Friday, November 16, 2007

H.R.3915: THE DEMOCRATS THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET: The Political Reality if Republicans Choose to Take It

The full House voted on H.R. 3915 yesterday and the vote was almost entirely party line. Here are the final tallies.

Latest HR 3915 Vote in the House of Representatives
(Democrats in roman; Republicans in italic; Independents underlined) H RES 825 YEA-AND-NAY 15-Nov-2007 11:36 AM QUESTION: On Ordering the Previous Question BILL TITLE: Providing for consideration of H.R. 3915, Mortgage Reform and Anti-Predatory Lending Act
Yeas Nays NV
224 6

193 2 7

224 195 13

My initial interest in this bill was entirely self interest. The bill threatened to remove Yield Spread Premium, a tool that I use not only to make money but to provide better loans for my borrowers. There continues to be all sorts of confusion as to whether or not YSP has been eliminated. The members of my Representative's office (Rahm Emanuel) weren't sure themselves. His financial services specialist first sent me here ( this link was useless to me since I had already referenced it myself.) He then sent me here ( a document that is about one hundred and thirty confusing pages. You can take my word for it or open up the link and see for yourself). It was clear that my Representative and his office didn't have much more information about this bill than I already did on my own. I registered my extreme opposition to this bill to which his guy reminded me that Emanuel is NOT on the banking committee. It was typical politico. Whenever there is a bill they are proud of, the Democrats passed it. In this case facing an irate constituent, Emanuel is suddenly not on the committee. Those excuses are no longer acceptable since Emanuel voted for the bill.

What I have figured out is that YSP is NOT the best tool for political hay in this bill. YSP can be removed and added easily. There is another much more serious much more systemic problem with this bill and that can be used to make political hay. The bill is called The Mortgage Reform and Anti-Predatory Lending Act of 2007. Here is the first and main problem (from a Winston Salem newspaper regarding the North Carolina anti predatory lending law upon which this is modeled)

There is no specific definition about what exactly predatory lending entails, though most observers believe that the description applies when lenders take advantage of borrowers by charging high interest rates and consider only the value of a borrower’s assets, as opposed to what the borrower can afford to pay.

That's right, the Democrats (which we can now say since the vote was essentially party line) are attacking a problem they can't define. That should scare everyone. In my business if you can't define it, what that means is you, the borrower and consumer of loans, HAVEN'T SIGNED ENOUGH PAPERWORK YET. In practical terms, when someone is vague and cannot define an issue, it means they are actually quite ignorant to it.

What the Democrats are equivalent to is someone going into a lab and mixing chemicals even though we have no science background. We wouldn't accept that, but yet we sit by while totally clueless individuals mix perverbial chemicals with the loan process.

Let me lay out every instance within this law where I believe the practical effect will be YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET.

steering any consumer to a loan that the consumer lacks a reasonable ability to repay, does not provide net tangible benefit, or has predatory characteristics

There are at least three new disclosures just in this sentence. I know there will be a net tangible benefits disclosure because the Illinois Legislature has already created that for ALL loans in Illinois. There will no doubt be a reasonable ability to pay disclosure, and probably an anti predatory lending disclosure. In other words, without looking at any other part of this bill, THE DEMOCRATS THINK YOU DON'T SIGN ENOUGH PAPERWORK YET.

Safe Harbor: A presumption can be made that the minimum standards (reasonable ability to repay and net tangible benefit) are met for “qualified mortgages” and “qualified safe harbor mortgages.” Qualified mortgages (prime loans) are presumed to meet the minimum standards and this presumption may not be rebutted. For qualified safe harbor loans, the presumption may be rebutted only against creditors.

The term safe harbor is very important in this bill because "safe harbor" loans are excluded from much of the legislation. Since it becomes vital that a loan be a "safe harbor" loan, you can bet that banks will create however many disclosures they feel necessary in order to insure that each loan meets the vague definition that the law lays out. Since the law itself is vague and undefined, the banks can respond with whatever paperwork they deem necessary to make sure becomes defined as "safe harbor" in the closing documents. In other words, if we went no further, THE DEMOCRATS THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET.

steering any consumer from a prime loan to a subprime loan,

This sounds reasonable however "prime loans" can mean a lot. For instance, Fannie Mae is prime. Fannie Mae has several different categories. For instance, Fannie Mae has Expanded Approval levels, 1, 2, and 3. If someone is only approved for EA 3, their rate can easily reach 9% and beyond and if the loan to value is over 80%, there will be a large PMI payment as well. So, what if someone is only approved for EA 3, and I steer them toward sub prime (which very likely would have a better deal in such a scenario). Could I be sued? That question is very undefined. The most likely reality is that no one that voted for this bill even knows that there is such a thing as Expanded levels on Fannie Mae loans. I bet most of the legislators think Fannie Mae is candy. What is the practical effect of such vague and undefined situations, that's right, YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET.

You think I am at the end. Oh no, I am just getting started.

Assignee/Securitizer Liability (does not extend to trusts and investors): Subject to exemptions below, for loans that violate the minimum standards (reasonable ability to repay and net tangible benefits), a consumer has an individual cause of action against assignees and securitizers for rescission of the loan and the consumer’s costs for rescission.

Exemption from Liability: An assignee/securitizer will not be liable for a loan that violates the minimum standards if the assignee/securitizer provides a cure to make the loan conform to the minimum standards within 90 days of receiving notice from the consumer, OR (1) has a policy against buying mortgage loans that are not qualified mortgages or qualified safe harbor mortgages and exercises reasonable due diligence to adhere to such policy AND (2) has obtained representations and warranties from the seller or assignor of the loan regarding not selling or assigning loans that violate the minimum standards.

This wordy and most likely extemely confusing portion of the bill, first, actually allows that a foreclosed borrower can sue the securitizer (Wall Street or those that turn mortgages into mortgage backed securities). This is of course unprecedented and would open up a pandora's box that none of the legislators could possibly manage and control, however the second portion of this piece of the law lays exception to the suits. Since those exceptions are also vague and undefined (for instance it says as long as Wall Street did its "due diligence"...keep in mind mortgage backed securities have markets in the billions so we can assume that no law is necessary for there to be "due diligence") and the stakes are so high, we can expect that with this portion of the bill, THE DEMOCRATS REALLY, REALLY, THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET.

When the holder of a mortgage loan or anyone acting on behalf of the holder initiates a judicial or non-judicial foreclosure, (1) the consumer who has a rescission right under this bill may assert such right as a defense to foreclosure against the holder to forestall foreclosure, or (2) if the rescission right has expired, the consumer may seek actual damages (plus costs) against the creditor, assignee, or securitizer.

This portion of the bill could ACTUALLY be construed as motivating the borrower to get foreclosed because instead of punishing the borrower for not carrying out their end of the bargain (since a mortgage is a contract and a borrower agrees to make payments on time) the bill mostly lays out steps which the borrower can take action against their creditor. Since it goes without saying banks would never allow themselves to be sued by those they foreclose on, the practical effect of this portion of the bill is YOU REALLY, REALLY, REALLY, HAVEN'T SIGNED ENOUGH PAPERWORK YET.

Finally, there is this,

requiring pre-loan counseling.

We tried pre loan counseling here in Illinois. What it did was forced mostly poor folks to spend $300 extra dollars in closing costs (it was of course mandated that the broker pay but those costs are invariably then passed onto the consumer) to meet with a state sponsored counselor so some stranger can tell them if their loan is good for them. The practical effect was a significant drop in real estate sales, more bureacracy, and of course a handful of new disclosures specifically to address that portion.

Here is the bottom line. If I debated anyone, on either side of the aisle, about this bill they would be so embarrassed I could probably force them to resign. Most of the legislators are clueless about any part of my business. It is easy to pass legislation that only creates more paperwork if you never have to deal with any of it. By the time a loan is closed, it looks much like an edition of an encyclopedia. Those loans must be kept in storage since regulators can inspect any of them anytime. That means that a successful mortgage company has an overwhelming amount of paperwork to deal with. Again, it is easy for the legislators to constantly legislate more paperwork since they have no responsibility in managing it. I have no such luxury, and you the consumers don't either.

The only conclusion I can make is that clueless legislators from one party (the Democrats) have designed a bill that tackles a problem they don't understand or define. The only practical effect of this bill is YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET. Imagine any Republican running with that slogan. H.R. 3915 can become the symbol of the Democrat's entire domestic economic agenda if the Republicans want it to. Leaders like Barney Frank led in crafting it. Chris Dodd is leading the charge on the Senate side. The Republicans can add H.R. 3915 to their list of Democratic legislative failures. All they need to do is make a few commercials with this on the screen


This bill is the perfect test case to see just exactly how powerful the internet really is. While this bill may not be known by much of the mainstream, it is the equivalent of a rockstar on the internet. The blogosphere is abuzz with it and my own site's traffic has exploded with with people reading my work regarding it. The beauty is that on the internet, there is bipartisan opposition all over the internet. Whenever the crazies at Daily Kos find themselves on the same side of an issue as libertarians, small government conservatives, and of course mortgage professionals, you know you have a juicy opportunity. What needs to happen is for all the sides to get connected and to attack Congress at once.

The narrative is there for us to take. THE DEMOCRATS THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET. The parties must meet and spread the message together. On the other hand, this bill has a populist message and good targets, however our side has the truth. The way for my vision to be realized is for all of the internet to relentlessly beat the message I am talking about,


This may sound self serving and egotistically but what if everyone knew about my article? What would they think of H.R. 3915 and the party that sponsored it? If I am wrong, please challenge me. The way for this to work is for everyone opposed to this bill to spread the message throughout the internet until the internet does what it is supposed to do, create a network. Once that happens this message goes from niche to mainstream and everyone behind this bill will have to answer why


I can't say it enough.

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