Congressional Hearings May Presage Tighter Subprime Regulation

U.S. lawmakers may expand the federal government's role in overseeing mortgage lending as Congress looks for ways to protect borrowers at risk of losing their homes with the implosion of the subprime market.

U.S. Representative Carolyn Maloney said Congress should broaden proposed federal subprime-lending guidelines to cover state-regulated lenders and make them mandatory. And Senate Banking Committee Chairman Christopher Dodd will question federal bank regulators at a hearing today over what he called a ``pattern of neglect'' that triggered the subprime crisis.

``What is important now is for those who are in a position of power to help protect homeowners and stabilize the system,'' said Maloney, a New York Democrat who heads a House Financial Services subcommittee on financial institutions and consumer credit. Congress should ``lessen collateral damage,'' she said.

Rising defaults have prompted calls in Congress for legislation. Late payments on subprime loans reached a four-year high of 13.3 percent in the fourth quarter, while foreclosures on all home loans also reached record levels, the Washington-based Mortgage Bankers Association reported last week.

HSBC Finance Corp. Chief Executive Officer Brendan McDonagh will appear before the Senate panel today, as will executives from Countrywide Financial Corp.; WMC Mortgage, a unit of General Electric Co.; and First Franklin Corp., Dodd said in a statement. New Century Mortgage Corp., the second-largest subprime lender, refused to send a witness, the statement said.

Enforcement Lapses

Officials from the Federal Reserve's division of banking supervision and regulation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. will also testify at the Senate hearing on the causes and potential consequences of the market turmoil.

Dodd, a Connecticut Democrat who is seeking the party's 2008 presidential nomination, wants the regulators to explain whether supervisory and enforcement lapses contributed to the problem.

``The regulators apparently have been not doing as good a job as I think they should have been doing, but we'll know the answer to that question as we bring them before the committee,'' he said last week.

One lawmaker said it's too soon for Congress to jump to conclusions or pass legislation, a sentiment echoed by some in the banking industry.

``Before we rush into any action here in Washington, we need to see how well the industry and the markets are able to adapt to the contraction that's going on,'' said Representative John Campbell, a California Republican whose district is home to some of the biggest subprime lenders, including New Century and Ameriquest Mortgage Co., both based in Irvine. ``There's a risk that if you overreact that you'll actually dry up available resources to make subprime loans.''

Clarify the Terms

Subprime home loans are made to borrowers with poor or limited credit ratings or high debt burdens.

Maloney, whose subcommittee will hold a hearing on the issue on March 27, said Congress should require banks to clearly disclose mortgage terms and ensure borrowers can make payments for the life of a loan. The move, which would adopt voluntary guidelines proposed by federal regulators March 2, should also be extended to cover state-regulated lenders, she said.

FDIC Chairman Sheila Bair, mortgage industry officials and consumer groups are expected to testify before Maloney's panel.

`Best Enforcement Mechanism'

House Financial Services Committee Chairman Barney Frank said in a March 20 speech that ``assignee liability'' should be a component of subprime legislation. The provision would hold buyers of subprime mortgages partially responsible for flawed loans.

``People will say `if you have assignee liability, people won't buy certain mortgages,''' Frank said. ``Good, because then they won't be made and that's probably the best enforcement mechanism that we can have. In a way, it's using the market to help enforce this.''

Frank, who plans to ask the U.S. Government Accountability Office to examine what led to the problems in the subprime market, said the role of the Federal Housing Administration should be expanded to help subprime borrowers.

An executive of a bankers' group urged lawmakers to be cautious about writing new legislation.

There are millions of subprime borrowers whose loans were issued properly and who wouldn't have a home without them, said James Ballentine, director of housing and economic development at the Washington-based American Bankers Association.

``To the extent that any legislation would stifle a market that is operating well, we have concerns about that,'' Ballentine said. Before enacting legislation, he said, Congress should wait to see whether a regulatory approach works best.

source:www.bloomberg.com