every borrower who misses a payment," Royce said.
The bill's prospects in the Senate are unclear. In a statement, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) commended the House vote and said he would soon introduce his own mortgage regulation bill.
The House voted as the mortgage market continued to be roiled by mounting foreclosures and the fallout on Wall Street reached into the billions of dollars.
Treasury Secretary Henry M. Paulson Jr. recently said there could be more than 1 million foreclosure proceedings started this year, with 620,000 of them dealing with sub-prime loans made to people with poor credit. Some analysts say a much larger number of mortgages are headed for trouble.
In a move fiercely opposed by mortgage brokers, the House bill would prohibit financial incentives to sell mortgages at higher interest rates than the borrower qualifies for, according to Rep. Barney Frank (D-Mass.), the legislation's chief proponent.
Brokers have defended such incentives, known as yield spread premiums, as worthwhile for borrowers who may prefer to finance certain expenses through higher interest rates, thereby holding down their upfront closing costs.
Frank said the bill could allow for circumstances in which consumers knowingly agree on higher rates.
The bill also would restrict prepayment penalties charged to borrowers who pay off their loan balances early, typically by refinancing on cheaper terms. Such penalties would be banned on high-cost, sub-prime loans.
The bill's supporters were pleased that 64 Republicans joined the Democratic majority in supporting the measure, which also would require better disclosure to borrowers about the terms of the loans they are taking on.
"The bill not only helps do away with predatory practices but empowers consumers with the most important tool of all: information," Rep. Deborah Pryce (R-Ohio) said.
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A bill passed by the House on Thursday would impose stricter federal oversight on the mortgage industry. The legislation would:
* Establish a federal standard for home loans, requiring that they be made only to borrowers who have a reasonable ability to repay them.
* Clarify that fairness rules apply to all those who originate home loans, including the mortgage brokers and independent, nonbank lenders who have played an increasingly important role in the mortgage industry in recent years.
* Seek to prohibit financial incentives that encourage brokers and salespeople to steer borrowers into costlier loans than those the customers qualify for.
* Make banks liable if certain sub-prime mortgages that they purchase and package into securities violate lending rules.
Source: Times research