Homeowner Responsibility

The Homeowner Responsibility Amendment

In the wake of the recent financial crisis, Senator Chris Dodd, Chairman of the Senate Banking Committee, has been trying to get his financial regulatory reform bill (S. 3217) passed. A roadblock has been created by other senators who think that the bill doesn’t do enough to prevent lenders from continuing to underwrite risky loans.

The Homeowner Responsibility Amendment (no. 3955) was introduced in the Senate in order to strengthen the new bill’s ability to prevent predatory lending and, by extension, to prevent as many foreclosures and bankruptcies as possible. The amendment is co-sponsored by Senators Bob Corker (R-TN), Judd Gregg (R-NH), George LeMieux (R-FL), Tom Coburn (R-OK), and Scott Brown (R-MA).

The debate centers on how much government regulation is too much. Senator Dodd’s bill is designed to police the financial sector through expanding the powers of existing regulatory agencies, while Senator Corker’s amendment would place more emphasis on regulating the lenders themselves and moving the establishment of underwriting guidelines to the federal level.

The Dodd bill proposes two new regulatory entities. One is a Consumer Financial Protection Agency, to be overseen by the Federal Reserve Board, and the other is a Risk Council, to be made up of representatives from all major federal financial stakeholders and overseen by the Department of the Treasury. They would be charged with examining current lender practices, especially in large companies, and creating new rules to encourage lenders to be fiscally responsible.

Critics of the bill would not stop at encouragement. This new amendment is one of several amendments which have been proposed to specifically target and standardize the minimum requirements that various lenders use to approve loans. Senator Corker and colleagues insist that toughening these requirements is the best and most direct way to create true consumer protection and avoid creating “toxic” loans.

One hotly debated provision of Senator Dodd’s bill involves the creation of a mandatory donation by each lender to a collective risk management fund of up to $50 billion, which would then be used instead of government bailout funds to assist failing lending institutions. The Obama administration considers this fund unnecessary, while the cosponsors of the proposed amendment say that it is counterproductive and will only limit smaller lenders’ available loan funds. They would prefer that the government study the effects of risk retention funds on the market before actually creating any such fund.

The proposed federal lending requirements for all underwriters include:

• Minimum five percent down payment
• Mandatory private mortgage insurance to be paid by borrowers who still owe more than 80 percent of their home’s value
• Mandatory documentation of income, employment history, and credit history
• Debt-to-income analysis which calculates proof of each borrower’s ability to repay the loan
• Periodic reassessments of any federal lending guidelines

Exemptions would only be made available for certain non-profit lenders.

“Politics as usual” may be another roadblock on the way to passing financial regulatory reform. Republicans continue to accuse the Democrats of rushing reform legislation, while Democrats continue to accuse the Republicans of stalling reform legislation. The bill and all its proposed amendments are set for further debate in the upcoming weeks.