WASHINGTON - Though the Wall Street and banking features of the giant financial industry reform bill taking shape on Capitol Hill have drawn most of the attention, home buyers and mortgage applicants should be major winners when the legislation is finally signed into law - probably early next month.
Not only will the zero-down, funny-money loans and slipshod underwriting that triggered the housing bubble and bust be virtually eliminated from the marketplace, but so will the "steering" practices used by loan officers to earn extra fees by putting unsuspecting borrowers into poisonous mortgages.
Conferees from the House and Senate are negotiating the differences between their bills, but on the key consumer fundamentals, it's not too early to project the probable results.
Here's a quick overview of what's likely to go to President Obama's desk affecting housing and mortgage finance:
• Some form of new consumer-protection agency - armed with broad powers to rein in bad mortgage products and predatory lending practices anywhere in the country - is now a certainty.
The House bill creates a stand-alone independent federal entity, while the Senate bill creates a consumer financial product safety "bureau" housed inside the Federal Reserve.
• Uniform minimum standards for mortgages and underwriting practices.
Though such bubble-era favorites as "stated income," "pick-a-pay," and negative amortization loans are not prohibited by the legislation, lenders will be powerfully motivated to offer fully documented, verified income mortgages with down payments sufficient to ensure that borrowers have a stake in the deal.
• Prohibition of prepayment penalties on nontraditional loans that are not fully documented, fixed rate, and carry standard amortization schedules.
This would prevent, for example, the sort of "gotcha" adjustable-rate mortgages of the boom years.
Prepayment penalties would still be permitted on income-verified standard loans, but lenders would be required to offer alternative financing without penalties for early payoffs.
• Mandatory provision of credit scores when mortgage applicants are turned down. Though this appears only in the Senate version, it has a strong chance of ending up in the final bill in some form.Since lenders often place great weight on credit scores in their decisions, the idea here is to provide unsuccessful applicants with the actual credit score that contributed to the loan turndown.
• Restrictions on mandatory arbitration clauses embedded in many contracts for mortgage and other credit.
The House bill would empower the Consumer Financial Protection Agency to restrict lenders' use of mandatory arbitration requirements if it finds them to be harmful to borrowers. The Senate version would require the consumer agency to conduct a study of mandatory arbitration clauses before taking any action to restrict them.
• Real estate appraisal improvements. The House bill gives the new consumer protection agency oversight on home mortgage appraisals, and the power to create rules and standards to guarantee "appraiser independence" from pressures by lenders, realty agents and others. The Senate bill does not have appraisal provisions, but a bipartisan push is under way to convince conferees to adopt the House version.